Costa Group Holdings Limited

CGC Details

Business Updates for CY21: Costa Group Holdings Limited (ASX: CGC) is engaged in growing, packing, and marketing fresh fruits and vegetables. It is present in five segments – Berries, Avocados, Citrus, mushrooms, and tomatoes. CGC has announced the acquisition of KW citrus orchards in the Sunraysia region in March 2021, which resulted in increased capacity to export to premium markets such as Japan. Construction of new 10 hectares of tomato glasshouse and 2.5-hectare nursery project in Guyra, New South Wales is likely to lead to increased production capacity. The company focuses on substrate berry production, blueberry improvement program and utilising long crane raspberry and blackberry plants. CGC has reported its performance on harvests in China and Morocco in CY20, which were better than the previous year and expectations. The company has witnessed strong pricing across its four berry varieties. Avocado has seen a growth in its export volumes. The pricing for Avocado remains under pressure due to the higher production of Hass variety.

CY20 Financial Highlights: CGC has registered an increase in its revenue to $1,164.9mn in CY2020 against $1,047.9mn in CY2019. CGC has registered an increase in NPAT to $67.4mn in CY2020 against $27.5mn in CY2019. The company has seen a decline in its cash balance to $32.45mn as on 27 December 2020 against $35.96mn as on 27 December 2019.

Revenue Growth (Source: Analysis by Kalkine Group)

Key Risks: The company is mainly engaged in food production. Thus, any adverse climatic conditions may lead to lower production and impact the financials of the company. The company requires to supply its products regularly to distributors and retailers. Thus, any disruption in the supply chain may impact the financials of the company.

Outlook: CGC expects 1HCY21 to be marginally ahead with robust international operations compared to the same period previous year. The company still expects challenges in domestic produce conditions. The company expects its depreciation and amortisation charges to be ~$110mn for CY2021. CGC continues to look for organic and inorganic growth opportunities with its strong balance sheet in the future. Tomato glasshouses and nursery construction works are expected to complete on schedule and budget. The contribution from the additional ten hectares is not likely to add till the end of CY22.  

Valuation Methodology: EV/Sales based Relative Valuation Method (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 of CGC gave a return of ~-28.96% in the last one month and a return of ~-27.41% in the last three months. The current market capitalisation of CGC stands at ~$1.35bn as of 28 May 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$2.745~$4.890. On the technical analysis front, the stock has a support level of ~$2.80 and a resistance of ~$4.24. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount as compared to its peer median, considering a pricing pressure across avocado segment and a decline in cash balance as on 27 December 2020. For this purpose, we have taken peers Select Harvests Limited (ASX: SHV), Tassal Group Ltd (ASX: TGR), Graincorp Ltd (ASX: GNC). Considering the company has registered a revenue CAGR of 35% over CY18-CY20, increasing capacity through inorganic growth, strong pricing across berries varieties, decent outlook, current trading levels and valuation, we recommend a “Buy” rating on the stock at the current market price of $3.31, down by ~1.781% as on 28 May 2021.

CGC Daily Technical Chart, Data Source: REFINITIV 

Select Harvests Limited

SHV Details

Update on Business Performance: Select Harvests Limited (ASX: SHV) is engaged in processing, packaging, marketing, and distributing edible nuts, dried fruits, seeds, and a range of natural health foods. The company grows, process and sell almonds to the food industry from its owned almond orchards. The company has reported an increase in its Almond yield to 28,250 MT, better than the industry with an average almond price of $6 per kg and production cost at $5.56 per kg. SHV has informed about acquiring Piangil Almond orchard, generating an additional volume. The company focuses on optimising its operational costs and expecting to reduce its water cost by 3% for 2021 crops. The company is witnessing robust global demand for Almonds in a low pricing environment. 

Ceasing of a Substantial Holder: SHV has informed that Vanguard Investments Australia Ltd. has ceased to be the investment manager for an institutional client resulted in terminating to be a substantial holder in the company’s share from 21 May 2021.

1HFY21 Financial Highlights: SHV has registered an increase in its revenue to $84.75mn in 1HFY21 against $61.68mn in 1HFY20. SHV has registered a decline in its profit to $1.27mn in 1HFY21 against $17.35mn in 1HFY20, mainly on the back of higher cost of sales. The company has witnessed a significantly higher water rights price in 1HFY21, leading to higher cost and lower profits. SHV has seen an improvement in its liquidity position with an increase in cash balance to $2.83mn as on 31 March 2021 against $1.45mn as on 30 September 2020.

Revenue Growth (Source: Analysis by Kalkine Group)

Key Risks: The company deals in multiple currencies. Thus, any fluctuation in the foreign currency may impact the financials of the company. The company is mainly engaged in almond production. Thus, any adverse climatic conditions may lead to lower production and impact the financials of the company.

Outlook: SHV continues to focus on reducing its operating costs across all the production areas. Moreover, focus on keeping the balance sheet healthy to explore market opportunities, particularly to increase its almond base. SHV expects the sale of consumer goods and non-almond related products to be completed during 2HFY21. Further, the company expects its debt levels to be consistent as the higher sales receipts may offset crop growing cost and other working capital requirements. SHV continues to focus on developing Carina west processing facility to increase the volume in the future.

Valuation Methodology: EV/Sales based Relative Valuation Method (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 of SHV gave a return of ~-4.37% in the last one month and a return of ~12.16% in the last three months. The current market capitalisation of SHV stands at ~$716.53mn as of 28 May 2021. The stock is currently trading below the average 52-weeks’ price level range of ~$4.91~$6.766. On the technical analysis front, the stock has a support level of ~$5.286 and a resistance of ~$6.616. We have valued the stock using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of high single-digit upside (in % terms). We believe that the company can trade at a slight premium as compared to its peer average, considering a strong balance sheet and an increase in its top line. For this purpose, we have taken peers Graincorp Ltd (ASX: GNC), Tassal Group Ltd (ASX: TGR), Costa Group Holdings Ltd (ASX: CGC) to name a few. Considering the company has registered an increase in total revenue in 1HFY21, healthy balance sheet to explore acquisition opportunities, focusing on reducing operational costs, current trading level, and valuation, we recommend a “Hold” rating on the stock at the current market price of $5.90, down by ~1.007% as on 28 May 2021.

SHV 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.

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