Brokers are unsurprised by a guidance upgrade from fruit&veg producer Costa Group and believe the market is already way ahead.<\/p>\n
– Big profit growth upgrade By Greg Peel<\/p>\n Fruit & vegetable producer\/wholesaler Costa Group ((CGC)) held its AGM yesterday and took the opportunity to upgrade FY18 profit growth guidance to 20% from 10% previously. The upgrade appears material but is largely attributable to Costa recently increasing its stake in Moroccan blueberry producer African Blue to 90%.<\/p>\n Excluding this contribution, Ord Minnett (white-labelling research from JP Morgan) calculates only a 4-5% increase in organic growth guidance. That said, the broker still considers 20% growth to be conservative, given its own forecasts imply 32%. Earnings momentum is strong and Costa offers attractive long term opportunities.<\/p>\n UBS had similarly set a forecast of 30% profit growth and agrees Costa offers significant opportunities in both the near and longer terms.<\/p>\n Not to be left out, Macquarie is forecasting 27%, with 12% represented by African Blue, but sees further upside risk to guidance as the year progresses. Ord Minnett concurs, noting a large earnings skew to the second half is expected this year, of 32\/68% by the broker’s estimates.<\/p>\n I found my thrill<\/u><\/p>\n Export protocol still needs to be out in place, but the Australian government has taken a significant step, Macquarie points out, in placing blueberries on the horticultural market access priority list for negotiation with China. Success would provide both advantages and disadvantages for Costa.<\/p>\n Access to China would be provided for any Australian blueberry producer, Macquarie notes, making Costa’s Chinese operations less of a prestige. However, given Costa is by far the largest and most technologically advanced producer, offering superior berries, the broker believes Costa can supply quality berries at a lower cost.<\/p>\n At the AGM management suggested initial Chinese demand has been very promising, with the Chinese showing a preference for high quality, larger sized fruit.<\/p>\n Priced to Perfection<\/u><\/p>\n Costa’s acquisition drive is not yet over, with avocados offering a potential next step. Brokers agree there’s not a lot not to like about the stock, but none of the positives have been lost on the market. On Ord Minnett’s estimates, the market is pricing at PEs of 27x for FY18 and 26x for FY19. The company’s guidance upgrade was more catch-up than revelation.<\/p>\n UBS believes the upside story is well priced in, leaving little room for error.<\/p>\n Investors should be mindful of the fact Costa is an agricultural producer, brokers point out, thus subject to same vagaries of seasonal and weather-related risks as any farming operation. The company, like everyone else, is also looking at substantial increases in power costs going forward.<\/p>\n UBS has pulled back to Neutral from Buy, lifting its target to $6.80 from $5.70.<\/p>\n Ords has raised its target to $6.43 from $5.01, and already had a Hold rating.<\/p>\n Macquarie still believes there is enough in there to continue backing the stock, and had already set a target of $7.00 prior to the guidance upgrade. The broker has retained that target and an Outperform rating.<\/p>\n That leaves the consensus target among the three FNArena database brokers covering the stock at $6.74, or a mere 0.8% above the current trading price.<\/p>\n<\/p>\n
\n– Largely acquisition driven
\n– Opportunities attractive
\n– Share price is not<\/strong>
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