Treasure Chest | Sep 21 2020
This story features COSTA GROUP HOLDINGS LIMITED. For more info SHARE ANALYSIS: CGC
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. The road ahead in 2021 appears smoother for Costa Group after several years of major capital investment and as 2020 moves to the rearview mirror
-Platform to drive medium-term growth established at Costa Group
-Strong volume potential at a time when prices are elevated
-Improved water storage, lower water allocation prices
By Eva Brocklehurst
Horticultural business Costa Group ((CGC)) is coming to the end of a period of material capital investment, just in time for a much better agricultural outlook in 2021. Strong exports and domestic demand, as well as prices, support more positive views about the year ahead.
Wilsons notes over the next three years, as all major expenditure will be in place and amid continued innovation, a platform has been established that will drive quality, yield growth and shareholder returns. The company has deployed -$303m over recent years which, given the lead in expenditure versus earnings in agricultural production, should create volume and earnings growth over the medium term.
Most of the remaining production for the second half is under cover and largely protected from weather. There is also plenty of water after good rain and water infrastructure improvements in key Australian growing areas.
The recent expansion of the berry assets in Morocco and China as well as completion of the tomato glasshouse and maturing avocado orchards stand the business in good stead for 2021-22, Bell Potter assesses. Citrus is also expected to benefit from yield improvement as acreage matures.
The broker has a favourable view of Costa Group because of expansion internationally as well as the avocado orchards providing lower per-unit costs at a time when prices are elevated. Bell Potter, not one of the seven stockbrokers monitored daily on the FNArena database, has initiated coverage with a Buy rating and $4.05 target.
Wilsons, too, expects modest growth in international, assuming margins contract as the supply/demand balance evolves along with sustained growth in royalty income. More normal seasons and yields in Morocco and better seasons and yields in China are likely to follow.
Earnings in the first half missed expectations but trends are considered constructive nonetheless and financial benefits from the commercial farming program could prove forecasts conservative, the broker admits.
Underlying sales improved in the first half but the yield and volume impacts were particularly pronounced in berries and tomatoes, Wilsons observes. Grapes, which have a heavy skew to the first half, also had a very difficult season. A late start to the citrus harvest, however, will skew earnings to the second half. All up, the broker is confident that current trading conditions imply a stronger second half.
There is also potential upside from further capital expenditure. The company provided no explicit guidance but the broker is confident in 2020 forecasts and expect significant improvement in 2021.
Seasonal factors such as drought, bushfires, hail and fruit fly which have prevailed in 2019-20 are unlikely to occur to the same extent in the short term and this underpins citrus, tomato and berry production.
Goldman Sachs expects a strong improvement in earnings in the second half, given the impacts of the drought will be less severe and also notes Costa Group has a minor exposure to the slowdown in food service as a result of the pandemic.
Credit Suisse notes raspberry production should resume after plants with genetic flaws were replaced while the new mushroom facility is now at targeted efficiency rates. The broker does not erase all the negatives from its estimates, but expect top-line growth will prevail in 2021.
Pricing is much more favourable and Bell Potter calculates, in total, there is around -$35m in seasonal and pandemic-related impacts on 2020 that should turn around in 2021-22.
Improved seasonal conditions and the investment in water storage capacity at Corindi have alleviated water issues and water allocation prices along the southern Murray Darling Basin, where the citrus properties are located, are down -35% year-on-year.
Pricing, based on wholesale market data, is solid, Credit Suisse ascertains, and the stock is recapturing investor imagination, despite the agricultural risks. The business has strong momentum now into 2021 and domestic/export demand as well as pricing in citrus are supportive, yet Macquarie believes this is well factored into the share price.
Wilsons and Goldman Sachs, both also not of the seven, have an Overweight rating and $3.67 target and Neutral rating and $3.30 target, respectively. The database has four Buy ratings and one Hold (Macquarie). The consensus target is $3.63, suggesting 11.2% upside to the last share price.
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