Citrus looking fruitful for Costa

Costa Group ((CGC)) may be set to deliver higher growth from its citrus operations than previously expected. The company is Australia's largest marketer of citrus, with a 16% market share and exports making up around 70% of its crop.

Brokers have visited operations in Renmark, South Australia, where the company's entire citrus business is located. Costa Group operates five citrus farms and two packing facilities, with recent upgrades expected to benefit the business in FY18-20.

UBS suspects citrus is the least well understood of the company's five segments. Certainly, the broker acknowledges it underestimated the scale of the operations and the number of efficiency programs being undertaken. Initiatives have also been taken to minimise weather impacts.

This forms the basis for UBS expectations that citrus should grow modestly in terms of its share of produce operating earnings (EBITDA) in the near term. This expectation is coupled with a strong outlook for mushrooms, berries and avocados.

UBS considers the company positioned for low double-digit growth over the next 3-5 years. Nevertheless, while over 70% of earnings emanate from protected cropping, being an agricultural company some volatility in earnings should be expected. UBS reiterates a Buy rating and $5.70 target.

Ord Minnett agrees that despite being an agricultural business, Costa Group is relatively resilient. Product and geographical diversity support the business and de-risking of farming operations has occurred where possible, including protected cropping, water storage and back-up electricity to protect mushroom production from power outages.

The main question for Ord Minnett is just how much more growth can be delivered, although higher prices and yields for citrus could lead to upside to forecasts. The broker notes market expectations are high, yet still suspects management's 10% adjusted net profit growth guidance for FY18 may be too low. Ord Minnett has a Hold rating and $5.01 target.

Higher Prices?
Last year Costa exported $70m of citrus product. Ord Minnett concludes from research and comments from competitors that higher citrus pricing is being experienced, although the company has not confirmed this. The broker looks forward to the AGM trading statement at the end of November, by which time two thirds of the FY18 citrus harvest will be completed.

Ord Minnett considers materially higher citrus export pricing is the main positive in the outlook. The broker also notes a $5m onerous lease provision taken within the farms and & logistics division last year is non-repeating. As well, there is growth in avocados, where prices remain elevated, raspberries and international operations. The main offsetting factors currently noted are the prices of blueberries and truss tomatoes.
 
Source: www.fnarena.com

Publication date: 10/6/2017


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