The Motley Fool

Why I think Costa Group Holdings Ltd (ASX:CGC) is a buy right now

Shareholders of fruit and vegetable producer Costa Group Holdings Ltd (ASX: CGC) finally had something to cheer about on Friday after the company’s share price surged almost 12% higher, making it the day’s top performer on the ASX200. An upswing like this had been a long time coming for Costa Group – only a week or so ago the company’s shares had looked like they were on the brink of dropping below the 52-week low they had set back in February.

Friday’s price surge was in response to an announcement the company made concerning its acquisition of the farming operations of Nangiloc Colignan Farm in the Sunraysia district of North West Victoria. Under the arrangement, Hong Kong agriculture and biotechnology company CK Life Sciences will actually acquire the farmland and will then enter into a 20-year contract to lease the land to Costa Group.

This will significantly increase the number of hectares in Costa Group’s Riverland and Sunraysia farmland portfolio. According to the Friday announcement, Costa Group currently has 2,429 hectares of citrus plantings in the South Australian Riverland area. This new deal will add an extra 240 hectares of citrus, 204 hectares of table grapes and 123 hectares of wine grapes.

Costa Group CEO Harry Debney expects that the deal will reduce the company’s reliance on its Riverland assets, as well as open up new and significant growth opportunities. The citrus plantings at Nangiloc Colignan Farm include 103 hectares of Afourer mandarins and 105 hectares of oranges, both of which are key export items.

Investors will hope that this announcement will reinvigorate Costa Group’s shares, which have been on a downward trajectory for a few months now. However, as recently as June, Costa’s share price was reaching new all-time highs, even breaking through the $9 barrier for the first time in its history. It has now fallen back to $6.89.

But if the momentum from this new deal lasts now might be a great chance to snap up shares in Costa on the cheap. Costa is Australia’s largest horticultural business and could be a good long-term growth company to buy and hold. With its large portfolio of fruit and vegetables, the company taps into growing popular consumer trends for healthy eating.

This is borne out in its financials. For FY18, Costa Group reported annual revenue growth of 10.2% to just over $1 billion. Statutory NPAT almost doubled to $115.2 million, but a great portion of that was due to a one-off step change in accounting treatment brought about by the consolidation of African Blue, its Moroccan blueberry joint venture. Although even after stripping this and other material items out of the result, Costa Group still reported underlying NPAT growth of 26.3% to $76.7 million.

Costa is also bullish about its future growth prospects, pursuing a number of expansionary projects both within Australia and across its international segment. The company expects its focus on long-term sustainable returns will mean it is well positioned to deliver low double-digit earnings growth over the next 3-5 years.

Foolish takeaway:

This new Nangiloc Colignan Farm deal has done a lot to show the market that Costa Group is serious about seizing opportunities for strategic expansion. Hopefully, it will remind investors that Costa is a growing company that can continue to deliver long-term returns to its shareholders.

Along with fellow health company Freedom Foods Group Ltd (ASX: FNP), and even the salmon producers like Tassal Group Limited (ASX: TGR) and Huon Aquaculture Group Ltd (ASX: HUO), I think Costa Group is well positioned to benefit from increasing consumer demand for healthy and organic fresh produce. And given its share price is still well below its 52 week high, it could offer good value to new investors right now.

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Motley Fool contributor Rhys Brock owns shares of COSTA GRP FPO and Freedom Foods Group Limited. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia has recommended Freedom Foods Group 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 Scott Phillips.

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