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Costa Group looks in a pickle on rumoured capital raising

Tom Richardson
Bow of blueberries, raspberries and strawberries

Costa Group Ltd (ASX: CGC) shares remain locked in a trading halt today as the company updates its “trading outlook” with most signs pointing to another profit downgrade.

When handing in its August 2018 interim profit report the fruit and vegetable grower warned that there was “downside risk” to its guidance if pricing for blueberries and mushrooms remained weak.

In May 2019 Costa guided investors to expect net profit between $57 million to $66 million on EBITDA-SL between $140 million to $153 million for calendar year 2019.

If it delivers another significant downgrade on these expectations then the shares could be in for some heavy falls.

As at June 30 2019 Costa also had gross debt of $354.8 million or net debt around $309 million when deducting $45.8 million cash on hand. The gross debt having blown out from $290.4 million at June 30, 2018 on the back of an aggressive acquisition policy that has not delivered. 

The net debt stood at 2.59x EBITDA-SL as at June 30 2019 which is notable because if EBITDA over calendar 2019 is going backwards it may come close to breaching its debt covenants with bankers.

Generally anything more than 3x EBITDA for a listed company will be in breach of debt covenants, which then means bankers have multiple contractual enforcement options they can demand of debtors.

I am not suggesting Costa will breach debt covenants, just that these are becoming more relevant given its leverage as at June 30 2019.

The Australian newspaper is today reporting that Costa will try and raise capital after delivering a downgrade which mean it’s in a real pickle to put it kindly. 

Any capital raising via the placement of shares to institutional backers will be at a steep discount to the cum-downgrade share price which won’t be pretty in itself. 

It’s fair to say then that Costa’s management team is not going to get in the textbooks of Harvard MBA students on how to run a listed business. 

For now though what the Australian is reporting is unofficial, while what I’m suggesting is only educated speculation. For example it’s not impossible Costa has some good news up its sleeve, but I doubt it given the August trading update. 

Back in November 2017 the Costa family sold 17.1 million shares or 5.3% of the business to public markets for $6.55 a share. This only a couple of years after insiders took a lot of money off the table at its 2015 IPO. 

The post Costa Group looks in a pickle on rumoured capital raising appeared first on Motley Fool Australia.

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Motley Fool contributor Tom Richardson owns shares in Dicker Data.

You can find Tom on Twitter @tommyr345

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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019