Company Overview: Costa Group Holdings Limited (ASX: CGC) is one of Australia’s leading growers, packers and marketers of fresh fruit & vegetables and operates in five major core categories: berries, mushrooms, glasshouse tomatoes, citrus and avocados. The company’s operations revolve around over 6,000 planted hectares of farmland, 30 hectares of glasshouse facilities and three mushroom growing facilities across Australia.

CGC Details

Business Diversification and Global Expansion to Fuel Future Business Growth: The company operates a diversified premium category portfolio with rising market share, and its vertically integrated business model continues to attain competitive advantage. The company’s diversification focused business is being backed by geographic spread of production, National Australian footprint across the 6 states, Multiple sales channels (domestic & export) and international berry footprint (Morocco, China). The company’s China launch is tracking with respect to the initial five-year plan with further growth potential. In addition, market acceptance for a premium blueberry offering is strong and increasing in China. CGC is optimistic about annual demand growth of over 20% for blueberries, which would be supported by the growing middle class. CGC is focused on breeding varieties suitable for growing in different latitudes and regions, both northern and southern hemisphere. In addition, CGC is optimistic about several opportunities for global blueberry footprint expansion via third party and joint venture growing operations.

1HCY21 Financial Highlights:

• For the half-year ended 27 June 2021, the company recorded revenue amounting to $612.4 million, which was in line with 1HCY20.
• Backed by positive pricing, yield and demand maintained over the entire China season and favourable earlier fruit timing as well as stronger pricing in Morocco, CGC witnessed a growth of ~25% in revenue in the international results.
• EBITDA-S and NPAT-S for the year rose by 4.3% and 3.0% to $124.4 million and $44.4 million, respectively. CGC declared a fully franked interim dividend of 4.0 cents per share to please its shareholders.
• In addition, the company finished the acquisition of wholesale distribution business, Select Fresh Group (SFG), as a part of its strategy to develop and expand its presence in the fresh foodservice sector.
• After the end of half-year, the company wrapped the acquisition of Citrus business, which was underpinned by the successful capital raising of $190 million and from existing debt facilities.
• As on 27 June 2021, the company had a cash balance of $97.0 million as compared to $32 million as on 31 December 2020. The increasing cash was backed by the timing of receipts from the end of the international season.

Revenue Share (Source: Analysis by Kalkine Group)

Commencement of New Leases: As announced on 23 December 2021, the new leases for those farms previously leased by Costa from Vitalharvest has now been effective with Macquarie Asset Management.

• The said leases cover seven farms operated by the company, which include three citrus farms in South Australia and four berry farms (two in NSW and two in Tasmania).
• The new leases begin on 1 December 2021 and will expire in December 2040 with a 10-year option exercisable by Cost.

Top 10 Shareholders: The top 10 shareholders together form around 59.47% of the total shareholding, while the top 4 constitute the maximum holding. Allan Gray Australia Pty Ltd and Ubique Asset Management Pty Ltd are holding a maximum stake in the company at 19.36% and 14.40%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: During 1HCY21, the company recorded a gross margin of 66.8% against the industry median of 37.5%. EBITDA margin for the half-year stood at 19.6% against 18.8% in 1HCY20. On the leverage side, the company recorded a debt-to-equity ratio of 0.82x in 1HCY21 against 1.01x in 1HCY20.

Margin and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Demand and Supply Risk: The company’s business could be impacted by the disruptions in the demand and supply for the products in which it deals.
• Climate Change Risk: CGC is also exposed to a risk arising from the change in climate, which could impact annual crop production.
• Stiff Competition: The company’s operational and financial performance could be impacted by the rising market share of peers.

Outlook: The company believes that it is well-placed to capitalise on rising demand for both blueberries and citrus. Looking forward, CGC’s growth plan revolve around generating revenue, increasing yield, production efficiencies and innovation. This would be mainly backed by the construction of new 10 hectares of tomato glasshouse and China expansion. For CY21, the company anticipates EBITDA-S and NPAT-S to be marginally ahead of CY20, excluding any contribution from 2PH Farms. The citrus season is likely to be supported by strong export into Japan, China and Korea. In addition, the main berry season is expected to deliver healthy growth in 2HCY21. The company is increasing its own plantings in Southern (Agadir) Morocco in order to extend the growing season through earlier timing. Also, the company is focused on expanding its operations in India, Namibia, Laos and New Zealand. CGC is likely to release its FY21 results on 22 February 2022.

Valuation Methodology: P/E 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: The stock is trading below its 52-week low-high average of $2.670 - $4.811, respectively. The stock has been corrected by ~4.56% and ~2.90% in the past one and three months, respectively. The stock has been valued using a P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers’ average P/E multiple, considering the diversified revenue stream and growing international segments revenue. For the purpose of valuation, peers such as Elders Ltd (ASX: ELD), United Malt Group Ltd (ASX: UMG), and Select Harvests Ltd (ASX: SHV), and others have been considered. Considering the expected upside in valuation, growing international revenue, synergies from the recent acquisitions, decent liquidity position, rising earnings, focus on international expansion and optimistic long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $2.880, as on 24 January 2022, 12:34 PM (GMT+10), Sydney, Eastern Australia.

CGC Daily Technical Chart, Data Source: REFINITIV 

Note: The purple line reflects the RSI (14-day period)

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

Note 2: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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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