The Costa Group Holdings Ltd (ASX: CGC) share price is down nearly 33% after giving investors a trading update and profit guidance.
Costa is Australia’s largest horticultural business. It produces glasshouse tomatoes, berries, avocados, mushrooms and citrus fruit. It has over 4,500 planted hectares of farmland, 30 hectares of glasshouse facilities and seven mushroom growing facilities across Australia.
Costa also has international interests, with majority-owned joint ventures covering six blueberry farms in Morocco and three berry farms in China.
Costa’s Disappointing Trading Update
Costa said that it has experienced subdued demand in a number of categories, particularly tomatoes, berries and avocados during December 2018. The fresh produce company also said that trading conditions in January are slower than expected.
The “patchy” demand has resulted in reduced pricing for a number of product lines. The citrus offseason also finished earlier than expected.
Costa said that all of the above factors will result in a reduction of previous profit guidance. But there were more warnings…
If current trading conditions continue, combined with short term slippage of the commissioning of the Monarto mushroom facility upgrade in South Australia and the previously announced additional costs from investments such as African Blue, Costa expects its 12-month underlying profit to be essentially flat.
The previous prediction for underlying profit was for double-digit growth.
Should Investors Worry About Costa?
Costa said it doesn’t view the immediate issues as structural, instead, it regards the conditions as cyclical. Management believes it can still reach an underlying profit figure that will be in line with previous guidance and maintain double-digit compound profit growth between 2017 and 2019.
As a small silver lining, Costa is that ongoing growth plans across the categories continue to track well.
Is It Time to Buy Costa?
I think this could be an opportunity for potential Costa investors who have been waiting on the sidelines for a cheaper price.
However, there is a chance its shares will fall lower in the coming days as shareholders absorb the bad news. Therefore, it may be better to go for more reliable businesses such as the ones in the free report below.
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