Why the Costa Group share price will be suspended until next week

Here's why the Costa Group Holdings Ltd (ASX:CGC) share price will stay suspended until next week…

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The Costa Group Holdings Ltd (ASX: CGC) share price won't be returning to the ASX boards today as planned.

Its trading halt was due to end this morning, but the horticulture company has instead requested a suspension for upwards of five more trading days.

Costa explained that it has requested "a voluntary suspension pending an announcement to the market in respect of its trading outlook, which it is not in a position to make at this time." It "currently expects that the voluntary suspension would be required for up to 5 trading days."

What is happening?

Costa certainly is having a year to forget. Due to a range of different factors the company has downgraded its profit guidance numerous times already and looks set to do it again next week.

It all started in January when subdued demand for tomatoes, berries and avocados led to its first guidance downgrade. Instead of low double-digit growth for the 12 months to June 2019, it downgraded guidance to a largely flat result.

Then in May at its AGM, Costa downgraded its calendar year 2019 profit guidance due to a deteriorating operating environment. This included weak mushroom demand, production issues in Morocco, lower raspberry yields, and fruit flies at its citrus operation in Stuart's Point.

At that point Costa still expected its calendar year earnings to be higher year on year, but just not as much as previously forecast.

However, in August the company released its half year results and revealed an 8.4% decline in EBITDA-SL. This led management to warn that "trading and forecasting remains challenging with potential further downside risk."

Given the time that Costa is taking to release this latest update, it seems inevitable that another downgrade is coming. I suspect it could also amend its longer term guidance.

If its earnings guidance is downgraded, it could put the company in danger of breaching its debt covenants.

In light of this, there is speculation that it may launch a capital raising to clear some of its debt. However, given its poor performance this year, this would likely be at a material discount and highly dilutive.

As a result, I continue to believe investors would be better off watching this one from a safe distance. Instead, I would look at the companies selling its produce such as Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW).

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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