Prospects at Costa Group improving

The Costa Group is Australia's largest horticultural company and a major supplier of produce to food retailers in that nation. As citrus recovers and strong prices hold out for mushrooms, the 2021 forecasts for the Costa Group have improved. Tomato demand is also expected to recover with the return to school.

The Costa Group is moving ahead cautiously, continuing to withhold guidance for 2020, despite robust demand for its produce and strong pricing as a result of pandemic-induced disruptions.

While citrus may swing the outcome this year, Citi still believes Costa Group is on track for meeting forecasts for operating earnings (EBITDA) of $146m. The Moroccan harvest is almost complete and the yield and prices are favourable.

Costa Group has benefited from disruptions to the Spanish harvest and Citi calculates Morocco will add $8m to 2020 operating earnings. Meanwhile, China is well ahead of plan, with exceptional yields.

The company has taken advantage of the knowledge gained from the pandemic disruption in China to apply this to other markets. However the costs to mitigate against the pandemic are considerable, Macquarie highlights, with a major dislocation of markets and operations.

Macquarie assesses the first half is critical, as it represents 83% of 2020 forecasts. Still, the majority of core produce categories are now experiencing positive demand and prices in the retail sector.

Wholesale demand has reduced but is showing signs of levelling out. This has mainly affected farms and logistics in the food service sector because of the closure of food outlets. Meanwhile, given the rain on the east coast of Australia in recent months, the company now has good water security across all sites for 2020. As a result construction of the new glasshouse in Guyra has re-started.

Mushrooms, berries & tomatoes
Strong prices and demand are holding up in the grocery channel for mushrooms and the new low-cost Monarto facility will be at full output in July, so profit margins in mushrooms are likely to materially improve. Citi assesses that this new facility will be a "interesting" test of the market's true supply/demand balance.

Citrus remains the biggest uncertainty this year as the crop is smaller and more variable. However, a weaker Australian dollar is helping prices and Japan and the US are accepting imports of citrus. Macquarie notes exports of citrus achieved good prices to Japan in April albeit forward tonnage estimates are well below original expectations.


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