The highlight of the result was the international segment, shown below to be growing quite strongly, thanks to China, where CGC’s locally grown products have enjoyed considerable uptake.
Berries, within the Produce premium segment were also notable, with price increases of 40%.
In general, the business is asset heavy, which tends to depress the highly cyclical returns.
Management has a target of generating 15% returns through the cycle, which seems plausible based on the relatively limited listed history. However, we are far from that aspirational average at the moment, and given energy costs, labour costs, and supply chain costs, we aren’t likely to get there in a hurry.
However, should those costs normalise, the upside is material.
The abovementioned capex means there’s relatively little left over for dividends or a more meaningful de-gearing unless the earnings expand or those COVID/supply chain cost pressures abate.
That said, expansion should come from increased yield/production across the various product lines. For example, Riverland, Sunraysia, and 2PH are forecast to collectively increase citrus volumes by 17% per annum out to 2024.
At a headline level valuation metrics are generally reasonable, having de-rated enormously since listing…
Costa is starting to screen as good value on the Fama French factors…
And has an implied earnings trajectory which looks reasonably achievable.
Overall, a high risk high reward ag play. A little like TGR, we would probably need to see capex intentions moderate before contemplating CGC for the Core Portfolio, but it sits fine in the absolute return portfolio.
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