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Why the Costa (ASX:CGC) share price is plunging

The Costa Group Holdings Ltd (ASX:CGC) share price has plunged around 20% in early trading after an update given at its AGM.

The Costa Group Holdings Ltd (ASX: CGC) share price has plunged around 20% in early trading after an update given at its AGM.

AGM update

After paying respects to Frank Costa AO, who sadly passed, Costa gave a trading update at its annual general meeting.

First the company gave an update about the focus on some of the categories.

Construction of its new 10 hectares of tomato glasshouse and 2.5 hectare nursery project, both at Guyra in Northern NSW recommenced in the second half of the year. The commissioning of the glasshouse and nursery are anticipated to be completed by the end of August 2021 as planned.

It’s also looking for high quality citrus assets to build out its offering and export market opportunities and is actively engaged in a citrus acquisition program. The acquisition of the KW Orchards citrus farm and associated packing operations in March has increased the company’s footprint in the Sunraysia region to around 700 hectares of citrus, 250 hectares of table grapes and 130 hectares of wine grapes. Planning has also commenced for the development of a large-scale citrus packing facility to be located in the Sunraysia region.

In the berry category, it continues to focus on developing its substrate production, blueberry variety improvement program and further utilising long cane raspberry and blackberry plants.

The international segment continues to focus on seasons extension. The focus here is using its “world-leading” blueberry genetics and IP to drive toward the goal of a 52-week supply from Africa.

In addition to its own production footprint, which runs from December to June in Morocco, it has also licensed its genetics to growers in South Africa and Zimbabwe where the aim is to supply product from these areas through June to December into European markets.

FY21 update that affected the Costa share price

Costa said international performance has been very positive versus the prior year and against expectations.

In China, although volumes were initially slightly down due to some late flowering, the yield is expected to finish in line with expectations. There has been strong pricing and demand over the season. This was also helped by lower imports of South American fruit.

However, the international result is going to be negatively impacted by the higher Australian dollar.

In the domestic segment, there has been mixed performance.

Berries have seen solid pricing with a good performance to date.

Mushroom production at Monarto has been impacted by short term labour constraints. Once fully addressed, it expects improving outcomes.

Avocado volumes and quality have been “pleasing” and export volumes continue to grow. But there has been recent pricing pressure, leading to lower prices compared to last year. This trend is likely to continue into the second half with increased volume across the industry.

In the citrus operations, challenges relating to hail damage and fruit fly restrictions have impacted the current half year. However, the company is expecting strong yields in the second half.

Tomatoes has also seen some short term pricing pressure, though this is slowing and pricing is improving.

Overall first half performance is expected to be marginally head of the previous period in the 2020 calendar year.

Summary thoughts on the Costa share price

Costa is committed to driving long term sustainable growth. It said its strong balance sheet and operating cashflow will allow it to maintain its growth plans as it pursues organic and acquisition opportunities.

I don’t think Costa is going to generate the biggest profit growth over time, but there could certainly be opportunities during periods of cyclical lows.

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