Costa Group halts trading after earnings warning triggers selloff

Mon 11 Jul 22, 3:24pm (AEST)

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Key Points

  • The broker’s FY22 earnings estimate are -5% lower
  • The broker has lowered citrus and avocado revenue/price for 2022, and… carried some avocado weakness into future years due to oversupply
  • Costa Group enters trading halt following Credit Suisse rating and earnings downgrade

Companies seldom enter trading halts for good reason, and when Costa Group (ASX: CGC) paused trading today pending an announcement, the agribusiness’s share price was already down -12% to a two-year low of $2.53.

Today’s fall follows an analyst warning about a potential earnings impact from lower citrus supply and the entrenched avocado oversupply situation.

Earlier today Credit Suisse downgraded Costa to Neutral from Outperform, and slashed its target price -24% to $2.80 from $3.70 on the back of poorer than expected 2022 citrus season expectations.

Disease and myriad challenges

The company delivered a strong first half for the produce segment, despite a myriad of challenges, including lockdowns in China and unfavourable weather in Morocco.

The broker notes while Costa appears to be navigating the current trading environment better than competitors, freight capacity and cost issues are weighing on the stock.

Due to lower quality and disease (navel oranges), the current citrus season from the Southern States is also expected to fall well short of expectations.

While the company's 2PH Farms acquisition means it has exposure to the better-quality Qld citrus, elsewhere, avocado pricing has not recovered to the broker's estimates.

Earnings estimates

As a result, the broker’s FY22 earnings estimate are -5% lower.

Despite a near -10% depreciation in the A$-US$, the broker now expects the group’s A$ citrus export prices to be flat.

"We lowered our citrus and avocado revenue/price for 2022, and… carried some avocado weakness into future years because the industry is entrenched in oversupply."

The broker is now forecasting earnings (EBITDA) - well short of consensus estimates – of $244.3m in FY22 and $280.5m in FY23.

By comparison, consensus estimates are $275m and $302.3m, respectively.

Credit Suisse is forecasting a full year FY22 dividend of 9.00 cents and EPS of 11.82 cents, and 9.00 cents and EPS of 16.71 cents in full year FY23.

Costa Group share price over 12 months.


Written By

Mark Story


Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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