Another profit warning from takeover target Costa Group

Weather conditions and changed buying habits due to cost-of-living pressures are impacting Australia’s largest fruit and vegetable group.

Fruit and vegetable grower Costa Group is headed for a fall in annual earnings, hit by the weather and lower pricing amid high volumes of berries and tomatoes as consumers opt for less expensive produce.

Costa’s second profit downgrade in four months came as Australia’s largest fruit and vegetable group again urged shareholders to accept a reduced, $1.5bn takeover offer by US buyout firm Paine Schwartz Partners.

Its shares fell 3.9 per cent to $2.96 on Monday after the nation’s largest citrus grower said it now expected its earnings for the 2023 calendar year would come in below the 2022 result.

The result was set to be impacted by continued unfavourable impacts from adverse weather conditions in late 2022 and early 2023 in the citrus category, including the 2023 Queensland table grape crop.

High industry volumes in berries and tomatoes plus a change in shoppers’ buying habits due to cost-of-living pressures were also impacting its produce business, resulting in lower pricing.

“The more recent favourable growing conditions on the Australian Eastern seaboard are expected to deliver significant industry volumes in Costa’s berry and tomato categories and when combined with a significant change this year in Australian consumer sentiments influencing purchasing behaviour because of current economic conditions, forecast pricing in Costa’s produce segment is expected to be below Costa’s previous expectations for the remainder of the calendar year.”

Fruit and vegetable grower Costa Group is headed for a fall in annual earnings.

Costa in August said it expected its 2023 earnings before interest, tax, depreciation and amortisation, before fair value movements in biological assets (EBITDA-S), would remain above the 2022 result.

That was despite a $30m hit due to a deterioration in the outlook for later season quality in citrus, together with a softening in consumer demand for tomatoes.

While Costa did not provide numerical earnings guidance on Monday, the fact that the company saw a need to update its guidance will lead investors to expect it will be ‘a material change’, that is at least 10 per cent worse than the company previously expected.

Australia’s biggest fresh produce supplier to major food retailers reported EBITDA-S of $214.8m for the 2022 year, a 1.6 per cent decline on the previous year.

Independent expert Kroll Australia noted that Costa’s lower revenue growth in the first half mainly reflected an 11 per cent decline in tomato revenue from lower-than-expected pricing due to greater competition and lower sales volumes amid softer consumer demand for its premium products.

Kroll said Costa’s 2025 revenue was forecast to be higher than in 2023 and 2024, reflecting a continued recovery of citrus prices and in demand for tomatoes.

It also noted brokers had pointed to perceived risk from weather conditions, cost-of-living pressures and “the availability of alternative, less expensive produce”.

The independent expert concluded that the Paine Schwartz Partners-led consortium’s takeover offer was fair and reasonable, and therefore in the best interests of shareholders in the absence of a superior proposal.

Kroll assessed the value of Costa shares on a controlling interest basis to be in the range of $2.62 to $3.28.

“As the scheme consideration of $3.20 per Costa share falls within our assessed value range for a Costa share, the scheme is fair,” its report said.

Kroll said Costa’s share price was likely to fall should the takeover not go ahead, noting that there were two earnings downgrades, the Bureau of Meteorology had declared two major climate drivers linked to hot and dry conditions, and the broader equity market had declined.

“No alternative bidder has emerged since the announcement of the scheme,” it added.

Paine Schwartz Partners sliced $100m from the value of its takeover bid in September, citing the company’s recent poor earnings guidance and softening market conditions.

On Monday, the Costa board said it continued to unanimously recommend shareholders vote in favour of the bid in the absence of a superior proposal.

Investors will vote on the proposed takeover on January 30.