The expansion of citrus orchards continues apace for
-Potential for greater export supply to Asian markets
-Costa consistently achieves a price premium for exported citrus
-Net profit growth expected to be marginal in 2021
Citrus is blossoming for
The acquisition of
This is a strategically sound acquisition, Citi asserts, estimating the transaction to be 4% accretive in FY21 from a contribution of five months. 2PH generates revenue per tonne that is nearly double that of Costa and achieves 39% operating earnings margins.
All sales are derived from mandarins of which 50% are proprietary cultivars. As a result, Credit Suisse believes the company has bought a good strategic asset and includes the acquisition in modelling.
The acquisition will provide greater export supply to Asian markets and also enables the company to obtain exclusive rights to proprietary varieties and a larger production scale as well as geographical diversity.
Macquarie also highlights the ability of 2PH to sell into a global market and attract premium pricing for its niche citrus products. The implied acquisition multiple of 6.6x FY21 operating earnings is undemanding, the broker asserts, and while more expensive than prior acquisitions, is understandable given the superior margins and offshore earnings 2PH offers.
Export
Goldman Sachs believes citrus could be the next "big thing" for the company offshore as it has already implemented an export strategy that will be complemented by the transaction. In evidence is the highly profitable berry operations that have been established in
Credit Suisse agrees Australian citrus is well-positioned for export, given the southern hemisphere timing and premium quality relative to
Costa is not allowing for much in the way of cost synergies but Credit Suisse points out there may be revenue opportunities as the company has a strong distribution network in
Goldman Sachs highlights perpetual access to plant breeder rights and a long-term platform to establish offshore production and/or license these rights. Costa is acquiring royalty-free rights to commercialise plant breeder rights and trademarked Amarette and
There are also future varieties being developed by 2PH breeding program in
Goldman Sachs likes
Costa has consistently achieved a price premium for exported citrus and the broker expects this should continue. Goldman Sachs, not one of the seven monitored daily on the database, has a Buy rating and
Rights Issue
Costa has announced a fully underwritten renounceable entitlement offer to raise
Nevertheless, the broker suggests this highlights a conservative approach and provides some capacity for further growth initiatives such as Conaghans. Costa will pay
The broker's view is supported by the balance sheet which has pro forma net debt/earnings of 1.4x as of
Outlook
The base citrus business is tracking along with the broker's expectations while avocados are well below as lower prices persist and there are early signs that the
The company has also indicated that net profit growth will be marginal and, given the 2PH acquisition is late in the citrus season, the dilution from the capital raising could be overwhelming, Credit Suisse warns, resulting in a decline in earnings per share of -20% in FY21. The broker upgrades estimates for 2022 by 5% after including the acquisition.
Citi continues to envisage risks around domestic produce into the second half, namely for citrus and the 80% of the crop that is yet to be harvested. Costa has signalled that this is a more normal pricing year for the 20% that has been harvested. Berry pricing for the main season in NSW is also a risk, Citi points out, as wholesale pricing for raspberries and blueberries appears softer.
Jarden believes the outlook is mixed, although earnings and returns on investment should improve into 2022 as one-offs are cycled, the Monarto venture ramps up and there is some normalising of the supply/demand dynamics.
Hence the broker forecasts a 54% lift in 2022 earnings per share, in part driven by 2PH but primarily by these other factors. Assuming a successful integration of the acquisition, Jarden remains positive about the stock and retains an Overweight rating.
The broker, also not one of the seven stockbrokers monitored daily on the database, has a
Wilsons considers the "relatively full" purchase price is justified by the unique nature of the asset and the strong margins. Nevertheless, after considering the earnings profile for the whole produce segment, the broker is "marginally underwhelmed" by a lack of growth.
Wilsons, not one of the seven, retains a Market Weight rating and
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