This top fund manager thinks Costa Group Holdings Ltd (ASX:CGC) is a buy

I think it’s an interesting move to watch how the top-performing fund managers operate. Brokers often have self-interested reasons for promoting a share. If a fund manager decides to buy a share then that’s purely because the share is good value in their opinion.

The Bennelong Concentrated Equities Fund was the best performing long-only over three and five years according to Mercer a few months ago.

Yesterday, it was announced that Bennelong had increased its holding of Costa Group Holdings Ltd (ASX: CGC) from 10.21% to 11.34% on 7 September 2018. You have to strongly believe in the company when you own more than 10% of it.

As a reminder, Costa is one of Australia’s largest food companies – it grows tomatoes, citrus fruit, mushrooms, berries and avocadoes.

In FY18 Costa revealed that NPAT-S grew by 26.3%, which was a solid result. One of the key pleasing aspects of the report to me was that the Produce EBITDA-S margin grew from 12.3% to 14.1%, showing the economies of scale are helping the fresh food producer grow the bottom line faster.

Costa will hopefully benefit from growing food prices over time for a variety reasons: diets are moving towards more fresh food, Asian middle class demand for quality Australian produce will likely keep increasing and some food experts predict there could be a global food shortage by 2030.

However, Costa isn’t just relying on price increases for growth. In FY18 it invested $132.3 million in growth initiatives. Approximately $61.6 million of the money related to acquisitions and the rest was growth & productivity capital expenditure – separate to operating capital expenditure.

I’m also a fan of the fact that Costa is expanding geographically in both China and North Africa.

There are risks too. One of the key risks is that Costa is subject to food price movements just like any other food producer. Droughts, weather disasters and price competition from competitors and supermarkets could all harm profits.

Foolish takeaway

Costa is becoming increasingly profitable and is predicting NPAT-S growth in the low double digits for the short-term. It’s trading at 23x FY19’s estimated earnings. With the share price currently declining I’d personally wait to see it stop falling before pressing the buy button, but I am very interested in buying more Costa shares for my portfolio.

Instead, I’m closely look at one of these top shares as my next share purchase, it has strong ageing tailwinds and is trading at an attractive price.

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Motley Fool contributor Tristan Harrison owns shares of COSTA GRP FPO. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. 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 Scott Phillips.

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