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Costa Group Holdings (CGC): Citrus sours CY22e

CY22e trading update

CGC’s CY22e trading update quantifies the impact of the citrus quality issues while highlighting reasonable trading conditions across the remainder of the portfolio. Key points:

Citrus quality issues: The QLD crop has been harvested and packed and the southern crop (Sunraysia & Riverland) is ~80% complete. The impact of the quality issues highlighted in Jul’22 has resulted in considerably lower pack out rates (20% below budget), lower average pricing outcomes (lower grades) and higher costs.

CY22e guidance: At this stage CY22 EBITDAS is expected to be modestly ahead of CY21 levels, implying ~$220m versus consensus of $230-266m, midpoint of $251m and BPe $263m. The group is operating within all balance sheet covenants.

CY22 pricing trends: YTD22e Pricing trends have been favourable, with average domestic wholesale prices (ex-avocado) up ~15% YOY, export citrus flat YOY and QLD wholesale avocado prices through the peak selling widow up ~20% YOY.

Following the update we have downgraded our EBITDAS forecasts by -16% in CY22e, -3% in CY23e and -2% in CY24e. CY23-24e changes reflect weakness in the AUDUSD impacting dollar sensitive costs (fertiliser & ag-chem). Our NPV target price falls to $2.75ps (prev. $3.55ps) following these changes and adoption of higher discount rate hurdle (+60bp).

Investment view: Buy rating unchanged

Our Buy remains unchanged. Our favourable view on CGC is driven by: (1) expansion and maturation of the international berry operations; (2) expansion and maturation of the avocado orchards; (3) maturation of the citrus orchards driving a material uplift in production volumes; and (4) generating returns on investment in new farming capacity (avocado, citrus and tomato) to grow earnings CY22-26e. The CY22e citrus quality issues appear seasonal rather than structural in nature and as such we do not see them as a recurring impact on the business under more normal seasonal conditions.

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Authored by Jonathan Snape – Analyst – at Bell Potter Securities, 17 October 2022
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