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Costa Group Holdings Ltd (ASX:CGC) announces another juicy acquisition

Costa Group Holdings Ltd (ASX: CGC) has announced the acquisition of citrus fruit and grape grower Nangiloc Colignan Farm (NCF).

Costa is Australia’s largest fresh food grower of tomatoes, avocadoes, mushrooms, berries and citrus fruit.

NCF is located in the greater Sunraysia district of North West Victoria. Citrus fruit and grapes are grown across a total of 567 hectares. This breaks down to 240 hectares of citrus including 103 hectares of Afourer mandarins and 105 hectares of oranges, 204 hectares of table grapes and 123 hectares of wine grapes.

Costa plans to convert a lot of the wine grape plantings to primarily citrus plantings.

However, Costa has agreed that CK Life Sciences will acquire the farm (subject to various conditions) and subsequently lease the farm to Costa for 20 years. CK Life Sciences is an investment business.

Costa CEO Harry Debney talked up the merits of this acquisition “This acquisition and location in the Sunraysia region will reduce reliance on any one region in our portfolio and will also open up additional growth opportunities. In particular, with respect to Afourer mandarins and naval oranges this will allow us to further take advantage of export market demand.”

The farm has 3,800ML of water under permanent licence and also has a 100ML of irrigation dam capacity. The farm infrastructure includes a main operating shed, cool rooms, machinery beds and workshops.

Mr Debney also went on to talk about the opportunities for exporting food in the citrus category:

“Over recent years Costa has embarked upon both greenfield growth and M&A activity in the citrus category. This has been fuelled by expanded favourable export markets and free trade agreements with countries including Japan, South Korea and China. In order to further capitalise on this, Costa is trialling several new mandarin, orange and lemon varieties on commercial sized blocks that have market potential with improved attributes including, seedless, high brix (sugar), red flesh and different maturity timing.”

Costa said that with the current 2,429 hectares of citrus category plantings the company has in the South Australian Riverland, the NCF acquisition will take the total plantings in the Riverland and Sunraysia regions to 2,996 hectares.

Is Costa a buy?

Expanding the total output of Costa’s citrus category is a pleasing move, particularly if some of the produce is going to be exported. There is fast-growing demand for the Asian middle class for quality Australian fresh food.

I also like that Costa is diversifying its growing regions meaning it can continue supplying clients even if there are problems at one particular location.

With Costa management predicting that profit can grow by double-digits for the next few years I think Costa looks attractive at 22x FY19’s estimated earnings.

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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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