Why the Costa Group Holdings Ltd share price is soaring

Credit: Didriks

Having recently completed its first year on the ASX – and with shares up 40% – it’s time for investors to have another look at Costa Group Holdings Ltd (ASX: CGC). This diversified horticulture company has interests in Australia, China, and Morocco, while producing a variety of fruits including berries, bananas, tomatoes, and citrus plants.

Over the past year, Costa has proceeded to diversify its holdings nicely in terms of both geography (here and overseas) and crop. This protects it from a downturn or disease in any particular crop, and indeed the company managed a strong result last year despite plunging tomato and banana prices.

Source: Costa Group report

Source: Costa Group report

Costa’s growing export and international production capacity is also improving its resistance to ‘supplier risk’, which is the potential for buyers like Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) to pressure it for lower prices.

As its global footprint grows, Costa may be able to reliably export oversupplied crops from here to more attractive markets.

Management has also bought into the China story in a reasonable way, with one berry farm in China and a second being recently purchased. The expertise gained by operating in China should stand the company in good stead over the long term. Foolish contributors have written before of the growing demand for food in China and Costa stands to benefit.

At the time of the Initial Public Offering (IPO) I avoided Costa, as much of the land is held by the Costa family (who leases it to Costa the company) and I felt that the company’s debt levels were high given that there were few assets to underpin it. Now that the company’s debt has come down it is in a much more attractive position – low debt should be a mandatory requirement for owning farming businesses, in my opinion.

With the forecast growth in profits for the year, Costa looks to be valued at around 18 times its forecast earnings, or 20 times last year’s pro-forma earnings. With a more attractive balance sheet and its expert management the company looks a decent prospect for investors wanting to play the so-called ‘food boom’ over the next 5-10 years.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. 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.

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