Micro Cap Rising Stars – Clover

This story features CLOVER CORPORATION LIMITED. For more info SHARE ANALYSIS: CLV

By Greg Peel

Microequities is an Australian financial adviser specialising in in-depth research of listed “micro caps” – those companies of low capitalisation too small to register on ASX indices or to attract research coverage from leading stockbrokers. In June Microequities hosted its Rising Stars conference, at which selected companies presented their wares. FNArena was invited to attend, and over a period of time is providing conference highlights. This is the sixth in the series.

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“So why don’t we just eat tuna?” I asked Dr Ian Brown, but he smiled, knowing the question was a rhetorical one.

Dr Ian Brown is the CEO of the Clover Corporation ((CLV)), a company which has established a globally competitive position in the growing market for nutraceuticals. Before you ask, consider this: How many ads you see these days for food products that guarantee to be beneficial for your health because they now have added this, or added that?

Milk with added iron, orange juice with added calcium, cereal with added just about whatever you may desire – all these sorts of supermarket items have now become common place, and invariably common place among anything that may be described as “packaged” food. It’s a sad indictment on the world in which we now live that a short stroll across to the fruit and vegetable aisles would probably alleviate a lot of the need for any “added” things, but Big Mac culture has ensured that not only are Australia and other Western countries now nations of lumbering fatties, but that we also seem to believe that packaged food with “added healthy stuff” is actually far more beneficial than broccoli.

Or, for that matter, fish. It’s a further sad indictment on Australia in particular that for a nation whose population clings to the coastline, the bulk of that population would rather eat only a steak, chop, sausage, or burger, than ever think of buying fish beyond the odd fish&chips at the beach or anything that came pre-frozen. And don’t even start on tofu.

Yet fish – at least “oily” fish – is one of the best sources of essential fats. These are the sort of fats that paradoxically don’t actually make you fat, but instead lower cholesterol and ward off heart disease and, if you’re young, are vital for healthy growth – particularly when it comes to the brain. One of the most important essential fats is omega-3, which seems these days to be artificially added to just about anything. And another excellent source of omega-3 are soy beans (hence the tofu), if you don’t count walnuts and flax seeds which aren’t really everyday sort of meals.

So I come back to my original question as to why, in the pursuit of health, don’t we Westerners just eat more salmon, sardines or tuna? The answer is that…well…we just don’t. And because we don’t, a whole new industry has grown up rapidly in recent years, and that industry is known as “nutraceuticals” (which is just a combination of “nutrition” and “pharmaceuticals”) Nutraceuticals are anything you add to anything else to make it healthy.

One of the most important omega-3 fatty acids is docosahexaenoic acid, or DHA. DHA is not easily synthesised in the body, so it is necessary to consume certain foods to supplement that deficiency, and these aren’t all readily accessible. The best sources of DHA are tuna and soy beans.

Deficiency of DHA has been linked to schizophrenia, depression, Alzheimer’s and ADD. DHA has also been proven to help manage asthma, allergies, irritable bowel syndrome and cancer. It is probably no surprise that as the quality of the Western diet depletes, it is apparent that incidence of the aforementioned conditions or diseases is on the rise. DHA is also very important for the healthy development of an infant’s brain.

Clover was founded in 1988 to identify, develop and commercialise specialty functional and nutritional ingredients, with an initial focus on “HiDHA” marine oils. The company was listed in 1999. A company by the name of Nu-Mega Ingredients was founded as a joint venture in 2003.

Nu-Mega’s primary interest is the provision of HiHDA omega-3 tuna oils and powders. The company extracts tuna oil from a fish cannery located in American Samoa, and the extraction actually occurs from a by-product of the canning process. Hence the processing of the tuna nutraceutical does not actually take anything away from the normal process of producing canned tuna.

Nu-Mega then applies a microencapsulation technology developed in association with Food Science Australia and licensed by the CSIRO. This process protects the oil to ensure no lingering “fishy” odour. The powder is then added to foods (18% of applications), to infant baby formula (76%) and other supplements. It is then distributed throughout Australasia (75% of sales at present), Europe (20%) and the US (5%).

Clover fully acquired Nu-Mega in November 2007.

Nu-Mega also has completed the construction of a mill in Moree, NSW, dedicated to the processing of soy beans. The mill has been built as processing modules which allows for throughput expansion. In 2005 Clover acquired a 50% interest in Future Food Ingredients, also located in Moree. FFI uses Nu-Soya technology, licensed from Byron Australia, which allows for the preparation of soy ingredients without the typical soy taste (which sort of sums up nutraceuticals).

FFI achieved a 140% increase in sales revenue in the first half of FY08, and Clover expects to move the business into profitability in FY09. The greatest area of sales expansion is in Asia, and Clover expects this trend to continue. The product range will be increased to maximise utilisation of the Nu-Soya plant.

Clover has spent the last four years balancing out the investment in FFI, the writing-off of obsolete equipment, and the cost of research & development against the rising profitability of Nu-Mega. Hence net profit peaked in FY04 at $1.2m, troughed in FY06 at $0.4m, and is on the rise again. First half FY08 profit was close to $0.7m on a revenue of $10m.

Clover has a market cap of $24m at 14.5cps. At the end of FY07 the company held $10m in cash and is debt free. The top 20 shareholders control 55.1% of the shares, including WHSP & Co Ltd with a 28.55% stake.

Key milestones achieved by Clover in FY08 include increased production capacity, and the securing of a five-year contract with Mead Johnston & Company to supply 50% of its tuna oil and powder for infant formula. In FY09 Clover intends to capitalise on its growing sales performance, increase its global sales distribution network, and recruit additional personnel (beyond the current 30) to facilitate growth.

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