Company Overview: Costa Group Holdings Limited (ASX: CGC) is a horticulture company and provides fresh produce supplies to major Australian food retailers. Its produce consists of mushrooms, berries, glasshouse-grown tomatoes, citrus, avocados, to name a few. The Group is a leading producer of blueberries and grows it in Australia, Morocco, and China. It also licenses its blueberries to various parties, including Driscoll’s in America.

CGC Details

Resilient Performance in H1CY21 Driven by Growth in International Segment: The company is focused on its expansion strategy in the international markets and has reported strong volumes from the markets of China and Morocco. Moreover, its international licensing program gives it a platform to expand its presence in the geographies of Africa and the Americas.

Increased Traction in Sales from the International Segment:

CGC reported decent growth in sales and EBITDA from the international segment during H1CY21 period. Revenues grew by ~25% to $149.4 million in H1CY21, compared to $119.5 million in the pcp. EBITDA also improved by 28.1% to $82.1 million during the same period under consideration. The growth in sales can be attributed to further development and market penetration of premium blueberry varieties and genetics across multiple regions.

• China: The company has been able to execute its growth strategy in China and reported the first crop from the new Guangmen plantings (67ha). It also enjoyed a significant pricing advantage throughout the season owing to concerns on imported products due to COVID-19 and disruption in the South American export season.
• Morocco: It witnessed an improved performance from Morocco owing to greater contribution from Agadir, resulting in higher yields. Aggregate tonnes of production in Africa grew by ~19% to ~1,456 tonnes in H1CY21, compared to the pcp.
• Emerging Regions: Segment revenue skewed towards the second half of FY21.

Peek Into H1CY21 Performance:

• The revenue was in line with the pcp period at $612.4 million in H1CY21. Produce has decreased by 6.9% owing to negative impacts in Citrus and lower production in Tomato & Mushroom. However, the impact has been offset by an increase in international sales during the period.
• There has been an improvement in EBITDA-S to $124.4 million during the period, reflecting an increase of 4.3% on the pcp.
• NPAT-S grew by ~3% to $44.4 million in H1CY21, aided by an effective tax rate of ~11% due to the benefit from agricultural concessions in international markets.

Revenue Trend (Source: Analysis by Kalkine Group)

Growth Drivers Moving Ahead:

• The company has successfully integrated and acquired the assets of 2PH & KW Orchards. The acquisitions position the group for opportunities in the export market and expand production footprint along with gain in access to proprietary breeding programs.
• It plans for further expansion in China with additional 50 hectares of blueberries planted and delivering increased international segment yield in CY22.
• CGC has received the Board approval for commercialisation program to plant 40 hectares of avocado trees, across a number of regions. It expects the initial harvested crop from CY23/24.

Top 10 Shareholders: The top 10 shareholders together form around 34.38% of the total shareholding, while the top 4 constitute the maximum holding. Perpetual Investment Management Limited and Lazard Asset Management Pacific Company are holding a maximum stake in the company at 12.16% and 5.90%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The Group delivered an improvement in gross margin performance at 66.8% in H1CY21, compared to 63.5% in the previous corresponding period. It reported a marginal decline in net margin performance to 7.7% during the same period. The company ended the period with a cash position of ~$97 million as of 27 June 2021, an increase from a level of $32.45 million as of December 2020. There has also been an increase in the net debt of the company to ~$208 million, owing to an increase in debt levels due to working capital needs and for acquisition purposes.

Profitability Metrics & Liquidity Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Climate Risks: The Group's performance is dependent on favourable climatic conditions and any adverse impact on climatic shift might affect its expected profitability.
• Inventory Risk: Its line of business makes it prone to the inventory of produce becoming obsolete.
• Supply Chain Risk: Any impact or disruption in the supply chain due to macro issues like the ongoing COVID-19 pandemic might hamper the company's earnings.

Outlook: The company has reiterated its financial guidance for CY21 and expects EBITDA-S and NPAT-S to be marginally ahead of CY20. It anticipates positive momentum to drive the remainder of the citrus season, particularly with increased export into Japan, China, and Korea. CGC also expects the berry season to report improved performance in H2CY21, compared to the prior comparable period.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per a recent update, the company’s Director, Tim Goldsmith has undergone a change of interest in the company and has acquired 10,000 shares for a consideration of $3.06 per share via on market trade. As per ASX, the stock of CGC is trading below its 52-weeks’ average levels of $2.970-$4.811. The stock of CGC gave a negative return of ~33.22% in the past six months and a negative return of ~4.82% in the past one month. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average EV/Sales multiple, considering the decrease in production of key produce, increase in debt levels and risk of uncertainty in climatic conditions. For the purpose of valuation, few peers like Elders Ltd (ASX: ELD), Select Harvests Ltd (ASX: SHV), Tassal Group Ltd (ASX: TGR) have been considered. Considering the expected upside in valuation & current trading levels, improvement in performance in H1CY21, impressive growth in the international segment and optimistic outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $3.01, as on 25 October 2021, 03: 29 PM (GMT+10), Sydney, Eastern Australia.

CGC Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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