Why Costa Group Holdings Ltd (ASX:CGC) could light up the market in 2019

Costa Group Holdings Ltd (ASX: CGC) shareholders must have been feeling pretty happy this weekend after shares in the Australian fruit and vegetable producer rallied strongly on Friday, finishing the day up almost 5.5%. This is the second consecutive Friday that Costa Group has been the top performing stock out of the ASX200, and it adds to the impressive recovery in the company’s share price in November. After several months spent in freefall, Costa Group shares are already up almost 14% so far this month.

Last week’s late share price surge was in response to an announcement that Costa Group had acquired the farming operations of Nangiloc Colignan Farm in the Sunraysia district of North West Victoria. The deal significantly increased the number of hectares of citrus and grape plantings in Costa Group’s portfolio, making the company less reliant on its existing citrus plantings in the South Australian Riverlands.

The acquisition also provides Costa Group with new international growth opportunities. Nangiloc Colignan Farm produces Afourer mandarins and navel oranges, both of which are key export items to Asian markets.

What drove Friday’s gains?

The jump in Costa Group’s share price came on the back of a positive trading update issued by the company at its Thursday AGM.

Costa Group admitted that earnings for the 2018 calendar year would be lower than the 2017 calendar year, but this was for a number of reasons. Firstly, seasonal factors have decreased this year’s citrus crop. The company states this is due to citrus’ “biennial bearing cycle”, meaning output levels should rebound in 2019.

The other reasons for lower earnings this year are almost all down to Costa Group’s growth strategy. Depreciation and interest charges will be higher due to increased capital expenditure while farming cost investment will be higher due to the newly acquired Nangiloc Colignan Farm operations as well as the expansion of its Chinese and Moroccan businesses.

The upside to all this is that it sets up Costa Group for a bumper 2019. The company stated that it expects earnings for the 2019 calendar year to be 30% above 2018, with the bulk of its revenues skewed towards the second half of the year. This would allow the company to continue to deliver on its promise of low double-digit NPAT growth for the next 3 to 5 financial years.

Foolish takeaway:

I believe Costa Group is a solid longer-term investment which still offers great value to new investors at current prices. Despite posting some solid gains so far in November, Costa Group’s current share price of $6.95 is still well shy of the all-time high of $9.04 it hit back in June.

Like fellow health food company Freedom Foods Group Ltd (ASX: FNP), I believe Costa Group is well positioned to cash in on continuing consumer demand for organic, fresh and healthy local produce. Plus, with its expanding overseas operations and increased capacity for export, Costa Group is pursuing exciting opportunities for international growth.

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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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