Costa Group Holdings
Date of inclusion: 4 August 2021
Share price on inclusion in Marc & Stuart’s Top Picks: $3.21
52-week range: A$2.78 – A$4.81
Risk Level: Medium
Australia’s largest supplier of fruit and vegetables
Costa Group has grown from a single fruit shop in Warrnambool into Australia’s largest supplier of fruit and vegetables. Whether you’re buying berries, mushrooms, glasshouse tomatoes, citrus products or avocados in Australia, they likely have passed through Costa’s warehouses on the way to market or have been grown by Costa on its more than 6,000 planted hectares of farmland, 30 hectares of glasshouse facilities or the company’s three mushroom growing facilities across the country. Some years ago Costa started to go international, setting up blueberry farms in Morocco and berry farms in China, thereby offsetting the seasonality of the core business.
Costa stock was battered by the 2018-19 Australian drought, but is now in recovery mode
The 2018-2019 drought reduced the availability of product at the same time as Costa had taken on a lot of debt to expand its various facilities. The result was a late 2019 recapitalisation at $2.20 per share. After that event the drought broke and Costa stock steadily recovered, helped by the fact that gearing was much more modest, with interest cover in calendar 2020 a healthy 7.7x.
Costa is defensive
Food stocks did well through 2020 due to the perception that people still had to eat in spite of a raging pandemic. Obviously, the company’s earnings are subject to the vagaries of the weather, but we believe Costa is gradually offsetting that with its overseas expansion.
May 2021 guidance has created a buying opportunity
On 27 May 2021, at the Annual General Meeting, Costa management indicated that the 2021 calendar year might see slower growth than expected due to production issues in mushroom, citrus and tomatoes. We think the resulting sell-off was overdone for issues that were temporary. Costa is now (4 August 2021) trading at an EV/EBITDA multiple of only 11x FY22 consensus in spite of consensus EBITDA growth expectations in excess of 15% per year for the next two years. The recent acquisition of 2PH Farms, a citrus grower, indicates that Costa is back in growth mode.