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Should you buy Costa Group Holdings and Select Harvests Limited for Chinese growth?

While the past seven months have been a very pleasing period for investors who backed the initial public offering of fruit and vegetable grower Costa Group Holdings Ltd (ASX: CGC) with the stock up around 15%, it’s been a rather torrid period for shareholders in almond producer Select Harvests Limited (ASX: SHV) who have watched on in horror as the stock has plunged 60% since late July 2015.

Readers will of course be familiar with the appealing thematic of the Asian region’s growing demand for high protein, high quality food, and the potential for Australia to become the “food bowl” to Asia.

With both Costa and Select Harvest reporting interim profit results, it’s a timely opportunity to review both stocks.

Costa Group

  • Pro forma revenue increased 12.7% to $403.8 million
  • Pro forma net profit after tax was $20.2 million
  • An interim dividend of 3 cps was declared
  • Net debt was $113 million at balance date
  • Costa reported impressive operational developments including achieving consistent year round production in high quality blueberries, the commissioning of a new 10-hectare tomato glasshouse which is now operating at capacity and the signing of an agreement which will see Costa hold 70% in a joint venture to produce berries in China.
  • The group provided guidance for transacted sales to exceed $1 billion for the full year and for the prospectus pro forma profit forecast of $47.6 million to be achieved.

Select Harvests

  • Underlying net profit after tax increased 8% to $21.1 million with the highlight being the 64% earnings growth of the Food division
  • Underlying earnings per share were down 7% to 29.5 cps
  • Net debt was $52.6 million
  • An interim dividend of 21 cps, up 40%, was declared

Food Bowl

While food demand in China will surely rise, profiting from this dynamic is not necessarily easy.

Most agricultural businesses remain exposed to uncontrollable external factors such as commodity prices and the weather which limits their investment appeal.

Companies such as Costa and Select Harvests like certain other ASX-listed peers including Huon Aquaculture Group Limited (ASX: HUO) and Australia Agricultural Company Ltd (ASX: AAC) are in the process of vertically integrating, building their brands and limiting their exposure to environmental factors. The companies that do this successfully and capture market share in China will be best placed to profit from the “food bowl” theme.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.