Dining Boom: Why Costa Group Holdings Ltd should be on your watch list

Credit: Didriks

Costa Group Holdings Ltd (ASX: CGC) is a fairly newly listed fruit and vegetable producer with a market capitalisation of $990 million.

The supermarket wars driving prices lower have been quite detrimental to Coca-Cola Amatil Ltd (ASX: CCL) and Woolworths Limited (ASX: WOW). But this doesn’t seem to have had the same effect on Costa.

In its FY16 results Costa revealed pro forma revenue growth of 11.8% and pro forma net profit after tax growth of 29.7%.

Costa has four main produce segments: mushrooms, berries, citrus and tomatoes.

Overall the fruit and vegetable industry saw price deflation of 1.67% in the last financial year, most of this deflation was felt in the banana, apple, tomato and potato categories. Costa only produces bananas and truss tomatoes, so its exposure was limited to the deflation. The other categories for Costa were stable or achieved growth.

Even though there was some price deflation, Costa still managed to increase revenue in all of its segments. In FY16 Mushrooms were 29% of total sales and Costa grew mushroom revenue by 4%. Citruses comprised 33% of sales and grew by 32.2%. Berries were 22% of sales and grew by 26.4%. Tomatoes were 16% of sales and grew by 14.4%.

The growth of all of these categories was mainly through volume growth. Costa expects to have another good year in FY17 as it expands its plantations and also has purchased more farms to add further growth.

Management has estimated net profit after tax (before self generating and re-generating assets) growth of 15% for FY17 in a recent update (excluding a one-off non-cash impairment against the company’s investment in Polar Fresh).

Another part to Costa is its international division. It is a joint owner of berry producer African Blue, which has five farms in Morocco that sell to Europe. Costa also gets a royalty stream from licensing propriety blueberry varieties.

In January 2016 Costa created a joint venture with Driscoll’s to create farms in China. The first farm has been established with raspberries and blueberries. Costa owns 70% of this venture.

Foolish takeaway

Costa has good diversification by geography and food type that it can sell in the future. Although I’m not expecting huge growth in the coming years, it could be a good company to own to profit from the food boom and healthier changes that society is making.

Costa is trading with a price/earnings ratio of 38.8, which is expensive but perhaps worth it for the growth potential. It has a grossed up dividend yield of 4.16% which looks pretty attractive. Costa is definitely a stock that I have on my watchlist.

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Motley Fool contributor Tristan Harrison 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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