What the Costa Group is Going to Do With All That IPO Money
One of Australia’s biggest wholesalers and exporters of fruit and veg is going public. The Costa Group was started as a family business in the early 1930s. Once the offer is complete, the Costa Group will have a market cap of up to $839.4 million. And the Costa family will still own 10.5%, pushing them further up the ranks of Australia’s wealthiest families.
Yesterday the Group put out the prospectus for their IPO.
They’re expecting to list on the ASX under the code CGC in late July.
Under the offer, 64.8–78.2 million new shares will be issued. The indicative price range is $2.20–2.70. The final price will be determined by an institutional bookbuild, which should finish on 22 July. That means the Group is hoping to raise somewhere between $541–637.4 million.
So what are they going to do with all that extra money? Well, they’re going to use some of it to pay down their $132 million debt. But that still leaves a lot left over.
Neil Chatfield is the chairman of the Costa Group. In a letter to potential investors, he said that ‘The purpose of the Offer is to raise capital to provide Costa with access to capital markets to give added financial flexibility to pursue further growth opportunities [and] repay the Company’s existing debt…’
Part of that growth will be expanding their Moroccan blueberry farm, which they have as a joint venture with Moroccan firm Agrogailes and UK firm Total Berry. And they’ve signed a deal with US firm Driscoll’s to build a berry farm in Yunan Province, China. The climate there is supposed to be similar to Costa’s berry growing regions on the east coast of Australia. They’re hoping that this farm will take care of projected growing demand in Asia. Especially from the burgeoning Chinese middle class.
But they’re also going to be investing in research and development, ‘product innovation’, and expansion of export markets. And to do that, they’re turning away from old-fashioned farming towards the tech of the future.
Technology before agriculture
The Group doesn’t necessarily want to be known as an agriculture company. They want to be known as a technology group first. By technology, they mean the kind of tech that’s going to allow them to meet demand for expensive seasonal produce, like berries. And measures that will allow them to maximise production and quality — even in difficult growing conditions. They’ve also got logistics and wholesaling operations, which presumably use special systems of their own as well.
Chatfield also said:
‘The Company practises proactive risk management through diversification of categories and geographies, growing in protective cropping environments, using technology…
Costa is currently undertaking a significant expansion program in its berry produce category, designed to cover seasonal and geographical production gaps as well as to meet increasing consumer demand for berries. Costa is also investing in a new 10 hectare tomato glasshouse in Guyra, New South Wales, to provide increased flexibility in relation to selecting and growing tomato varieties that provide unique offerings to the market.’
In other words, they’re working out how they can grow good quality, high-margin produce like berries. Things where there are usually ‘seasonal production gaps’. Like blueberries and raspberries. By their estimates, they already produce 50% of the blueberries and 65% of the raspberries in Australia.
The Group grows a lot of produce in glasshouses. And they’re not like any glasshouses you’ve ever seen. We’re talking a 20 hectare state-of-the-art glasshouse with over 650,000 individual tomato plants.
Source: Costa Asset Management
[Click to enlarge]
They’ve also developed new irrigation and hydroponic growing methods. For example, their irrigation technology allows them to minimise the amount of water needed to grow citrus. Citrus trees are notoriously thirsty.
They’re adding to these methods on a regular basis. For example, they’ve got the rights to an unspecified ‘licensed technology from Monterey Mushrooms Inc which enhances the Vitamin D content of mushrooms.’ Monterey themselves say:
‘Monterey Mushrooms, Inc. has been working with the United States Department of Agriculture to replicate what happens in nature when mushrooms are exposed to light. Through their research efforts, they have found that mushrooms respond to light in much the same way humans do, by converting the sun’s rays into Vitamin D. Mushrooms have a natural level of vitamin D, and when exposed to sunlight they synthesize vitamin D. No matter how you serve them, either cooked or raw, all of the vitamin D comes through for you. These new mushrooms offer 100% of the recommended daily Vitamin D intake in one 3-ounce [84 grams, or five medium size mushrooms] serving after being exposed to ultraviolet light.’
This is pretty interesting, seeing as a serving of regular mushrooms only has about 5–25% of your RDI of vitamin D depending on the type. Perhaps Monterey has special machinery that makes the UV light exposure extra fast and efficient.
Also, Costa is partnering with research organisations to look at IP-protected varieties of fruits and veggies. They’ve even got their own type of blueberry genetics, which they license out for extra income.
Costa’s technology doesn’t stop at the growing stage. They use brix sensor technology to make sure the fruit they export to Japan is sweet enough for that market. Here’s the one they use at their facility in the Riverland:
[Click to enlarge]
And here’s the control panel of a non-destructive Brix sorting machine made by a Chinese manufacturer:
[Click to enlarge]
Basically, the fruit goes through a scanner which uses a light sensor to measure the acidity and sugar content. That data then informs the machine at which stage to flip the little cup holding the individual fruit, sending it into the right basket. But the systems cost millions of dollars to buy and install on the line, so not many citrus producers have them.
It’s possible that Costa could invest in more equipment like this, to better allow them to serve export markets across Asia.
Poised to benefit from the ‘dining boom’
There’s no doubt that the Aussie IPO market is red hot right now. Over the past year, IPOs from companies in a vast variety of industries, from insurance and healthcare to tech and communications, have all attracted a lot of attention.
The Costa Group IPO should do the same. Especially with their potential access to Asian markets. Companies that are seen as having potential to tap Asian demand for Aussie fresh food are of particular interest. It’s a phenomenon that’s been dubbed the ‘dining boom’. You just have to look at the strong interest in Aussie dairy producers to see what that means. IG analyst Evan Lucas said ‘There is interest in agribusiness…Any business which has the opportunity to push into Asia always gets people’s interest.’ IBISWorld senior analyst Caroline Finch agrees. She said ‘The domestic market would have to be relatively saturated, so either you’re looking to carve out growth in the supply chain in Australia or in the case of Costa Group, they have started moving into wholesaling internationally…And we would expect that…the international growth would almost certainly have much higher potential and would be attracting a lot of interest.’
Individual investors will just have to wait and see what happens when the final price is announced to the market on 23 July.
Contributor, Money Morning
PS: If you’re umming and aahing over whether this IPO is a good opportunity for you, you’re not alone. It takes time, skill and understanding to make good investment decisions. But not as much time as you might think. And you certainly don’t need an advanced degree or fancy software. In his report ‘How To Become A Great Investor In Two Simple Steps’, Sam Volkering shows you how it’s done. He reveals why diversifying your investments could be a big mistake, how to figure out your asset allocation in less than 10 minutes, and why ‘buy and hold’ investing is dangerous in today’s market. Click here to find out how to download your free copy now.