Costa Group shares dive as poor weather threatens to spoil orange crop

Shares in Costa, Australia’s biggest fruit and vegetable wholesaler, have dived as much as 12 per cent amid concerns that poor weather has spoiled its bumper citrus crop.

Costa Group says while demand and pricing for oranges is still strong, wild weather has affected the quality of its produce.

Shares in Costa, Australia’s biggest fruit and vegetable wholesaler, have dived as much as 12 per cent amid concerns that poor weather has spoiled its bumper citrus crop, forcing the group into a three-hour trading halt.

Costa requested a suspension of trade while it drafted a market update in an attempt to calm ­investors.

In the statement, released to the ASX at 3pm, Costa said while the “citrus season had seen strong demand and pricing”, wild weather had damaged the quality of “certain varieties”, including popular navel oranges.

“The full impact of these quality issues across the citrus portfolio on final pricing outcomes and second-half earnings cannot be determined until the citrus season is further progressed,” the company said.

“Weather events have … resulted in some quality issues which have become evident as the season has progressed, most notably with navels, and more so in Sunraysia than the Riverland. This has impacted pack-out rates versus the prior year.”

Investors will have to wait until the end of August for more details when Costa presents its half-year financial results.

After a sharp fall, Costa shares later recovered some ground, closing 8 per cent weaker at $2.65.

It came after Credit Suisse analyst Larry Gandler slashed his target price for Costa from $3.70 to $2.80 a share, saying: “It appears the 2022 citrus season is not matching our previous expectations”. “Demand remains strong for Costa produce. However supply and logistics remain a challenge,” Mr Gandler wrote in a note to investors before the trading halt.

“The 2022 citrus supply is hampered by lower quality/disease in the southern states (navel oranges) and logistics issues (lack of freight capacity and higher shipping cost).

“Lower quality fruit and shipping delays lead to lower prices. We now expect Costa’s Australian citrus export prices to be flat despite a near 10 per cent depreciation in the AUD/USD. We were previously modelling strong outcomes for citrus despite it being an ‘off year’ in the biennial cycle.”

Credit Suisse cut its forecasts for Costa’s earnings before interest, tax, depreciation and amortisation by 5 per cent to $244m and 2 per cent to $280m for the next two financial years. Mr Gandler said avocado prices had also “not quite recovered to our modelling”.

Like many operators in the sectors, the $1.33bn horticulture giant struggled during two years of border closures which prevented overseas backpackers from picking fruit, exacerbating a tight labour market.

During its peak harvest period, Costa normally employs about 1300 workers in its citrus growing areas along the Murray River.

Costa was forced to issue a clarification to its earnings forecasts in May, following the renegotiation of its farm leases, after Macquarie Asset Management took over its former landlord ­Vitalharvest. “Relative to the old leases, the group’s CY22 annualised ­EBITDA-S will be approximately $5m higher, whilst the NPAT-S (net profit after tax) result is forecast to be $6.4m lower, notwithstanding that there will be no material impact on cash earnings,” the company said in clarified guidance after its annual meeting.

“Forecast CY22 operating and growth capex is expected to be in line with previous guidance. Previous guidance for depreciation and amortisation expenses of circa $130m and interest costs of circa $38m remains consistent with current expectations.”

Costa listed on the ASX in 2015, pitching itself to investors as an industrial technology company rather than an agricultural business, highlighting its protected cropping model. This involves moving plantings away from the paddock and into sheltered areas.