The Costa Group Holdings Ltd (ASX: CGC) share price is down 16% in early trade after providing the market a trading update.
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.
What Happened With Costa?
The company said that in the last six months it has experienced an “unprecedented level of volatility across virtually all our categories and seen our earnings negatively impacted.”
Costa said that it has been focused on building capacity to be able to grow blueberries and raspberries for 52 weeks of the year, leaving it as the only significant berry grower for periods that fall outside the main growing season with production across four states. This is loved by retailers because they can supply berries of consistent quality and price year-round.
The fresh food company also said that last year it exported 73% of its citrus crop to over 25 countries. Costa said that avocado exports are also increasingly important for the company – 60,000 trays of avocados were exported in 2018.
Profit Expectations Downgraded
In Morocco fruit quality has been good but price competition from Spain is high. From early May, The Driscoll’s grower network started to see high waste in the major raspberry variety from a condition called ‘crumbly fruit’, Costa is seeing resulting low yields and harvest labour inefficiencies which are substantial.
The warmer weather has supposedly had an effect on mushroom demand and consequently has led to lower prices for mushrooms.
In the citrus fruit category there was a female fruit fly found at the Impi farm at Stuart’s Point and now authorities are in the process of implementing a 15-kilometre exclusion zone from the Riverland fruit fly region, therefore it seems likely that 17,000 of citrus fruit will have to be packed by third party packers and cold treated to meet export protocols.
Water prices remain high and future allocation levels are uncertain.
The company said that its EBITDA-SL for 2019 (click here to learn what EBITDA means) will be in a range of $140 million to $153 million compared to $125 million last year and net profit-SL will be in a range of $57 million to $66 million compared to $56.6 million last year.
Is Costa A Buy?
It is unfortunate that so many of Costa’s food segments have been affected at the same time. This may be short term and therefore it could be a buying opportunity, but there is obviously volatility with its produce segments, so it’s not for the faint hearted.
If I didn’t already own some shares I would be considering whether it’s worth buying today or not, however it’s not an easy decision.
The reliable ASX shares in the free report below might be easier to evaluate and own.
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Disclosure: Jaz owns shares of Costa at the time of writing, but that could change at any time.
