Should Costa Group be in your ASX 200 share portfolio?

The Costa Group Holdings Ltd (ASX: CGC) share price has dropped 2.47% on the ASX this afternoon, to trade 13 cents lower at $5.14.

Costa Group describes itself as “Australia’s leading grower, packer and marketer of premium quality fresh fruit and vegetables.” The company sells mushrooms, berries, tomatoes, avocados, grapes, bananas and citrus fruit from its own farms, as well as a group of strategic alliance partners. These partners allow Costa to provide fresh produce in Australia, Asia, North America and Europe throughout the year.

Growth forecast upgraded on 1H FY19 results

Costa is a growth company that has traditionally traded on a multiple which reflects that. The Costa share price is down 41% from its all-time high, after announcing on 10 January 2019 that it expected flat profit growth in FY19. The halt to profit growth was unexpected and brought about by weaker demand for its berries and avocados, alongside some delays in upgrading a mushroom facility.

On 27 February 2019, the company released its half-year results, which were better than the market expected. Costa Group’s share price was up 4.4% on the day, from a 2.4% decline in revenue and a 42% decline in EBITDA before SGARA, material items, and amortisation. Fortunately, management said that: “during February solid price recovery has been experienced across our categories from the earlier challenging period.” For the calendar year to 31 December 2019, management now expects profit growth of at least 30%.

Costa has grown both organically and through acquisitions. The company most recently acquired berry producer African Blue and used some debt to do so. Net debt currently sits at $244.6 million. Investors should not only pay attention to the amount of debt that the company has on the balance sheet but also the serviceability of that debt. Costa paid $4.2 million in interest expenses, for the half to 31 December 2018. This is compared to $3 million in the prior corresponding period. Interest rates are not expected to rise rapidly in the near term.

Costa shares go ex-dividend on 13 March, with the company paying a 5 cent fully franked interim dividend. This dividend brings the company’s yield to 2.56%, or 3.66% grossed up.

Foolish takeaway

There is no doubt that the average person is more health conscious than they were 20 years ago. Costa has a number of recipes on its website, but I think healthiest thing for you to do is buy some shares in the company. Over the long term, I expect Costa Group’s current share price and forward P/E ratio of 21x to represent a respectable entry point.

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Motley Fool contributor Proutlb95 has no position in any of the stocks mentioned and expresses his own opinions. 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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