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Costa share price crashes 31% lower after completing its institutional entitlement offer

The Costa Group Holdings Ltd (ASX: CGC) share price has crashed lower after returning from its suspension this morning.

The horticulture company’s shares fell as much as 31% to $2.38 before rebounding slightly.

At the time of writing the Costa share price is down 23% to $2.66.

Why is the Costa share price being hammered?

Investors have been selling Costa’s shares today after it downgraded its earnings guidance and undertook a capital raising.

Due to tough trading conditions, Costa downgraded its 2019 calendar year earnings guidance. It now expects adjusted net profit of $28 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of $98 million over the 12 months.

This compares to its previous guidance, which itself had been downgraded, of EBITDA in the range of $140 million to $153 million and net profit in the range of $57 million to $66 million.

Whilst that downgrade was always going to weigh on its shares today, the addition of a dilutive capital raising added extra weight.

This morning Costa completed its institutional entitlement offer and raised approximately $87 million. The offer was strongly supported by eligible Costa institutional shareholders, who took up approximately 88% of their entitlements. These funds were raised at $2.20 per share.

A bookbuild for the institutional entitlement offer shortfall shares was then conducted and attracted strong demand from both existing shareholders and other institutional investors. The bookbuild cleared at a price of $2.30 per share, which was a 10 cents premium to the offer price.

Costa CEO, Harry Debney, was pleased with the outcome of the institutional entitlement offer.

He said: “We are very pleased our shareholders have strongly supported the equity raising, which is part of a prudent approach to ensure Costa’s balance sheet will continue to allow the company to deliver on current and future growth initiatives in order to deliver strong shareholder returns in the medium to long term.”

“There was strong demand for shortfall shares in the Institutional Shortfall Bookbuild from both existing shareholders and new investors, and we are pleased that institutional shareholders who did not participate and other ineligible institutional shareholders will receive a premium of $0.10 for their renounced entitlements”, added Mr Debney.

Retail entitlement offer.

Costa will now push ahead with its retail entitlement offer, which is expected to raise approximately $90 million at $2.20 per share.

This offer will open on Wednesday November 6 and gives eligible retail shareholders the opportunity to subscribe for 1 new share for every 4 existing shares held. To be eligible, investors need to own shares when the market closes on October 31.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. 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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