Costa Group Holdings Limited

CGC Details
 
Stock Tumbled ~28% on Revised Guidance:Costa Group Holdings Limited (ASX: CGC) is a leading horticulture company in Australia and the largest fresh produce supplier to food retailers in Australia.
 
FY19 Guidance Revised Downward: The company as on 30 May 2019, revised its EBITDA-SL guidance which is now expected to be in the range of $140 million to $153 million as compared to the pro forma CY18 EBITDA-SL result of $125 million. NPAT-SL has also been revised to the range of $57 million to $66 million from CY18 NPAT-SL of $56.6 million, depicting moderate growth in the range of 0.7% to 16.6% on y-o-y basis. Earlier, the company had expected CY2019 NPAT-SL growth of at least 30%.
 
6 Months to December 2018 Financial Performance:The company recently confirmed that CGC’s financial reporting will now be based on the calendar year because of the earnings profile becoming further skewed to the January to June half year period. The management anticipates further amplification to the above condition due to pre-harvest farming costs incurred over the July to December period.For the six months ended December 2018, Costa Group’s revenue went down by 2.4% on the previous corresponding period to ~$478 million. EBITDA before SGARA and material items and amortisation (EBITDA-S) was $335.3 million, down 42% on the prior period. NPAT-S earnings amounted to $8.5 million which was below plan by approximately $3.5 million and Statutory NPAT was $4.3 million. In the last six months, the company has experienced an unprecedented level of volatility across virtually all of its categories and seen the earnings impacted negatively. The six-months ended December 2018 results reflected the issues with respect to the financial reporting year, consolidation of African Blue as a result of CGC assuming majority ownership, an ‘off-year’ citrus crop in which volumes were lower, and the subdued trading conditions in December.
 
 

Profit and Loss Account (Source: Company Reports)        
 
 
Performance of Product Segments:

• Blueberryperformance was mixed. The strong production volumes from the Corindi New South Wales farm was offset by lower volumes from the end of the Far North Queensland season.
• Raspberry production was impacted by unfavourable crop timing and its contribution was disappointing.
• The Citrus category’s contribution was anticipated to be significantly below the prior period due to the ‘off-year’ biennial fruit production cycle, and lower quality towards the tail end of the harvest which affected sales price realisation in November and December.
• Tomatoesfaced a weaker retail channel pull through due to an oversupplied tomato market with more product being sold via wholesale markets, resulting in an overall low price.
• Earnings from the international segment, including farming operations in Morocco and China and royalty income from the Americas are majorly weighted to the first half of the calendar year.
• Other product segments such as avocado, Costa Farms and Logistics segment, and mushroom performed fairly in line with the prior year.

 
Outlook: Forecasts for the full year at the end of April was aligned with the previous financial guidance provided in February. In the month of May, the company faced a diminishing operating environment due to certain factors which in aggregate, are likely to impact the full year results. Some of the major reasons are stated below:
 

• The crop season in Morocco is expected to continue through June, and price competition with Spain is high. Consequently, the season outlook has declined.
• Driscoll’s grower network started to see high waste in the major raspberry variety due to a condition called ‘crumbly fruit’ which is likely to result in low yields and harvest labour inefficiencies.
• The unreasonably warm weather in the month of May adversely impacted Mushroom consumption accompanied with price softness.
• Water allocation for seven citrus orchards remains at 100% for the balance of this water period ending June 30, and the water pricing being high, future allocation levels are uncertain.

 
The impact of the above rapidly emerging conditions suggests that the full calendar year results will be above the prior year but below its earlier expectations.
 
Stock Recommendation:On the price-performance front, the stock yielded -5.30% and -0.38% over a period of one-month and 3-months, respectively. For the six months ended December 2018, EBITDA margin stood at 6.5% which is lower than the Industry median of 18.8%. Net Margin at 0.8% for the same period was also below the industry median of 8.3%. The company’s ROE stood at a low level of 1% in relation to the industry median of 9.8%. Moreover, the company has recently downgraded its earnings guidance for FY19 due to certain environmental challenges which might trigger a sell-off in the stock as investors would flock to book profit at the current levels. Hence, we recommend a “Sell” rating on the stock at the current market price of $3.750 per share (down 27.606% on 30 May 2019).  


CGC Daily Chart (Source: Thomson Reuters)
 

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