How strong is the national obsession with fresh food? The Bureau of Statistics suggests 94.5% of the general adult population is not meeting recommended dietary intake levels for fruit and/or vegetables. That hasn’t stopped sales within the fresh fruit and vegetable industry growing at twice the rate of population since 2008.
The nation’s favourite fruit is the humble apple with a 15 per cent share of sales, while potatoes are the highest grossing vegetable with 18 per cent of sales. Incorporating raspberries, blackberries, blueberries, and strawberries – the berry segment is one of the industry’s fastest growing segments, generally witnessing double digit demand growth during recent years.
Berry demand has been a boon for the coming listing of Costa Group, which is the nation’s largest horticultural enterprise. Costa Group’s operations traverse the fresh food supply chain, from farming to logistics, wholesaling and marketing. On behalf of proprietary and third party farmed produce, the Company represents 9.5 per cent of Australia’s fresh fruit and vegetable industry. Within its core segment’s Costa Group’s market share is more significant, representing 91 per cent of raspberries, 77 per cent of blueberries, and 42 per cent of mushrooms supply in Australia.
Its listing on the Australian Securities Exchange represents a sell down by existing shareholders including the Costa Family and private equity group Paine + Partners. Whilst they are scheduled to retain a collective interest of ~ 23 per cent, incentive for new shareholders is provided by Costa Group’s capacity to expand its dominant market positions. Investment into upstream farming operations have placed the Company on course to generate its third consecutive period of increasing revenue and operating profit. Planted Hectares within its domestic tomato and berry operations are scheduled to rise by 50 per cent and a third respectively. Increasing contribution from Costa’s Group’s high growth international operations also have potential to generate returns.
Whilst the Company generates 75 per cent of income from ‘protected cropping’, uncontrollable weather and yield events create earnings volatility risks. Other considerations for new investors is the Company’s capital deployment strategy. Agriculture is a capital intensive industry and Costa Group’s investment hurdle of 20 per cent over three to five years may not exceed its cost of capital during periods of rising interest costs. However now buoyed by the benefits of vertical integration and dominant market positions, the outlook favours a mix of modest capital growth and income.
Company: Costa Group Holdings Ltd
ASX Code: CGC
Shares on Offer: 236.1m – 245.9m
Listing Price: $2.20 - $2.70
Market Capitalisation: $703.9m – $839.4m
Listing Date: July 24th
Author: Tim Morris
Jul 23, 2015
Having studied Commerce and Science at the University of New South Wales, Tim began his career in an analytical capacity with Wise-owl. Tim has conducted over 500 corporate valuations and appraisals, specialising in pre revenue assets and emerging markets. For the last five years, his Equity Capital Market insights have been featured as part of a weekly column in The Australian and regularly features on Sky News, CNBC, ABC and Bloomberg TV.