Fruit and veg supplier Costa Group Holdings Ltd (ASX: CGC) released a sterling set of results for 2016 this morning. Here are some of the highlights:
- Revenue of $821.9 million, up 11.6% on last year and up 9.6% on prospectus forecast
- Statutory net profit after tax (NPAT) of $25.3 million, up 485.6% on last year
- Pro forma NPAT of $49.3 million, up 29.7% on 2015 and up 3.6% on prospectus forecast
- Final fully franked dividend of 6 cents to bring the total to 9 cents for the year, 3.1% yield at current prices
- Strong start to 2017 with expected NPAT growth of 10%
There is quite a large difference between the statutory and pro forma figures stated above and so it is worth understanding why this is the case. The majority of the divergence is due to $15.3 million of IPO costs and a $6.7 million interest expense adjustment. The interest adjustment relates to the refinancing of group debt resulting in the write-off of $7.9 million of capitalised borrowing. Both of these items are one-off in nature and in my view it is reasonable to exclude them to determine the underlying performance of the business.
The remaining $2 million relates to upfront costs in establishing the company's China berry joint venture with Driscoll's. Personally, I'm okay with discounting these costs as well because they are likely to deliver benefits in future periods. I would take a similar attitude with Nearmap Ltd (ASX: NEA) which has a nascent US operation, but clearly others disagree given the crash in its share price upon its results release yesterday.
It was pleasing to see that Costa split out its maintenance capital expenditure (capex) from its growth capex in its directors' report (I only wish more companies would do this). Interestingly, the company reckons the capital cost of maintaining its current level of business was just $12.1 million in 2016, much lower than the $22.5 million depreciation charge that was booked. Potentially, this means that in fact pro forma NPAT is understated by about $7 million by taking the difference between the two figures and adjusting for tax.
All three of Costa's reporting segments performed well. The produce segment consists of four main product categories being citrus, berries, tomatoes and mushrooms. All categories experienced strong revenue growth with citrus and berries the stand out performers growing 32.2% and 26.4% respectively. Although the division delivered 24.2% profit growth over last year, profit was down 6.1% compared to forecast because tomato sales were impacted by lower pricing due to market oversupply.
The other two smaller divisions both reported higher profits than forecast and last year, but farm and logistics sales were hurt by depressed banana prices. The international segment smashed both sales and profit forecasts with transacted sales of $27.4 million, ahead by 46.5% and profit of $11.4 million, up 46.2%. This division consists of an African joint venture called African Blue with five farms operating in Morocco selling premium berries into Europe and a royalty stream from licensing proprietary blueberry varieties. It will soon be augmented by the Chinese joint venture and overall represents an exciting growth prospect for the company.
On the surface, Costa looks like a mature capital intensive commodity business but its international segment highlights the value of its intellectual property, particularly in terms of berry varieties. I think the business will continue to grow at a decent clip as it continues to export this knowledge to the rest of the world and continues to dominate its product categories domestically.
Furthermore, for a farming company Costa is a fairly capital light operation. Closing capital (debt less cash plus equity) was $459.4 million in 2016, but that includes $131.5 million of goodwill from acquired businesses. Capital invested tangibly is therefore $327.9 million and so using pro forma NPAT adjusted for excess depreciation over maintenance capex, return on capital employed (ROCE) is a very respectable 17.3%.
