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Why Costa Group’s 2020 guidance is in danger of being downgraded

It seems as though Costa Group Holdings Ltd (ASX: CGC) and its shareholders just can’t catch a break these days.

This afternoon the horticulture company was forced to provisionally downgrade its earnings guidance again following a weather event in South Australia this week.

What happened?

According to the release, on the afternoon of November 5 there was a hailstorm event in the Riverland region of South Australia.

This caused damage to three of Costa’s seven citrus farms in the region – Yandilla, Kangara and Amaroo.  Approximately one-third of the ~1,700 hectares of farmland was impacted by the weather event.

While the trees that were affected have not sustained any structural damage, the hailstorm has damaged the early stage fruitlets that are naturally forming on the trees at this time of year.

As the 2019 calendar year harvest has already concluded, there will be no financial impact for this year. Nor is there expected to be any impact in 2021 onwards.

But in 2020 Costa believes there may be some impact on the quality of some of the crops. If this eventuates, it warned that it may have an impact on pricing in the 2020 calendar year.

What will the financial impact be?

Management advised that it is still too early to know for sure but has given its best estimate.

It said: “Based on current information available to us, if the quality of some of the crops is impacted, we estimate that there may be an EBITDA-SL impact of between $4m-$6m and a corresponding NPAT-SL impact of between $3m-$4m in CY20.”

“However, given the preliminary nature of this assessment and it being too early to predict how other parts of Costa’s portfolio will perform in CY20, it is too early to determine whether any impact from this event will result in a change to the recently announced CY20 forecast,” it added.

Last month Costa revealed that it expects calendar year 2020 EBITDA-SL to be approximately $150 million and NPAT-SL to be approximately $56.6 million. So this wouldn’t be the biggest downgrade if it eventuates, but is still a touch disappointing.

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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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