Earnings preview: What to expect from the Costa Group half year result

The Costa Group Holdings Ltd (ASX: CGC) share price has been a positive performer in 2020 despite the pandemic.

Since the start of the year, the horticulture company’s shares have generated a return of 17.5%.

In light of this, expectations are likely to be high for Costa’s half year results on 28 August.

Ahead of the release, I thought I would take a look to see what is expected from the company when it hands in its report card.

What is expected from Costa in the first half of FY 2020?

According to a note out of Goldman Sachs, its analysts have upgraded their estimates slightly on the belief that Costa will deliver a much improved first half result.

It expects most parts of the business to be trading ahead of last year, with the exception of the Citrus business. It notes that the timing of its harvests this year means the citrus crop could push more earnings into the second half.

Nevertheless, Goldman expects first half revenue of $588.3 million. This will be up 3% on the prior corresponding period.

What about earnings?

The broker is forecasting much stronger profit growth thanks to its international business. It has pencilled in earnings before interest, tax, depreciation, and amortisation before self-generating and regenerating assets, leasing, and material items (EBITDA-SL) of $108 million. This will be a 31% increase on the prior corresponding period.

Produce EBITDA is expected to be up 15% to $54 million, whereas international EBITDA is forecast to be up 61% to $50.7 million.

Finally, on the bottom line net profit after tax before SL is expected to be $51.9 million. This will be up 27% on the first half of FY 2019.

What else should you look out for?

Goldman Sachs has suggested investors look out for costs relating to COVID-19. This includes additional labour costs required to maintain social distancing on farms and to secure labour. It will also be looking for any cost outlook commentary post-COVID.

The broker will also be looking for commentary on certain sides of the business with negative exposure to COVID-19. Goldman notes that Costa is mainly exposed to the supermarket channel, with 70% of revenue coming from here. However, it also has exposure to food service and wholesale markets. It expects these businesses to be a drag in FY 2020 given social distancing restrictions and lockdowns.

Finally, it will be looking for commentary on key produce categories. Although the company has moved away from quantitative guidance, the broker expects an update on conditions in key product categories.

Should you invest?

Goldman Sachs has a neutral rating and $3.30 price target on Costa shares at present.

This price target implies potential upside of 12% over the next 12 months, which isn’t too bad for a neutral rating. However, I’m not in a rush to invest. I would rather wait for its results release to see how it is faring and its expectations for the next six months.

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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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