Rainfall is berry good news for Costa Group

27 February 2020, Written by Matt Ogg

Rainfall is berry good news for Costa Group

Australia's largest horticultural company Costa Group (ASX: CGC) will have a lighter citrus crop this year and its Chinese berry farms may face challenges, but investors were encouraged this morning as the company showed signs of relief for two key growing areas.

Costa announced it had hit its earnings targets with an NPAT-SL of $28.4 million for the 2019 calendar year, along with solid revenue growth of $28.4 million.

The statutory result was in the red though with a $33.8 million loss, due to closure of higher-cost mushroom sites and the acquisition of the African Blue blueberry project in Morocco.

The Melbourne-based group also noted its net debt was better than previously forecast at $178.8 million.

But financials aside, one of the more encouraging updates to come out of today's announcement was the emphasis on heavy rainfall received in late January into February for Guyra and Corindi, the epicentres of Costa's tomato and berry operations respectively.

Prior to this weather event the company had dedicated an "intensive focus" on external water sourcing at both its Guyra tomato glasshouses to keep up crop cycles, while the annual raspberry crop was removed to protect the perennial blueberry footprint.

Costa reports the rainfall has now restored a "high level of water security" in Guyra and Corindi, the latter now with a replanting schedule underway for both raspberries and a new blackberry program.

Costa Group CEO Harry Debney is not resting on his laurels though. The company has been victim to volatile weather conditions for more than 18 months now - a state of affairs that led to successive profit downgrades and a subsequent decline in the share price.

"Although our key berry and tomato growing locations at Corindi and Guyra have received heavy rainfall over January and into February, improving our overall and ongoing water security across the business will continue to be a key priority in recognition of the risks associated with weather and climate cycles," says Debney.

"The company is committed to making our operations sustainable so they can both better withstand environmental risk including unforeseen and extreme weather events, and maximise opportunities with respect to improving our economic efficiency and profitability over the medium to long term."

The executive recognises the second half of 2019 was particularly challenging, which impacted fruit sizing and yield for its late season citrus, berry and avocado crops.

But in Costa's outlook, the company notes pricing levels have improved considerably across most categories, especially berries and mushrooms, while the outlook for the upcoming Far North Queensland berry season is favourable.

Positive early season performance has also been seen for the company's international segment, lifted by positive customer interest and support EU and UK for Costa's berry varieties.

Potential hurdles

The company explains the impact from the novel coronavirus Covid-19 is still unknown with peak volumes in China to be harvested from March.

Costa currently has 237 hectares of berry production in China including a new development for a fourth farm in Guangmen.

All its farms in the country are in the southwestern province of Yunnan, which to date has had a relatively low number of recorded cases of the virus.

"The China production outlook is positive, and the Coronavirus has not had any material impact to date on harvest activities," the company says.

"There have been distribution and logistics challenges caused by the restrictions on the movement of people and goods, however the challenges are currently manageable, noting the peak harvest period of March to May is approaching. 

"The company is intensely focused on supporting the wellbeing of our people in China."

While the end result will be subject to how the situation with Covid-19 unfolds, Costa is expecting NPAT-SL to be in line with 2018 at $56.6 million.

Another issue Costa will need to contend with is the upcoming citrus season - a crop which is one of Australia's leading fruit export commodities along with table grapes.

The company expects impacts from hailstorm damage in November on its citrus crop will be at the upper end of guidance, or around the $4 million mark.

"In addition, early season yield estimates suggest a lighter crop, due to both density and sizing, the extent of which will become apparent as the season unfolds," the company says.

However, Costa notes the overseas reception continues to be strong for citrus and table grapes.

"Over 70 per cent of the citrus crop was exported for the year, with Japan continuing to be the priority market," the company says, in reference to 2019.

CGC shares were up 6.64 per cent at $3.05 at 2:18pm AEDT.

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Business News Australia

Author: Matt Ogg





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