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Costa (ASX:CGC) share price grows on fruitful FY20 results

Costa Group Holdings Ltd (ASX: CGC) exceeded expectations with strong full-year results for the calendar year (CY20). Is today's jump in the Costa share price justified?

Australians seem to have been bulking up on fruit and vegetables as Costa Group Holdings Ltd (ASX: CGC) exceeded expectations with strong full-year results for the calendar year (CY20).

Is today’s 13% jump in the Costa share price justified?

Costa is the largest producer, packer, and supplier of fresh fruit and vegetables to the major Australian food retailers. This includes glasshouse tomatoes, mushrooms, berries, citrus, and avocados.

Strong revenue growth due to two main factors

Costa delivered a significant boost in its revenue in CY20, rising by 11.2% compared to last year (CY19). The increased international trading volume and favourable citrus and avocado prices were the key catalysts.

The combination of both domestic and international demand for citrus products drove higher prices. In respect to avocados, Costa was able to capitalise on the market supply constraints due to an increase in the volume of avocado production.

Costa was also able to take advantage of the expanded plant footprint across China, achieving higher yields. In addition, the early season production in the Agadir southern region farm in Morocco improved yields.

This exceptional revenue boost trickled down to Costa’s bottom line as EBITDA and net profit after tax (NPAT) surged by 47.2% and 108.4%, respectively, relative to CY19.

On the back of such a strong financial performance, the company declared a fully franked dividend of 5 cents per share.

Management outlook

Costa group CEO, Harry Debney appears to be looking forward to capitalising on last year’s growth through strengthening its existing competitive advantages.

The company notes its competitive advantages lie in yield, geographical spread, quality, and cost of production. To strengthen this, Costa has undertaken a citrus acquisition program and a commercialisation program for a new way to plant avocado trees.

The citrus acquisition program appears to offer a greater expansion of a product in high demand. And the commercialisation program aims to provide an eco-friendly way to produce more avocados at a lower cost.

My take

It appears Costa has really benefited from using its market-leading position to expand its geographical spread and ultimately, providing more diversified and better quality produce for retailers.

Costa’s management team seems to be taking the right steps in capitalising on the strong momentum across both the citrus and avocado categories.

This company does appear to have some solid competitive advantages, but investors should bear in mind that it still operates in a highly capital-intensive industry.

In saying that, Costa has declared a dividend, so if management continues to execute and prices for its main produce categories remain favourable, this may be a solid ASX dividend investment.

If you’re looking for more share ideas, I suggest getting a free Rask account and accessing our full stock reports. Click this link to join for free and access our analyst reports.

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