Costa Earnings: Strong Growth in Chinese Blueberries More Than Offsets Domestic Weakness

Costa’s CGC interim 2023 result was already known, with EBITDA lifting 7% on the prior corresponding period to AUD 150 million. But with greater segmental detail following the full release, we lower our 2023 EBITDA forecast by 1% to AUD 244 million—representing 14% growth on the PCP. An exceptional international result more than offset continued weakness in domestic Australian produce. We continue to think the indicative proposal from Paine Schwartz Partners is more likely than not to proceed. 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 in the middle of its eight weeks of nonexclusive due diligence. Costa expects to provide an update on the potential transaction in September 2023. The interim dividend has been deferred, given the potential transaction.

As foreshadowed, citrus headwinds are set to return in 2023. See our prior note: “Costa: Citrus Sours Near-Term Outlook.” The overhang from wet weather conditions in 2022 is set to weigh on citrus volumes and size in the second half to the tune of about AUD 30 million. But citrus headwinds had also weighed on the second half of 2022, resulting in a headwind of about AUD 40 million. Tomato demand has proven soft and is expected to persist into the second half. Combined with high industrywide supply, pricing is set to remain subdued. Growers competing in commodity categories such as fresh produce, where products turn fast and are often perishable, are generally price takers. Costa is no exception, leading to our no-moat rating. On the upside, stable weather and positive pricing in the early part of the main berry season is leading to stronger second-half berry earnings versus 2022. On balance, we forecast second-half 2023 earnings roughly in line with second-half 2022.