Costa: Citrus Sours Near-Term Outlook

Costa CGC has effectively reported its interim 2023 result, with underlying EBITDA of approximately AUD 150 million—about 7% above the prior corresponding period. Costa noted deterioration in citrus quality and softening tomato demand are set to weigh on the second half, albeit with full-year EBITDA still expected to exceed 2022. Depending on the magnitude of the hit to citrus quality, we expect Costa will have lower citrus volumes destined to the more profitable export market. Given this, and that international earnings are overwhelmingly skewed to the first half, we lower our full-year EBITDA forecast by 6% to AUD 247 million. This is still about 15% higher than 2022. Wet weather conditions, courtesy of La Niña, weighed on citrus quality and avocado volumes in the second half of 2022, and input costs were elevated. But the Australian Bureau of Meteorology indicates El Niño is probably around the corner. El Niño typically reduces rainfall during winter and spring, leading to better crop yields and quality in Costa’s main farming areas. We also expect elevated input costs, notably in fertilizers and labor, to continue easing.

Shares screen undervalued. We think pessimism around a potential acquisition by Paine Schwartz Partners has creeped into the Costa share price. Granted, the risk that Paine Schwartz returns with a lower offer (or walks away completely) has risen in light of the more challenged near-term outlook. But we continue to think the indicative proposal is more likely than not to go through. Our unchanged AUD 3.40 per share fair value estimate represents a 75% probability of a deal going through at the indicative price of AUD 3.50 per share, and a 25% chance of reverting to our stand-alone valuation of AUD 3.10 per share if an offer is not forthcoming. Paine Schwartz is amid its eight weeks of nonexclusive due diligence, which commenced June 6, 2023.

Costa will report full results on Aug. 31, 2023.