Costa offers heavy discount for $176m capital raise

In a year marked by successive profit downgrades as Costa Group (ASX: CGC) faced dual challenges of crop problems and slowing markets, the fruit and vegetable company is now raising capital to pay off debt at a price near its IPO level.

Buoyed by the narrative of healthy eating, demand in Asia and world-leading berry genetics, Costa's shares rose steadily for three years from $2.25 on opening day in mid-2015 to $8.68 on 22 June 2018.

But for the last 10 months they have been plummeting back down to earth. Horticulture is a cyclical industry that has rattled investors with every turn of fortune, sending hopes crumbling like so many raspberries that can't be sold.

Following a suspension from quotation that drew suspicions bad news was to come, yesterday Costa announced it would be raising $176 million in an entitlement offer at $2.20 per share; in other words the lower end of its IPO listing price.

Since listing the company has spent more than $400 million in capital expenditure and acquisitions to boost its presence in the fresh produce markets of Australia and abroad, including an entirely new expansion into avocados in 2016.

But growth has stalled this year as Mother Nature has impeded Costa's plans. For the current calendar year the group is now forecasting NPAT-SL to be in line with 2018 at around $56.6 million, with the equity raise aimed at strengthening the balance sheet to ride out the prolonged impact of drought conditions.

The company has slated a $60-70 million impairment charge from the accelerated closure of aged higher cost mushroom sites in Tasmania and Queensland, representing a more abrupt transition as it rolls out a new project in Monarto, South Australia.

Water security concerns have also led to a pause in construction for a 10ha glasshouse expansion project in Guyra, NSW.

In citrus the season was off to a very good start that bred confidence for a strong full-year outcome, extended dry and hot conditions impaired fruit growth in late season navel orange and mandarins. This not only reduced fruit size and yields, but has also increased demand for water.

Costa also notes the impact of raspberry crumble continues to build with he season peak still to come. Intensive mitigation work is being carried out but this is taking longer than expected, although the company expects 2020 to be more moderate.

"Management is focused on mitigating these unusual impacts and ensuring Costa is well positioned, subject to receiving adequate rainfall in our operating regions, for a return to more balanced portfolio performance from CY20," says CEO Harry Debney.

"Should the severity of current drought conditions persist or intensify the company will be required to deal with reduced availability of water in some regions, increased water consumption by crops, high water cost, as well as impacts on yield, fruit size and timing dependent on regional variation in heat and dry conditions, and individual crop response."

Business News Australia