Macquarie
CGC expects CY20 EBITDA-SL of $150m and NPAT-SL approx. in line with CY18 of $56.6m, which represents a c50% and 100% increase respectively on pcp. FY20 fct contemplates a “moderate improvement of dry weather/drought conditions and more normal season and crop cycles in Aust and Morocco”. However there is downside risk to fct should severe drought conditions persist (eg yield, fruit size etc).
We lower recommendation to UP from Neutral noting that earnings visibility continues to be limited along with a range of seasonal/agricultural risk factors at play. Given CGC’s poor earnings track record over last year, we think delivery is required to restore the faith; CGC’s CY20 guidance looks optimistic in this regard (we have taken a more conservative view and are 12% below EBITDA guidance).
Credit Suisse
Our valuation falls to A$3.40, rating remains OUTPERFORM relative to the issue price of A$2.20. The uncertain input to CGC valuation is long-term margin assumptions driven by output pricing. Yields and volume tend to normalise over time. Cost increases, water included, were not a major factor in CGC's 2019 downgrades. We lowered our average long-term margin assumption for the Produce division from 14% to 12%.
