Outlook Improving For Costa Group

Australia | Jun 01 2020

A much better 2021 is forecast for Costa Group, as citrus recovers and strong prices hold out for mushrooms. Tomato demand is also expected to recover with the return to school.

-Yield and prices favourable in Morocco
-Weaker Australian dollar helping citrus exports
-Outside of citrus, 2020 likely to be a more “normal” year


By Eva Brocklehurst

Costa Group ((CGC)) is moving ahead cautiously, continuing to withhold guidance for 2020, despite robust demand for its produce and strong pricing as a result of pandemic-induced disruptions.

While citrus may swing the outcome this year, Citi still believes Costa Group is on track for meeting forecasts for operating earnings (EBITDA) of $146m. The Moroccan harvest is almost complete and the yield and prices are favourable.

Costa Group has benefited from disruptions to the Spanish harvest and Citi calculates Morocco will add $8m to 2020 operating earnings. Meanwhile, China is well ahead of plan, with exceptional yields.

The company has taken advantage of the knowledge gained from the pandemic disruption in China to apply this to other markets. However the costs to mitigate against the pandemic are considerable, Macquarie highlights, with a major dislocation of markets and operations.

Macquarie assesses the first half is critical, as it represents 83% of 2020 forecasts. Still, the majority of core produce categories are now experiencing positive demand and prices in the retail sector.

Wholesale demand has reduced but is showing signs of levelling out. This has mainly affected farms and logistics in the food service sector because of the closure of food outlets. Meanwhile, given the rain on the east coast of Australia in recent months, the company now has good water security across all sites for 2020. As a result construction of the new glasshouse in Guyra has re-started.

Mushrooms, Berries & Tomatoes

Strong prices and demand are holding up in the grocery channel for mushrooms and the new low-cost Monarto facility will be at full output in July, so profit margins in mushrooms are likely to materially improve. Citi assesses this new facility will be a "interesting" test of the market's true supply/demand balance.

Morgans upgrades to Add from Hold, given there are signs the headwinds are moderating and this has potential to turn into a tailwind for 2021. Major growth expenditure has been largely deployed and the balance sheet is robust.

Some of the impact of the drought on berries and tomatoes has been countered by rain early in 2020 but there is still a shortfall. Tomatoes are suffering particularly from lower demand, but are expected to improve subsequently, given the skew towards "snacking tomatoes" that have been affected by reduced office and school attendance. Tomatoes represent 12% of produce sales.

The number of hectares under raspberries has reduced by around -33% but prices are firmer. Reduced supply of blueberries is also expected to support stronger second half pricing.

Wilsons suspects 2020 earnings will continue to trend below the previously withdrawn guidance level but could be better than 2019. Moreover, 2021 should benefit from a recovery in citrus and further structural growth in international.

The broker, not one of the seven monitored daily on the FNArena database, expects a recovery in mushrooms and berries will provide material earnings benefit in 2020 and retains a Market Weight rating and $3.35 target.


Citrus remains the biggest uncertainty this year as the crop is smaller and more variable. However, a weaker Australian dollar is helping prices and Japan and the US are accepting imports of citrus. Macquarie notes exports of citrus achieved good prices to Japan in April albeit forward tonnage estimates are well below original expectations.

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