Citrus Crop Critical To Costa Group In 2021

Australia | Jun 01 2021

Agricultural conditions may be the best they have been for some time, yet Costa Group can only offer a modest improvement to its earnings outlook for 2021

-Labour shortages prolonging recovery in 2021
-Costa to benefit from growth in new plantings
-Are factors affecting guidance seasonal not structural?

By Eva Brocklehurst

Costa Group ((CGC)) has offered a disappointing outlook for the remainder of 2021, as the problems encountered in the agricultural industry throughout the pandemic come to a head. Namely, labour.

Labour shortages for mushroom production have been pronounced amid bumper supply-driven weakness in avocado prices. Favourable growing conditions may exist and Citi now forecasts avocado prices will decline by -18% in 2021.

Costa Group has managed to secure sufficient labour to cover its citrus requirementsand main berry harvest at Corindi for the second half but mushroom production remains disrupted at Monarto.

Production is expected to recover once labour requirements are met although shortages are unlikely to be fully resolved until borders reopen. Reduced winter labour requirements (in Australia) may help in the second half.

Costa Group is an industry leader in each of its Australian produce categories and the international business outlook and execution remain strong. It is the domestic business where the uncertainty lies over the extent of a recovery in the second half. Hence, Morgans downgrades to Hold from Add.

The broker cites uncertainty surrounding the extent of an earnings recovery in produce and highlights the company is cycling a particularly easy first half domestic produce segment, having been affected by drought and bushfires.

Despite the clear evidence of a strong recovery in produce, the earnings guidance provided at the company's AGM now implies a contraction in that segment and operating earnings are now expected to be only slightly ahead in 2021.

The deterioration in profitability largely reflects weaker tomato and avocado prices and this spurs Morgans to raise questions regarding the extent of the benefits from elevated consumption experienced during the pandemic.

On the positive side, harvests in Morocco and China are progressing well and there has been strong pricing and demand over the season. Volumes in China are now finishing in line with expectations while Morocco has performed well despite increased costs.

The short-term pricing pressure on tomatoes because of increased field supply is abating. On the other hand, hail damage on citrus and fruit fly restrictions in South Australia have affected the first half performance.

Goldman Sachs envisages a positive earnings trajectory over the medium term largely because of the growth in volumes from new plantings. Challenges witnessed during the current half-year illustrate the leverage not only to agricultural conditions but also market conditions.

Regardless, the broker, not one of theseven stockbrokers monitored daily on the FNArena database, considers the negative share price reaction overdone and retains a Buy rating with a $4.85 target.

Furthermore, Goldman Sachs envisages a range of domestic growth opportunities, with the company actively pursuing a citrus acquisition program and planning for the development of a large-scale citrus packing facility. Commissioning of the 10ha tomato glasshouse at Guyra (NSW) is also on track for August and the roll-out of a high-density avocado program has also been approved.

Margins

Credit Suisse regards the factors affecting guidance are seasonal not structural. The main issue being what might be construed as a normal margin for domestic produce. Over a good year peak margins may be 14-15%, while in a bad yearthe company has experienced margins as low as 5-6%.


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