Australia's largest horticultural company COSTA GRP DEF SET (ASX: CGC) made its ASX debut today and dropped 2.5% to $2.18 while trading on a conditional and deferred settlement basis. The stock will begin trading on a normal settlement basis on August 3.
Costa Group is forecasting pro forma revenue of $704.4 million in financial year (FY) 2015 and at the initial public offer price is on an EV/ to pro forma FY15 EBITDA ratio of 11.7x-13.5x. The stock is also expected to yield between 3.4%-4.1% in FY16 based on pro forma earnings.
Evidently the forecast for moderate growth is based on the assumption that Costa will continue to see growing demand for its core horticultural products of berries, mushrooms, tomatoes and citrus fruits. Costa includes Woolworths Limited (ASX: WOW) and Coles the supermarkets operated by Wesfarmers Ltd (ASX: WES), as among its major clients for its food products.
The growth strategy largely revolves around increasing volumes and expanding farming operations, with the business hoping to leverage greater consumer demand for fresh Australian produce.
Horticultural businesses also carry considerable risk around the impact of climatic conditions on crop yields and price elasticity. There is also the risk that a major retailer like Coles, Woolworths, Aldi, or IGA stop sourcing products from Costa or demand lower prices.
The group also carries a pro forma net debt of $132 million, although with pro forma forecast earnings for FY15 of around $70.6 million this looks manageable. In my opinion any investors considering buying the stock would do well to let the market value Costa over the next few months before coming to any investment decision.
