Costa Group Holdings Limited 

CGC Details

Change in Substantial Holder’s Interest: Costa Group Holdings Limited (ASX: CGC) is engaged in the growing of mushrooms, berries, glasshouse grown tomatoes, citrus, avocados, and other selected fruits within Australia. Recently, the company informed the market that Perpetual Limited and its related bodies corporate, a substantial holder of CGC, has increased its voting power from 10.88% to 12.16%.

A Quick Look at 1HCY21 Key Aspects:

• Geographical Expansion: The company recorded a growth of 25% year over year from international revenues, owing to favourable pricing, yield, and ongoing demand over the entire China season, along with robust pricing in Morocco and favourable earlier fruit timing.
• Production Segment: The mushroom retail sales mix in 1HCY21 witnessed a growth of circa 80%, owing to the pre-pack product, which drove the segmental revenues. Coming to the Berry sales mix, there was a better-than-expected finish to the Tasmanian season. However, overall volumes were down in 1HCY21, due to climatic conditions. Total trays (Avocado) production saw a rise of circa 15.2% on pcp, whereas industry volumes went up circa 50% on a year over year basis.
• Buyout Synergies: The company successfully acquired quality assets during the period, namely 2PH & KW Orchards. These acquisitions will aid CGC to increase its total citrus group revenue contribution, open export market opportunities, expand production footprint and gains access to the proprietary breeding program.
• Top and Bottom Details: CGC has reported its top line of $612.4 million in 1HCY21 flat on a pcp basis. The company has reported NPAT-S of $44.4 million during the period, up from $43.1 million reported in the year-ago period.

Transacted Sale Highlight; Analysis by Kalkine Group

Risk Analysis:

• The company is engaged in food production. Thus, any adverse climatic conditions may impact the business of the company.
• In addition, the company needs to supply food products continuously to suppliers and distributors. Therefore, any supply chain disruption may impact the financials of the company.
• Further, forex headwinds, and global uncertainties may erode bottom-line growth.
  

Guidance: For CY21, the company expects EBITDA-S and NPAT-S to be slightly ahead of CY20 (excluding any contribution from 2PH acquisition). The company expects the overall berry crop to meet expectations coupled with ongoing favourable mushroom demand. Owing to decent Citrus yields and quality across the company’s growing regions, it expects robust demand from Japan, China, and Korean market in 2H.

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: The stock of the company has been corrected by ~5.5% in the past three months. Currently, the stock has a 52-week’s high and low level of $4.811 and $3.04, respectively. 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 upside (in % terms). The company might trade at a slight discount compared to its peers’ median EV/Sales multiples, considering integration risk, the impact of COVID-19, forex headwinds, etc. For the purpose of valuation, peers such as Australian Agricultural Company Ltd (ASX: AAC), Inghams Group Ltd (ASX: ING), Elders Ltd (ASX: ELD) and others have been considered. Considering optimistic long-term outlook, capital raising program, acquisition synergies, geographical expansion, valuation, and current trading level, we recommend a “Buy” rating on the stock at the current market price of $3.06, down by ~0.971% as on October 7, 2021.

CGC Daily Technical Chart, Data Source: REFINITIV 

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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