Why National Australia Bank Ltd is a major shareholder of Costa Group Holdings Ltd

Credit: Didriks

There are few votes of confidence bigger than one of the country’s largest asset managers owning shares in a company.

National Australia Bank Ltd (ASX: NAB) owns one of the country’s largest pension funds called MLC. It has a lot of capital to invest and chose Costa Group Holdings Ltd (ASX: CGC) as one of its investments.

Costa is one of Australia’s largest fresh food producers with some of its main food categories being mushrooms, berries and citrus fruit. Avocadoes became another major category after Costa purchased Avocado Ridge and Lankester. The company now has around 500 hectares of avocado plantings. It has an aim of becoming the number one market player in the avocado sector in Australia.

Costa has big growth plans with aims to double the capacity of its South Australian mushroom farm and to continue to expand in Morocco and China.

In China the company had planted 50 hectares between its two farms at Bailing and Manlai. The two farms are growing blueberries, raspberries and blackberries. A further 58 hectares is being planted in this financial year at a cost of around $20 million. Costa has also secured a further 100 hectares to grow over the next 18 months at the Manlai site.

In FY17 Costa more than doubled its statutory net profit after tax (NPAT). It grew its revenue to $909.1 million in FY17, which was a 10.7% increase compared to FY16. The company expects net profit after tax before self-generating and re-generating assets to show growth of 20% in FY18.

Foolish takeaway

Costa is one of the best-looking food shares on the ASX in my opinion. The company could generate a lot of growth through farm expansions as well as increased earnings from the increased cost of its produce as the human population increases and demand for food increases.

Costa is trading quite expensively at 33x FY17’s earnings. I haven’t bought any shares yet because of the high valuation, if the price/earnings ratio dropped below 30 then I might be more interested.

Until Costa becomes cheaper I’m going to try to buy these hot stocks at good prices.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia owns shares of National Australia Bank Limited. 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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