Candidly, I’ve had a change of heart about a recent share idea due to ongoing troubles.
The business I’m not sure about anymore is Vitalharvest Freehold Trust (ASX: VTH), which I previously wrote about here.
Vitalharvest is one of the few agricultural real estate investment trusts (REITs) on the ASX. The farms Vitalharvest currently owns are predominately citrus fruit and berries, which are all leased to Australian horticultural giant Costa Group Holdings Ltd (ASX: CGC). Vitalharvest has a profit-share agreement with Costa where it receives 25% of the operational profit from those farms.
Why I Changed My Mind
There has been some ongoing problems with Vitalharvest’s main (and only) tenant Costa Group. On Monday, Costa shares entered a trading halt and were further suspended on Wednesday for up to five trading days pending the release of an announcement regarding its trading outlook.
It’s widely suspected that the update will be negative, especially given that Costa has already downgraded its profit guidance twice this year. Agricultural volatility is to be expected and can present opportunities, but a share suspension, as is the case with Costa, doesn’t evoke a lot of confidence.
Although it’s not Vitalharvest shares in the suspension, the two companies are linked because Vitalharvest receives 25% of Costa’s underlying operating profit as variable rent.
Whilst a worst-case scenario outcome is unlikely, question marks have been raised in the Australian Financial Review about Costa’s debt covenants which could require a capital raising.
What Now?
In light of this, given that Vitalharvest is so reliant on Costa’s rental income, it seems like the prudent thing to do could be to sell for now and wait for the facts to emerge.
Although food demand may be growing, Vitalharvest has the operational risks of agriculture with its variable rent and the REIT risks of debt etc. Prior to this week’s news with Costa, I was willing to take that combination of risk with Vitalharvest, but this likely downgrade from Costa and the potential outcomes has made me uneasy to hold Vitalharvest.
I may decide to sell Costa too, depending on what’s in the update, whenever it is released.
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Disclosure: At the time of writing, Jaz owns shares of Costa Group, but this could change at any time.
