Why Is Costa Group On A High Run-Up?

On 16 November 2018, Australia’s leading horticultural company, Costa Group Holdings Limited (ASX:CGC) announced that it has signed a conditional agreement for the acquisition of the farming operations of Nangiloc Colignan Farm (NCF) located in the greater Sunraysia district of North West Victoria. Following this news, the share price of the company increased by 10.7 percent as on 16 November 2018 (1:15 PM AEST).

Nangiloc Colignan Farm grows high quality citrus and grapes across 567 hectares, which includes 240 hectares of citrus, including 103 hectares of Afourer mandarins and 105 hectares of oranges, 204 hectares of table grapes and 123 hectares of wine grapes. NCF farms is having around 3,800ML of water under permanent licence and more than 100ML of irrigation dam capacity.

According to the agreement and in conjunction with CK Life Sciences Group, first the farm will be acquired and then CK Life Sciences will enter into a 20-year lease of the farm to Costa group. The acquisition by CK Life Sciences is subject to satisfaction of various conditions. CK Life Sciences is mainly involved in investment holding and in activities of its subsidiaries which includes investment in nutraceuticals, pharmaceuticals and agriculture-related products and assets.

According to the Costa Group’s CEO Mr. Harry Debney, the acquisition and its focus on the Sunraysia growing region open up growth opportunities which are not available in the South Australian Riverland, an area where Costa produces approximately half of the citrus crop. Mr. Harry also told that in the past few years Costa Group has embarked upon both greenfield growth and M&A activity in the citrus category which has been fueled by expanded favorable export markets and free trade agreements with countries including Japan, South Korea and China. Currently, the company is having 2,429 hectares of citrus category plantings and after the acquisition it is expected that the company is going to have around 2,996 hectares of total plantings in the Riverland and Sunraysia regions.

In FY 2018, the revenue of the company increased by $93.0 million to $1,002.0 million as compared to last year. The company delivered a $76.6 million of underlying Net Profit After Tax, which is an increase of 26.3 percent on the previous full year and in line with the company’s forecast. EBITDA before SGARA increased by $35.6 million to $150.8 million in FY 2018 as compared to the last year mainly driven by the Produce and International segments. During FY 2018, there was a significant activity in company’s international growth projects, with the successful completion of acquisition of a majority ownership stake (increased from 49% to 86%) in African Blue. Due to the increased debt from the acquisition of African Blue and growth related capital expenditures, the net finance cost increased by $1.9 million to 7.16 million in FY 2018. The company is planning to make its portfolio broad enough to mitigate agricultural and market risks while maintaining a strategic focus on high-growth and high-value fresh produce categories.

In the last six months, the share price of the company decreased by 17.98 percent as on 15 November 2018. CGC shares traded at $6.820 with a market capitalization of circa $1.97 billion as on 16 November 2018 (AEST 1:00 PM).

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