Costa Group share price: implications of the 2PH acquisition

Horticultural and food supply company Costa Group (ASX: CGC) on Wednesday revealed it had entered into an agreement to acquire 2PH Farms – a citrus grower – for a little over $200 million.

Looking at the specifics of the deal, the total upfront consideration for the acquisition was earmarked at $219 million – inclusive of stamp duty and associated transaction costs.

The company said it would fund the majority of this acquisition through a fully underwritten entitlement offer, expected in the range of $190 million. The remaining $29 million will be funded through Costa’s existing, undrawn debt facilities.

In the near-term, management said the deal would be earnings accretive, boosting earnings per share (EPS) by approximately 10% in CY21.

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2PH Farms at a glance

According to Costa – 2PH Farms is currently the largest citrus producer in Northern Australia. The company grows a variety of proprietary mandarins and all up, has some 1,474 hectares of planted citrus, with an additional 210 hectares of citrus earmarked to be planted by 2023. Overall, 2PH’s orchard profile has been described as relatively young, with only 26% of its trees between 10 to 20 years old.

In fact, it was that last point that Costa focused in on during its presentation to the market, noting that 2PH citrus production is forecast to double by 2025 – growing from approximately 30,000 tonnes to 60,000 tonnes.

From an operational perspective and on a pro-forma basis, P2H’s calendar 2021 financial highlights include: $75 million in revenue, $29 million in earnings (EBITDA-S) against a 39% EBITDA-S margin and ~$8 million in total CAPEX, on an annual basis. It was noted that earnings are skewed to the second half of the year.

One final cost of $31 million – associated with the additional planting of 210 hectares of citrus – which is expected to be paid in mid-2023 was also flagged by Costa as an additional expense to the $219 million acquisition.

Why now?

Management outlined a number of reasons behind the 2PH acquisition, including:

• Gain exclusive rights to 2PH’s proprietary mandarin types.
• Drive increased citrus category revenue contribution on a group-level, expected to rise from 30% of total revenues to 35% post-acquisition.
• Increase citrus production scale. Overall, post-acquisition, Costa said its total citrus plantings would rise some 60%.
• Increase and diversify export sales, with a particular focus on Asian markets.

Market update in focus

Besides the acquisition and capital raise reveal, Costa on Wednesday also provided the market with a CY21 trading update and outlook.

Here the company said across the first-half of FY21 it expected to book revenue of ~$627 million, earnings (EBITDA-S) of ~$124 million and profits (NPAT-S) of ~$44 million.

YTD the Costa Group share price has fallen 18.47%.