Costa Group Holdings Ltd (ASX: CGC) shares are currently are in a trading halt after announcing an acquisition called 2PH farms.
Costa buys 2PH Farms
Australia’s largest fruit and vegetable business told the market it has entered into a binding agreement to buy the business and assets of 2PH Farms.
What’s 2PH Farms? It’s a central Queensland based citrus grower. It’s the largest grower in northern Australia, with a main growing location at Emerald and a smaller location at Dimbulah.
The 2PH tree age profile consisting of a majority of plantings which are yet to reach the maturity of 8 years, while half of the plantings are under 5 years old. Based on this maturity, the annual yield is forecast to increase from an expected approximate 30,000 tonnes in the 2021 calendar year to around 60,000 (or more) tonnes by 2025.
Those farms have large holdings of high and medium permanent water allocations (over 11,000ML).
2PH is expected to generate $29 million of underlying EBITDA (EBITDA explained) in the 2021 calendar year on a pro forma (company calculated) basis.
Costa has estimated that it will add around 10% to profit or earnings per share (EPS) in 2021, excluding future plantings at Conaghans and potential synergy benefits.
Cost
Costa is going to pay an upfront consideration of approximately $200 million in cash (or $219 million in stamp duty and transaction costs).
It will be funded by existing debt facilities from a fully underwritten $190 million, 1 for 6.33 pro rata accelerated renounceable entitlement offer at a price of $3 per share, which would be a 10.3% discount to the theoretical ex rights price of $3.35.
Benefits
There are a number of reasons for the acquisition.
Costa said that it would provide greater export supply to key Asian markets – 2PH already has a presence in Asia.
It will increase Costa’s citrus category revenue contribution from 30% to 35%.
2PH has exclusive rights to selected proprietary varieties.
It will give larger production scale and expanded geographical diversity. Citrus plantings will increase by 60% to 4,513 hectares.
This deal will also extend the variety and give early season timing. The 2PH season commences in mid-March, the earliest citrus season in Australia. There’s a future opportunity to achieve a 52-week supply into important Asian markets.
Summary thoughts on Costa and the share price
Based on current information, Costa expects 2021 underlying EBITDA (EBITDA-S) and underlying net profit (NPAT-S) to be marginally ahead of the profit from the 2020 calendar year ($197.2 million and $55.1 million respectively).
Costa isn’t a terrible business, it just doesn’t strike me as a company that can generate strong or consistent returns compared to other businesses. At best, it could be a cyclical play as it suffers the occasional setback.
If I were already a shareholder, I’d consider the capital raising, but there are other ASX growth shares which might do better in the long-term.
