Wednesday, October 19, 2011

Comvita Ltd: Does Cerebos' bid undervalue the company?

The hostile bid made by Singapore company Cerebos Pacific Ltd for Comvita Ltd [CVT.NZX] needs to be looked at by shareholders as a pure financial decision with little emotion over whether it is another kiwi company that might go into the hands of one of those evil overseas conglomerates.

Is the offer by Cerebos fair?

Lets take a look at an exercise I did with this company back on August 11 2010. I calculated the total return for the company since its listing on the main board of the NZX at just over minus 15% per annum for its 7 year listing until August 2010. Shareholders have had to inject alot of capital back into the company numerous times over its time as a listed company.

Shareholders have suffered, and on past performance alone one would have to come to the conclusion that the offer of $2.50 per share, which is a premium of nearly 20% over the price the shares were trading at before the offer was made, and a whopping 49% higher than the shares were trading at just 12 months ago, is a generous one.

Of course this company has grown fast, has products that are well sought after and its poor performance could well be behind it after patchy and unprofitable years establishing their brand.

What do its prospects under current ownership give to shareholders if they wish to hold CVT shares and what value should that bring to the offer being made by Cerebos?

A profit upgrade out mid September seems to add weight to management's contention that the Cerebos bid "undervalues Comvita" and CVT share holders should not sell. Having said that the past 5 years (see 5 year financial summary below) has been a roller-coaster profit-wise which adds weight to the Cerebos bid.

Cerebos may well be able to leverage their scale, connections and retail exposure to get more value from Comvita than the company itself has thus far. While CVT has increased revenue year by year meaningful profit has been a relative stranger most years. While the forecast of higher profit for the current year is positive the history of the company would indicate more of the same in the future.

Clearly if you have been a CVT shareholder since its 2003 listing on the NZX at $2.50 then the offer by Cerebos of $2.50 per share means you would have to think very hard about selling.

If you bought at the beginning of 2009 at around 75c or leading up to around $1.40 at the kick off of 2011 then the temptation to sell would be a strong one.

The market thinks the offer is too low - and the market is usually right - with shares closing at $2.70 yesterday. Combine this with director AJ Bougen's greater than 10% shareholding, along with other directors stakes in the business, it looks unlikely that even if minority shareholders decide to sell, there is a blocking stake that would mean the offer for Comvita would have to be significantly higher than $2.50.

The only question that remains is just how bad do Cerebos want Comvita?

Comvita @ Share Investor

Long Term View: Comvita Ltd

Discuss CVT @ Share Investor Forum
Download CVT Company Reports

Recommended Amazon Reading

The Intelligent Investor: The Definitive Book on Value Investing. A     Book of Practical Counsel (Revised Edition)
The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) by Benjamin Graham
Buy new: $14.95 / Used from: $7.50
Usually ships in 24 hours

Buy The Intelligent Investor & more @

c Share Investor 2011