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Costa (ASX:CGC) share price in focus after its results smash expectations

Costa share price

The Costa Group Holdings Ltd (ASX: CGC) share price will be on watch this morning following the release of its half year results.

Those results show that Australia’s leading grower, packer, and marketer of fresh fruit and vegetables is well and truly back on form after a couple of disappointing years.

How did Costa perform in 2020?

For the 12 months ended 27 December, Costa reported an 11.2% increase in revenue to $1,164 million.

This was driven by a 7% increase in Produce revenue to $930.2 million, a 49.1% jump in International revenue to $136.7 million, and a modest 0.8% increase in Costa Farms and Logistics revenue.

Boding well for the Costa share price is the fact that things were even better for Costa’s earnings in 2020.

The company’s operating earnings before SGARA and leasing (EBITDA-SL) increased 47.2% over the prior corresponding period to $144.8 million. This was driven by a strong harvest in China, a recovery from 2019 issues in the domestic market, and strong demand and pricing.

On the bottom line, the company posted a 108.4% increase in net profit before SGARA and leasing to $59.4 million. This reflects an effective tax rate of 14.8%, assisted by tax concessions in China and Morocco for agricultural companies. It offset COVID-19 costs of $5.4 million.

Thanks to its strong performance, the Costa board was able to declare a 5 cents per share fully franked dividend.

How does this compare to expectations?

The good news is that this result was significantly ahead of the market’s expectations. This certainly bodes well for the Costa share price on Monday.

According to a note out of Morgans, its analysts suspected that there was upside risk to its forecasts and this has proven correct.

Morgans was forecasting a profit of $52.2 million, whereas the market consensus was for a profit of $48.1 million.

Management commentary

Costa Group’s outgoing CEO, Harry Debney, was rightfully pleased with the result.

He said: “The company has delivered a strong result for CY20, in which we recovered from the drought, successfully managed our way through COVID-19 without any major disruption to our crop yields and supply, and once again demonstrated the benefits of being a market leader, operating fully vertically integrated produce categories, a 52-week production footprint and a diversified portfolio.”

“There were favourable market conditions in CY20 supported by positive demand and pricing across a number of our produce categories, including citrus, berry, and avocado. Our superior blueberry IP, in particular our premium Arana variety, meant we were able to sell increased volumes while also receiving a significant price premium.”

Outlook

This morning Mr Debney revealed that the company is aiming to increase its citrus footprint materially in 2021.

He advised: “Today the company announces it is actively engaged in a citrus acquisition program to increase its Sunraysia citrus footprint to at least 700 hectares over CY21. To support this expansion, we have also commenced planning for development of a large-scale packing facility to be sited in Mildura (Vic), signalling how much of priority the Sunraysia region is with respect to our citrus growth plans.”

“The company is committed to investing in new crop growing methods to achieve improved yields, reduce production costs, and address climate related risks. This is why in CY21 we will commence a commercialisation program for the planting of 40 hectares of protected, trellised high density substrate avocado trees, across a number of regions aligned to our existing avocado plantings. A small trial undertaken over the past three years has already delivered global leading results, including faster tree maturity, higher yield, better fruit quality and greater efficiency of water use versus conventional plantings,” he added.

No guidance has been given for the year ahead, but management appears positive on its prospects. It notes that demand and pricing across produce categories generally remains strong in 2021.

It also advised that there have been favourable conditions in the Riverland over the summer months. In light of this, early to mid-season navel crops are looking promising at this stage. As a result, the 2021 season looks set to be an ‘on year’.

Finally, management notes that it has a strong balance sheet and operating cashflow. This provides it with the opportunity to continue to invest in quality bolt-on opportunities, international expansion, and domestic innovation projects to drive growth.

The Costa share price is up 35% over the last 12 months. Shareholders will no doubt be hoping it extends this run today following this stronger than expected result.

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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. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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