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COSTA GROUP HOLDINGS LIMITED

(CGC)
  Report
Delayed Australian Stock Exchange  -  02:10 2022-07-05 am EDT
2.870 AUD   -2.05%
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Costa Group Investment Comes to Fruition

03/16/2022 | 04:06pm EDT

Investment in increased operations capacity is supporting a return to growth for Costa Group, with the company to benefit from expanded production coupled with a strong pricing environment. 

-Indicators point to a return to a growth outlook for Costa Group after a challenging period
-Growth is supported by investment in increased planting capacity and new produce breeds
-Organic and inorganic Produce segment growth should drive full year results

By Danielle Austin

The market sees a growth period ahead for fresh produce grower and marketer Costa Group ((CGC)), as a period of investment and growth initiatives looks to bear fruit for the company. 

Investment in increased farming capacities for key segments, including new acreage for crops and continuing research into new varieties, should provide returns over coming years, while results will further benefit in the current year from the reversal of negative sector conditions that challenged FY21. Costa Group management indicated growth across all five key segments -  berries, avocados, citrus, tomatoes and mushrooms - in the coming year. 

International berry operations in both China and Morocco continued expansion in the last year, with volumes up 27% on the previous year. Capital investment in international blueberry crops should deliver benefit in the near-term as premium blueberry volumes improve. The company's Arana Jumbo blueberry variety is already in high global demand, commanding a 25-30% price premium in global markets, and the company continues breeding programs focused on developing the next premium blueberry. The company expects a first crop of its premium tropical-climate Delight blueberry in FY23. Alongside the pricing benefits from premium berry varieties, the company continues to expand production capacity with the recent planting of 50 hectares in China's Baoshan, and a further 100 hectare agripark development planned in the region before year end. Australian berry volumes are also tracking ahead of expectation year-to-date. 

According to Costa the avocado segment outlook should improve after a difficult year competing in an oversupplied market. The company anticipates avocado pricing will improve on a combination of expected reduced volumes through the remainder of the year and increased demand as the hospitality industry resumes food service, while the company looks to benefit from avocado orchard expansion and maturation. 

While hail events drove a -$25m impact to revenue in the last year given damage to grape and citrus crops, the non-recurrence of events should benefit comparable current year results. The recent acquisition of citrus grower 2PH will also deliver a full-year benefit in FY22. Analysts note that 30,000 tonnes of fruit generated $29m in earnings for 2PH in FY21, and with fruit production estimated to reach 37,600 tonnes in FY22 the acquisition should deliver a notable earnings contribution. 

Initial return from the commissioning and ramp-up of the Tomato Greenhouse 4 project should benefit tomato production, which is already tracking ahead of expectations to date, while mushroom volumes have reported a high year-on-year increase. 

Costa Group also acknowledged the strong start to 2022 is a good indicator of continuing growth. The company reported 5% year-on-year revenue growth totalling $1,221m, and 7% year-on-year earnings growth totalling $218.2m. Material improvement in the Produce segment was reported, driven by strong contributions in berries, mushrooms and tomatoes, to deliver 18% year-on-year growth to segment earnings.  

La Nina weather drives high crop production, according to the Agriculture Bureau 

The Australian Bureau of Agriculture has implied favourable industry conditions for the agriculture sector outlook. Wet and mild conditions across most geographic areas in late spring should support an increase in crop production, and the value of domestic horticulture production is now anticipated to rise 5% in FY22, up from 4%. 

The Bureau warned labour constraints look likely to continue to impact the industry, but expects output levels to remain steady. 

Across FNArena's coverage, two brokers are Buy rated or equivalent on Costa Group and two are Hold rated or equivalent with an average target price of $3.64

Macquarie, which had picked Costa as its key long reporting season pick, retains an Outperform rating on the stock and has the highest target price among FNArena database brokers, increasing to $3.80 from $3.41. The broker predicts earnings growth of 23% in 2022 to $268m

Morgans noted significant earnings drivers should support Costa in delivering a stronger result in FY22. The broker, who maintained an Add rating and a target price of $3.70, further noted the company appears to have managed operational impacts from covid better than some peers, notably sourcing the labour necessary to harvest crops and deliver consistent supply. 

Strong demand for Costa's products in key markets should benefit full year results according to Credit Suisse. The broker is Outperform rated with a target price of $3.70 (down from $4.15) and forecasts full year earnings of $158.7m, with Produce segment earnings improving to 16.2% from 13.2% in FY21.

UBS forecasts improvement in mushrooms, tomatoes and grapes will account for 25% of full year earnings, equating to an expected $15m. The broker expects Costa Group can return to its typical double digit earnings growth in FY22, and forecasts earnings growth of 28% in the coming year to $279m

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© 2022 Acquisdata Pty Ltd., source FN Arena

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Financials
Sales 2022 1 363 M 933 M 933 M
Net income 2022 75,5 M 51,7 M 51,7 M
Net Debt 2022 887 M 607 M 607 M
P/E ratio 2022 17,9x
Yield 2022 3,56%
Capitalization 1 333 M 913 M 913 M
EV / Sales 2022 1,63x
EV / Sales 2023 1,53x
Nbr of Employees 3 273
Free-Float 96,0%
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Number of Analysts 14
Last Close Price 2,93 AUD
Average target price 3,65 AUD
Spread / Average Target 24,6%
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Managers and Directors
Sean Hallahan CEO, Director & Managing Director
Wayne Kenneth Johnston Chief Financial Officer
Neil Gregory Chatfield Independent Non-Executive Director
Peter Maxwell Margin Independent Non-Executive Director
Janette Anne Kendall Independent Non-Executive Director
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