November 25, 2019

By Lynda Kiernan

Australian fruit and vegetable giant Costa Group has undertaken a A$176 million (US$119 million) capital raise to offset debt, high water costs, and crop losses due to ongoing drought conditions in the country. 

Compounding the company’s challenges, while the company’s entitlement offer was being conducted three of its seven citrus farms, the Yandilla, Kangara, and Amaroo, with combined acreage of 1,700 hectares (4,200 acres), sustained damage from hail storms that could result in a hit to its net profit for the 2020 year of between A$3 – A$4 million (US$2 million – US$2.7 million). 

This year has seen a succession of four profit downgrades for Costa, with the company now forecasting net after-tax earnings for the end of December to be A$28 million (US$19 million), compared to expectations set in May of between A$57-$66 million (US$35.6 – $45 million), and only half of 2018’s earnings of A$56 million (US$38 million). 

Behind these numbers has been the season’s growing conditions, with serious drought cutting into yields and the harvest size of some of the company’s key crops, such as blueberries, avocados, late-season citrus, and raspberries – a crop that is particularly affected by the dry conditions as the berries crumble and are not fit for market. Low prices for mushrooms, a key earner for Costa, have also plummeted, with analyst Craig Woolford stating that mushroom profitability may have decreased by between 30 and 40 percent. 

“With raspberries, the financial impact of raspberry crumble continues to build with the season peak still to come,” as was noted in a presentation by Costa. “Intensive mitigation work is being done but this is taking longer than expected. Looking forward the impact for 2020 is expected to moderate.”

Water scarcity has also hit Costa’s balance sheet, leading the company to announce it was pausing its 10-hectare expansion project at its glasshouse operation in New South Wales, and was moving up the closure of its older mushroom facilities in Tasmania and Queensland – a move that will result in a one-off hit of A$70 million (US$47.4 million).

“Should the severity of current drought conditions persist or intensify the company will be required to deal with reduced availability of water in some regions, increased water consumption by crops, high water cost, as well as impacts on yield, fruit size and timing dependent on regional variation in heat and dry conditions, and individual crop responses,” said Harry Debney, CEO, Costa Group. 

Meanwhile, Costa has expended A$400 million (US$271 million) between capex and acquisitions since July 2015, without raising any capital, and its shares have fallen by approximately 60 percent from June 2018.

“Calendar year 2019 has been a challenging and disappointing year, with performance below expectations due to a combination of cyclical, one-off and structural issues,” said Debney in a call with investors and analysts, reports The Sydney Morning Herald.

“This year our diversified business model has not been as effective as in prior years, however we continue to believe our portfolio categories and growth strategies will deliver strong shareholder returns over the medium to long term,” he said.

In response to these difficult conditions, Costa opened an entitlement offer and a subsequent retail shortfall bookbuild, which closed on November 21, raising gross proceeds of approximately $176 million (US$119 million). 

The capital gained through this move will strengthen Costa’s balance sheet going into 2020. And despite serious challenges being faced across its operations, Costa said that its tomato crop remains strong, and its new mushroom growing and processing facility in Monarto, South Australia is now online.

“Any successful agribusiness must focus on long term strategies and value creation,” said Debney. “We have faced many and varied challenges this year, but we will continue to meet them head on. “We are in the best position in this industry to do so and are confident of building a stronger and more resilient company as a result.”

– Lynda Kiernan is Editor with GAI Media and daily contributor to the GAI News and Agtech Intel platforms. If you would like to submit a contribution for consideration, please contact Ms. Kiernan at lkiernan@globalaginvesting.com.