PGW - PGG Wrightson

[percy]

Wondered why our butter tasted a bit oily.?

[sb9]

One of the few companies with strong balance sheet to keep divvy payment. Well done PGW board and management!

[Sideshow Bob]

No doubt some of their divisions still operating under essential services for agriculture/food production/animal welfare?

[Snoopy]

One of the few companies with strong balance sheet to keep divvy payment. Well done PGW board and management!


Strong balance sheet? By some company standards, the balance sheet looks OK. But this is a highly seasonal business, which is fully exposed to adverse weather events. IMO no term debt is an optimal capital position and PGW are far from that. Despite the interim dividend, just paid, being higher, whether the final dividend will happen is up in the air in my view. The other 'elephant in the room' is the company superannuation scheme. We were lead to believe that no more capital will need to be injected into it. With a sharp correction in capital markets and even lower interest rates since balance date, I would be very surprised if another substantial capital injection is not required.



No doubt some of their divisions still operating under essential services for agriculture/food production/animal welfare?


Real Estate I suspect will be in lock down. Wool I guess they can stock pile. Livestock trading will still be needed. Buyers and sellers can do a certain amount on the net these days. Yet if I was a farmer, I would still want to eyeball any stock I bought, so actual transactions will probably be well down. I think the retail farm supply business is still in operation, but the front door to the stores is locked. IOW farmers can ring through their orders and PGW will arrange delivery. A large proportion of their sales were arranged by 'direct to farmer' visits before all this hit anyway. Then there is the drought that has fallen from the headlines with the COVID-19 escalation, but has not gone away. Horticulture is going gang busters. But what if the growers can't get the labour to get their fruit off the trees? They could be in strife by the end of the season. I don't think PGW will have an easy six months. But I do think they will come out the other side.

SNOOPY

discl: holder

[Balance]

Horticulture is going gang busters. But what if the growers can't get the labour to get their fruit off the trees? I don't think PGW will have an easy six months.

Talked to my doctor friend yesterday morning who have a number of farmers in his client list - farming families are banding together around the horticultural areas and helping each other out to overcome the labour shortage. Working well.

Times like these, NZ farming community have always always showed their resilience and co-operation.

More so the pity that Labour governments have never appreciated our farmers - preferring to pander to the dole bludgers and state dependents.

[macduffy]

The other 'elephant in the room' is the company superannuation scheme. We were lead to believe that no more capital will need to be injected into it. With a sharp correction in capital markets and even lower interest rates since balance date, I would be very surprised if another substantial capital injection is not required.


Good point, Snoopy. This must be a concern for all companies that still have benefit promise super schemes which are normally based on final salary, or something close to that. Unlike the more popular cash accumulation schemes where members take the risk of fluctuating values, the former remain the company's responsibility/liability. If markets don't recover sufficiently before the next actuarial valuations there could be some difficult decisions to be made.

[sb9]

Bit of rarity in these times to see divvy being paid into your bank a/c...thanks PGW!

[Balance]

There’s food shortage concerns everywhere in the world now - NZ agriculture is very well placed and a company servicing the sector is going to do very well.

[iceman]

There’s food shortage concerns everywhere in the world now - NZ agriculture is very well placed and a company servicing the sector is going to do very well.

Agree Balance. The strong companies coming out of this terrible situation are primary producers of clean and healthy food and their suppliers. Sadly, for a country growing a wide and abundant variety of good food, there is an appalling lack of options to invest in these on the NZX. A few months ago an idea of an index of primary producers was floated but then nothing happened. Now is the time for this.
My NZX portfolio is now 55% in this sector incl a bit of PGW

[JBmurc]

Bit of rarity in these times to see divvy being paid into your bank a/c...thanks PGW!

Yes and keep paying their lease and I'm happy ...unlike many commercial property owners at the moment

[nztx]

Bit of rarity in these times to see divvy being paid into your bank a/c...thanks PGW!



Agreed there - very good to see in line of Co's that have either cancelled, deferred or not declared a usual dividend

[DarkHorse]

Agree Balance. The strong companies coming out of this terrible situation are primary producers of clean and healthy food and their suppliers. Sadly, for a country growing a wide and abundant variety of good food, there is an appalling lack of options to invest in these on the NZX. A few months ago an idea of an index of primary producers was floated but then nothing happened. Now is the time for this.
My NZX portfolio is now 55% in this sector incl a bit of PGW
I agree on both counts. What are you other favourites in the sector?

[iceman]

I agree on both counts. What are you other favourites in the sector?

Sadly we don;t have enough choice for a country that is a huge producer of primary product. I'd say any diversified investment into this sector now is a good bet with the World needing the product and NZ$ weakness likely to be favourable.
There are some very good companies listed that would fit into this category.
My focus is and has been on SAN, ATM, SEK, PAZ (on the unlisted) and no doubt Fonterra should be on this list but I've never done research into them as I've never been interested in them (Fonterra) for some reason.
I personally have taken a big punt on PAZ and have been buying into SEK again and very tempted to start buying into SAN again. Have held both SEK and SAN for many years but sold out of both 1-2 years ago. I obviously also like PGW which should benefit from strong agriculture rebound.

This is most certainly not an advice by any stretch of the imagination, just ponderings.

[Snoopy]

From p17 in PGW AR2019"

"Innovation continues to be a focus for the Livestock team with a major project coming to fruition during the year. PGW’s new online livestock trading channel, bidr®, was delivered to market during the last quarter of FY2019. bidr® has the potential to be a gamechanger in the livestock trading market with strong interest from the industry to date. In addition, digital tools for the highly mobile Livestock team were delivered throughout the year to keep agents up to date with the latest market intelligence."

This looks like PGW have something equal to 'StockX' in their arsenal already. PGW have an additional advantage in that they are able to provide in house finance via their GoBeef and GoLamb programs. More information on StockX is here:

https://www.nzherald.co.nz/farming/news/article.cfm?c_id=195&objectid=11856447

I see Heartland are financing purchases through StockX. That will anger PGW who had signed up with Heartland to do all of their financing through Heartland owned "PGG Wrightson Finance". However, with PGW setting up their own in house finance operation again under another name (GoBeef and GoLamb) it is no less a competition challenge than PGW management deserve.

"The soundness of purchases is helped by StockX's secure online environment, standardised descriptions for each class and category of livestock, funds settled through an independently audited trust account and user-based feedback on buyer and seller completed transactions"

Is there a way outsiders can follow the 'user based feedback' so we can judge how well this new platform is going?


For PGW shareholders who don't know, there is a radio program called 'Rural Exchange' that plays on the Magic Radio talk network from 6am to 8am every Saturday and Sunday. It is also available as a podcast I believe.

The head of PGW Livestock was interviewed this morning and gave some insight on how 'Livestock' in general and "bidr®" in particular is going.

Sheep are selling well but cattle less so. A problem with cattle is that although they meat works are still open, the killing chain capacity is typically only 25% of what it was for cattle, due to Covid-19 separation requirements. Thus there is a problem with 'booking cattle in' and that means many cattle that would have gone to the works are still on the farm consuming feed. That means that at a farmer level, there is much reduced demand for cattle.

The "bidr®" platform has seen a 43% increase in agents signing up to in in the last couple of weeks. The platform has been opened up to non-PGW stock agents for the term of the lock down.

SNOOPY

[kiora]

Allied farmers have had their own platform for a few years
https://mylivestock.co.nz/

[Balance]

For PGW shareholders who don't know, there is a radio program called 'Rural Exchange' that plays on the Magic Radio talk network from 6am to 8am every Saturday and Sunday. It is also available as a podcast I believe.

The head of PGW Livestock was interviewed this morning and gave some insight on how 'Livestock' in general and "bidr®" in particular is going.

Sheep are selling well but cattle less so. A problem with cattle is that although they meat works are still open, the killing chain capacity is typically only 25% of what it was for cattle, due to Covid-19 separation requirements. Thus there is a problem with 'booking cattle in' and that means many cattle that would have gone to the works are still on the farm consuming feed. That means that at a farmer level, there is much reduced demand for cattle.

The "bidr®" platform has seen a 43% increase in agents signing up to in in the last couple of weeks. The platform has been opened up to non-PGW stock agents for the term of the lock down.

SNOOPY

Thanks, Snoppy - useful information.

Talked to my Waikato farmer friend - he has been happy when prices for beef plummeted during Dec 2019 - Feb 2020 to keep his remaining 'kill' animals and left them on his farm. Plenty of feed around and he laughed when I asked him about the drought - no drier than usual in summer was his reply except that it arrived several weeks earlier - they are prepared for the dry spell.

Demand from China has picked up again for beef, meat companies like Affco have exhausted their frozen inventory.

[sb9]

Just an observation, the seller at 1.90 with more than 200k+ volume on offer over past week seem to be almost filled in. Wonder would they drop in more volume at that price??

[Balance]

Just an observation, the seller at 1.90 with more than 200k+ volume on offer over past week seem to be almost filled in. Wonder would they drop in more volume at that price??

They haven't and if NZ gets out of the lockdown in 2 weeks' time, PGW will be one of first companies to benefit substantially - our agriculture sector is going to do well supplying food to the rest of the world.

[tim23]

They haven't and if NZ gets out of the lockdown in 2 weeks' time, PGW will be one of first companies to benefit substantially - our agriculture sector is going to do well supplying food to the rest of the world.

The market thinks you are right today!

[Balance]

The market thinks you are right today!

And think of all that billions of dollars currently sitting in cash looking for a better than 1% or 2% return post the lockdown.

PGW will be irresistibly attractive with its fully imputed gross dividend yield of over 10%+!

[BlackPeter]

And think of all that billions of dollars currently sitting in cash looking for a better than 1% or 2% return post the lockdown.

PGW will be irresistibly attractive with its fully imputed gross dividend yield of over 10%+!

Just wondering how their pension scheme is doing these days ... wasn't there a problem if interest rates are further dropping (which they are)?

[kiwidollabill]

To play devils advocate....

Yes they wont be as screwed as the rest of NZ industry but who says they will be doing great? Alot of that smart investor cash will go into long term prospects which have been beaten down...

Bank lending was tightening prior, I cant imagine they will be super keen to open the loan book after having to grow their consumer/business sectors to deal with the downturn. Any extra cash generated by a strong commodity sector will get put towards debt repayment c.f. asset purchases.

Water sector is almost topped out, agency is pretty cyclical (farm purchases at low...), its the retail side which keeps the cash coming....

[Snoopy]

And think of all that billions of dollars currently sitting in cash looking for a better than 1% or 2% return post the lockdown.

PGW will be irresistibly attractive with its fully imputed gross dividend yield of over 10%+!


Former controlling shareholder Alan Lai has had to sell down his Agria owned shares to below the 50.1% controlling level. But in reality, Agria (44.3% stake at EOFY2019) still does control PGW because Lai is good mates with David Cushing who controls the Rural Equities stake (5% IIRC) and the H&G family firm stake (2.66% at EOFY2019).

I suspect the high dividend reflects the will of Alan Lai, who still needs those dividends to support his leveraged buyout vehicle. Just because high dividends are being paid does not mean that this is in the best interests of PGW minority shareholders. There is risk with keeping dividends at current levels, and PGWs bankers may have a say as to whether this continues.

SNOOPY

[Balance]

To play devils advocate....

Yes they wont be as screwed as the rest of NZ industry but who says they will be doing great? Alot of that smart investor cash will go into long term prospects which have been beaten down...

Bank lending was tightening prior, I cant imagine they will be super keen to open the loan book after having to grow their consumer/business sectors to deal with the downturn. Any extra cash generated by a strong commodity sector will get put towards debt repayment c.f. asset purchases.

Water sector is almost topped out, agency is pretty cyclical (farm purchases at low...), its the retail side which keeps the cash coming....

Thanks for playing devil's advocate - it is good that all of us are challenged to test our views and conviction.

The agricultural sector is the one industry left intact pretty much by the lockdown and the outbreak - its importance to NZ has been undermined by this government with all kinds of hindrances but this government is going to be very dependent upon this sector to cushion NZ from a deep recession. Shoe is on the other foot, so to speak.

And the sector is doing well - be it dairy, meat or horticulture, heading into a fourth year of increased profitability. https://www.nzherald.co.nz/the-country/news/article.cfm?c_id=16&objectid=12304721

The world is going to need and want NZ's food with its unquestionable quality & integrity - we are already seeing that from China as that country emerges from its lockdown. And notice how much the NZ$ is down, compared to the last 5 years?

PGW has showed in its latest results and by paying a dividend (one of the few to do so) that the company is stable, financially sound (EBIT of $19m for HY & debts of $60m) and has overcome many of the problems it had in the past. In other words, well positioned to benefit from what's happening in the agricultural sector.

What's there not to like about a well-positioned industry, a well-positioned company in that industry and a great dividend yield?

[Balance]

https://www.newsroom.co.nz/2020/04/11/1122157/david-slack-back-to-the-land-after-lockdown?utm_source=Friends+of+the+Newsroom&utm_campaign=749b6bbd29-Daily+Briefing+11.4.20&utm_medium=email&utm_term=0_71de5c4b35-749b6bbd29-97843407

Farmers and farming back to the fore in NZ now that tourism is screwed for at least the next year or three. Guess Labour & Greens are are going to have to play nice to the sector after relentlessly hammering farming and farmers for the last 2 years.

“Perhaps the divisions we’ve had that have been exploited in the past politically will be seen for what they are: that we’re all in this together and we’ve just got to help each other out.”

[Snoopy]

https://www.newsroom.co.nz/2020/04/11/1122157/david-slack-back-to-the-land-after-lockdown?utm_source=Friends+of+the+Newsroom&utm_campaign=749b6bbd29-Daily+Briefing+11.4.20&utm_medium=email&utm_term=0_71de5c4b35-749b6bbd29-97843407

Farmers and farming back to the fore in NZ now that tourism is screwed for at least the next year or three. Guess Labour & Greens are are going to have to play nice to the sector after relentlessly hammering farming and farmers for the last 2 years.

“Perhaps the divisions we’ve had that have been exploited in the past politically will be seen for what they are: that we’re all in this together and we’ve just got to help each other out.”

A few issues raised in that article Balance. Like a potential weakening in demand for 'high end' meat cuts. The sort of thing favoured by those high end restaurants that won't exist anymore. Paul Hughs seemed a bit down on dairy too. I know the last dairy auction showed a much welcome spike in prices. But this could have been an end of season effect caused by diminishing supply of product on offer, rather than a portent of what is to come for next season. Then we have this continuing drought which seems to be worst in the upper North Island, including Waikato. This has resulted in a much lower yield of winter feed being grown. Palm Kernel importation to offset this could be a problem with the closure of certain critical ports in Malaysia. Farmers could be looking at a difficult few months.

More specific to PGW, let's not forget the position of the 'fixed up' (sic) pension plan either. The underlying investments will have plunged in value, while the further decline in interest rates will have fuelled a new discount rate present day valuation problem.

Not saying PGW is necessarily a bad place to be. I have been building up my own holding over the last few months after all. But I don't think PGW is the one way bet you paint it to be either.

SNOOPY

[sb9]

Hello, what's up with this special crossing this morning at $2.75 a piece of more than 5.6mln shares??



275
5,628,450
09:35
SP



That's almost 7.5% of total PGW shares on issue.

[Balance]

Hello, what's up with this special crossing this morning at $2.75 a piece of more than 5.6mln shares??



275
5,628,450
09:35
SP



7.45% of the stock done at above market price.

Interesting!

[Balance]

Do I smell a takeover offer?

Here we go - $2.55 and heading higher!

[percy]

Hello, what's up with this special crossing this morning at $2.75 a piece of more than 5.6mln shares??



275
5,628,450
09:35
SP



That's almost 7.5% of total PGW shares on issue.

Yesterday's close was $2.25 so 50 cents above that.
And Ghee Whiz we have just recently received the nice divie.
We certainly live in interesting times.

[sb9]

Yesterday's close was $2.25 so 50 cents above that.
And Ghee Whiz we have just recently received the nice divie.
We certainly live in interesting times.

Wonder if this triggers any SSH notice. Will be interesting to see..

[iceman]

Yesterday's close was $2.25 so 50 cents above that.
And Ghee Whiz we have just recently received the nice divie.
We certainly live in interesting times.

Couldn't help myself and got a few more this morning. We sure are watching an interesting development !

[tim23]

Wonder if this triggers any SSH notice. Will be interesting to see..

Above 5% they will be required to file notice.

[Snoopy]

Above 5% they will be required to file notice.

H&G (that's the Cushing's family firm) have filed a notice. But did they sell or did they buy?

SNOOPY

[mfd]

The seller was REL on the unlisted market, selling a bunch of the shares they picked up last year for a tidy profit + dividend. Maybe they think there'll be some cheap farms going soon or maybe they just had an offer they couldn't refuse. Wonder who the buyer is...

[sb9]

The seller was REL on the unlisted market, selling a bunch of the shares they picked up last year for a tidy profit + dividend. Maybe they think there'll be some cheap farms going soon or maybe they just had an offer they couldn't refuse. Wonder who the buyer is...

Yes that'll be of big interest, who is it? Someone very keen and with deep pockets as they paid 50c premium to previous day's closing price.

[Snoopy]

The seller was REL on the unlisted market, selling a bunch of the shares they picked up last year for a tidy profit + dividend. Maybe they think there'll be some cheap farms going soon or maybe they just had an offer they couldn't refuse. Wonder who the buyer is...


Pretty dismal milk price forecast for next season, $5.60 or something? Did REL need to sell to shore up their own balance sheet?

SNOOPY

[mfd]

Pretty dismal milk price forecast for next season, $5.60 or something? Did REL need to sell to shore up their own balance sheet?

SNOOPY

Perhaps, I thought they had a bit of a war chest from farm sales but maybe they needed a little more.

[Snoopy]

Perhaps, I thought they had a bit of a war chest from farm sales but maybe they needed a little more.

Just had a look through some of the REL announcements.

15-08-2019 Through on-market trades, REL acquired 72,238 PGW shares.

16-08-2019 Through on-market trades, REL acquired 27,035 PGW shares

29-08-2019. REL has this week acquired 2,842,736 shares in listed rural services company PGG Wrightson Limited (PGW). The shares that represent 3.766% of PGW’s shares on issue,

17-04-2020. Rural Equities Limited has this morning sold its parcel of 3,158,313 PGG Wrightson Limited shares.

However, the single sale through the market was reported as being for 5,628,450 shares. (from Stocknessmonster)

In AR2019 for PGW, H&G Limited (the Cushing family investment vehicle) was reported as holding 2,006,732 shares. Add that figure to the shares that Rural Equities sold and you still don't get 5,628,450. (that means that H&G had been increasing their holding since the PGW balance date too?).

But it does look like both H&G and Rural Equities have both now sold out of PGW. That is the only way I can make sense of the figures. Will David Cushing stay on the PGW board I wonder?

SNOOPY

[percy]

Perhaps, I thought they had a bit of a war chest from farm sales but maybe they needed a little more.

Be interesting to see where they recycle their funds.
Astute investors.

[tim23]

And the buyer? Elders perhaps?

[nztx]

And the buyer? Elders perhaps?


depends on whether one buyer or chopped up over more, as to whether there will be any filing by new or existing holder(s) buying

[tim23]

depends on whether one buyer or chopped up over more, as to whether there will be any filing by new or existing holder(s) buying

Good point, the premium is good news, Cushings must have been approached to sell their shares?

[nztx]

will say this - whatever the proceeds of H&G & RPL parcels were/are being applied towards, it must have been either awfully good
or urgent to forgo potential growth & the dividend stream from PGW & Rural Sector exposure in these times..

[percy]

Independent Chairman of PGW ...........Rodger Finlay...................also Director Rural Equities.
Executive Chairman of Rural Equities....David Cushing..................also director of PGW.


Saturday night speculation.Scales buys PGW and get their hands on Fruit fed,then sell the rump of PGW to Elders ,or another Australian stock agency.

[tim23]

That has merit, Fruitfed is a great performer in PGG but a bit unsung, remember they were listed in own right before W & K took them over.

Independent Chairman of PGW ...........Rodger Finlay...................also Director Rural Equities.
Executive Chairman of Rural Equities....David Cushing..................also director of PGW.


Saturday night speculation.Scales buys PGW and get their hands on Fruit fed,then sell the rump of PGW to Elders ,or another Australian stock agency.

[nztx]

Independent Chairman of PGW ...........Rodger Finlay...................also Director Rural Equities.
Executive Chairman of Rural Equities....David Cushing..................also director of PGW.


Saturday night speculation.Scales buys PGW and get their hands on Fruit fed,then sell the rump of PGW to Elders ,or another Australian stock agency.

Should we instead be looking at PGW based on estimates of it's break-up value rather than future trading prospects .. ?

[percy]

That has merit, Fruitfed is a great performer in PGG but a bit unsung, remember they were listed in own right before W & K took them over.

Yes W&K took over Fruitfed and on sold to PGW.
Cushings controlled W&K, so I would except David Cushing and Rodger Finlay would have a pretty good idea of the real value of Fruitfed, and the rump of PGW.
So with them accepting $2.75 a share I would expect that would be their thoughts on the breakup value of PGW.
However we do not know what a buyer of Fruitfed sees as its value to their company.
My speculation is based on the fact I see the only company in NZ that could take over PGW is SCL.Then we have to ask ourselves why.? The only answer I can come up with is they want Fruitfed.
It is a concern to me that Rodger Finlay [Chairman] and David Cushing [director] have sold.They are the main reason I increased our PGW holdings.Does it mean they will now resign from PGW's board.?
Perhaps we will be able to make a better informed judgement when we find out who brought their shares.

[Snoopy]

Independent Chairman of PGW ...........Rodger Finlay...................also Director Rural Equities.
Executive Chairman of Rural Equities....David Cushing..................also director of PGW.

Saturday night speculation.Scales buys PGW and get their hands on Fruit fed,then sell the rump of PGW to Elders ,or another Australian stock agency.


Intriguing Percy. Fruitfed is possibly the 'crown jewel' in the PGG Wrightson stable right now. It even got a special highlight slide at the AGM IIRC. I can't see any reason why PGG Wrightson would willingly sell it. So maybe a 'hostile' takeover of all of PGW would be a way to unlock Fruitfed?

Elders was sniffing around a year or so ago, before the seed division sale when PGW was 'too expensive'. But didn't they buy another chain in Australia instead? The interest in PGG Wrightson seemed to me a bit half hearted given what they actually bought.

I was scratching my head to try and find out why the Cushings might sell. Did they want to repay 'Rural Equities' debt? No, the sale of dairy farms during FY2019 saw all 'Rural Equities' debt paid back.

I noticed that Rural Equities has also sold their equity stake in Websters in Australia. So the reason given for Rural Equities putting money into both PGW and Websters originally - diversification - must no longer be current.

It would seem an odd time to launch a hostile takeover of PGW, with most supporting banks (the big Aussie ones) seemingly wanting to reduce their rural exposures and fearful for the strength of their loan books. So I have another theory. It is Rural Equities who have their sights on a big purchase of 'something else' and they want to be in a super strong position for their purchase so they can:

1/ Purchase without bank debt OR
2/ Be in a strong position to negotiate new bank terms when their banking facilities expire on 3rd May 2020 (not very far away!)

$2.75 for PGW shares sold is a full price given recent history. But try buying up a 7% stake in PGW by buying on market at under $2.75. You might have trouble doing that. PGW is a good dividend payer, so maybe the buyer was an income chasing superannuation scheme?

Or, how about this for a wildcard? David Cushing has fallen out with Alan Lai (pure speculation). So Lai has found another 'mate' to buy the stake so that he can maintain defacto controller of PGW! That might be worth paying a premium to do!

SNOOPY

[nztx]

Yes W&K took over Fruitfed and on sold to PGW.
Cushings controlled W&K, so I would except David Cushing and Rodger Finlay would have a pretty good idea of the real value of Fruitfed, and the rump of PGW.
So with them accepting $2.75 a share I would expect that would be their thoughts on the breakup value of PGW.
However we do not know what a buyer of Fruitfed sees as its value to their company.
My speculation is based on the fact I see the only company in NZ that could take over PGW is SCL.Then we have to ask ourselves why.? The only answer I can come up with is they want Fruitfed.
It is a concern to me that Rodger Finlay [Chairman] and David Cushing [director] have sold.They are the main reason I increased our PGW holdings.Does it mean they will now resign from PGW's board.?
Perhaps we will be able to make a better informed judgement when we find out who brought their shares.

Possibly - but the larger road block on the way is the Chinese Aria holding - and how easily that could be
dislodged by a new suitor.. or if push becomes shove for Chinese holder's banks wanting their loans repaid.

Nevertheless, if there was prospect of that, then it's difficult to comprehend H&G & REL wanting to exit PGW now
ahead of something more ..

[kiora]

Curious
Why did REL want to own a minority stack in PGG Wrightson in the first place?
As Percy has pointed out,it will be interesting to see what REL employ the funds into

[Southern Lad]

Curious
Why did REL want to own a minority stack in PGG Wrightson in the first place?
As Percy has pointed out,it will be interesting to see what REL employ the funds into

My pick is that REL will take the opportunity of the dip in their share price to make a buyback offer at a discount to NTA, thereby increasing the NTA of the remaining shares and increasing H&G’s ownership percentage.

[percy]

My pick is that REL will take the opportunity of the dip in their share price to make a buyback offer at a discount to NTA, thereby increasing the NTA of the remaining shares and increasing H&G’s ownership percentage.

Well it is the company they know best.
Currently H&G Ltd hold 67.10% of REL, and there are a number of other holdings associated with the Cushings and Rodger Findlay.

[sb9]

More being crossed...



275
855,823
11:37
SP

[Balance]

More being crossed...



275
855,823
11:37
SP

''

It's very clear what's happening behind the scenes.

Put 2 and 2 together and .....

[Snoopy]

''

It's very clear what's happening behind the scenes.

Put 2 and 2 together and .....


I must be a bit thick, because from where I sit it is far from clear. 855,823 shares is approximately 1% of PGW shares. So add to that the just over 7% of PGW already traded at $2.75 and it still doesn't reach 10%. 10% is needed for a blocking stake. So whoever is buying isn't there yet, if that is the goal. Apart from the Agria stake, the share register is widely distributed.

Looking back at the share register as reported in AR2019, the only single holder left with 855,823 shares to sell is Masfen Securities Limited. But why would Masfen agree to sell only 2/3 of his shares at $2.75? For that reason I don't think Masfen would have sold.

ACC had 653,354 shares. Not enough, but they may have accumulated more since reporting date. It might be ACC selling? Big institutional investors would not sell at less than an imminent takeover offer price. So are we looking at a takeover offer of $2.75 coming soon? If that is the end goal, why does the potential bidder not make a full bid now? I guess it would increase the credibility of a bid if they had H&G and ACC 'on board' in advance?

What today's action does show is that the buyer is not a white knight for Alan Lai and Agria. If that were the case, there would be no need to buy more PGW shares on the market today.

SNOOPY

[sb9]

I must be a bit thick, because from where I sit it is far from clear. 855,823 shares is approximately 1%. So add to that the just over 7% of PGW already traded at $2.75 and it still doesn't reach 10%. 10% is needed for a blocking stake. So whoever is buying isn't there yet, if that is the goal. Apart from the Agria stake, the share register is widely distributed.

Looking back at the share register as reported in AR2019, the only single holder left with that number of shares is Masfen Securities Limited. But why would agree to sell only 2/3 of your shares at $2.75? For that reason I don't think Masfen would have sold.

ACC had 653,354 shares. Not enough but they may have accumulated more since reporting date. It might be ACC selling. Big institutional investors would not sell at less than an imminent takeover offer. So are we looking at a takeover offer of $2.75? If that is the end goal, why does the bidder not make a full bid now?

https://www.nzx.com/announcements/351925

Details of the buyer...Beijing Holdings BAIC Ltd. (“BHBL”)

[Balance]

Looking back at the share register as reported in AR2019, the only single holder left with 855,823 shares to sell is Masfen Securities Limited. But why would Masfen agree to sell only 2/3 of his shares at $2.75? For that reason I don't think Masfen would have sold.

ACC had 653,354 shares. Not enough, but they may have accumulated more since reporting date. It might be ACC selling? Big institutional investors would not sell at less than an imminent takeover offer price. So are we looking at a takeover offer of $2.75 coming soon? If that is the end goal, why does the potential bidder not make a full bid now? I guess it would increase the credibility of a bid if they had H&G and ACC 'on board' in advance?

SNOOPY

Add Agria's stake of 44.3% to what they have accumulated, and they are guaranteed to have majority control when they launch a full takeover bid.

Otherwise, there's no logical explanation for anyone to pay a premium to build up towards a 10% stake in the company.

[percy]

Add Agria's stake of 44.3% to what they have accumulated, and they are guaranteed to have majority control when they launch a full takeover bid.

Otherwise, there's no logical explanation for anyone to pay a premium to build up towards a 10% stake in the company.

Anyone know who Beijing Holdings BAIC Ltd are.?
Agreed.........................

[freddagg]

Anyone know who Beijing Holdings BAIC Ltd are.?
Agreed.........................

Here is what Mr Wiki knows
https://en.wikipedia.org/wiki/BAIC_Group

[Snoopy]

Add Agria's stake of 44.3% to what they have accumulated, and they are guaranteed to have majority control when they launch a full takeover bid.


Yes, but if Beijing Holdings Limited make a bid, then any shares they hold prior to the bid being launched are excluded from voting on the deal. So it would only make sense to pick up shares before the bid was lodged if you were fairly sure those shareholders selling to you would have voted against the bid.

Could Beijing Holdings be looking to do a scheme of arrangement? That has a lower success threshold (75% of outstanding shares must vote yes) than a full bid. If Agria were to vote 'yes' for a scheme of arrangement, that would go a long way to reaching a 75% of outstanding shares voting 'yes' goal.



Otherwise, there's no logical explanation for anyone to pay a premium to build up towards a 10% stake in the company.

ACC have quite a good reputation for astute portfolio management. If it was them that sold, then the credibility of Beijing Holdings Ltd bid might be enhanced? I think there is a core group of PGW shareholders who 'don't want to sell to the Chinese'.

SNOOPY

[Snoopy]

Here is what Mr Wiki knows
https://en.wikipedia.org/wiki/BAIC_Group


A car company acquiring PGG Wrightson? That seems far fetched.

What about this?

https://www.bloomberg.com/profile/company/BJHLDZ:HK

Beijing Holdings Ltd

"Beijing Holdings Limited operates as an investment holding company. The Company operates in Hong Kong."

Director Lei Zhengang is in the "Offshore Leaks Database"

https://offshoreleaks.icij.org/nodes/103687?e=true

"This database contains information on more than 785,000 offshore entities that are part of the Paradise Papers, the Panama Papers, the Offshore Leaks and the Bahamas Leaks investigations."

and Chang Ling

http://hkmdb.com/db/people/view.mhtml?id=4743&display_set=eng

A retired Kung Fu movie actress. If the takeover gets off the ground, I wouldn't want to be part of the management team to 'get the chop' from her!

SNOOPY

[sb9]

Add Agria's stake of 44.3% to what they have accumulated, and they are guaranteed to have majority control when they launch a full takeover bid.

Otherwise, there's no logical explanation for anyone to pay a premium to build up towards a 10% stake in the company.

They probably would be mopping more on market for cheaper than 2.75 a piece.

[dameofdiv]

Beijing Holdings BAIC Limited https://www.hkgbusiness.com/en/company/Beijing-Holdings-Baic-Limited is a subsidiary of Beijing Capital Agribusiness Group: https://www.cbinsights.com/company/sunlon

More English information about BCAG here: http://www.agri.citic/html/en/AnimalBreeding/BeijingCapitalAgribussiness/

[winner69]

Collapsing oil prices not good for PGW

Didn’t I read that on here somewhere

[Southern Lad]

See PGW announcement this afternoon detailing some background Beijing Holdings BAIC Limited and there representations on their intentions/motivations.

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/352113/321311.pdf

I note that they say they are not associated with any existing PGW shareholder, however it’s hard to imagine they are a long term holder of only 9.019%. One suspects negotiations are about to start with 44% shareholder Agria.

[Balance]

See PGW announcement this afternoon detailing some background Beijing Holdings BAIC Limited and there representations on their intentions/motivations.

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/352113/321311.pdf

I note that they say they are not associated with any existing PGW shareholder, however it’s hard to imagine they are a long term holder of only 9.019%. One suspects negotiations are about to start with 44% shareholder Agria.

Yup - agree that must be the game plan.

BABL has bought out the 2 potentially troublesome shareholders in PGW who with 10% could have blocked a full takeover by BABL - once Agria sells to it.

Also, 44% + 9% > 51% = control.

[kiora]

Might have something to do with this
"Due to the outbreak of African swine fever last year and the resulting supply disruption amid efforts to contain Covid-19, food prices in China jumped 21.4 per cent in February, largely driven by a 135.2 per cent hike in pork prices – the biggest increase on record"
"China’s consumption of meat jumped from 7 million tonnes in 1975 to 75 million tonnes in 2017; the country now consumes roughly 50kg of meat per capita"
https://www.scmp.com/week-asia/opinion/article/3079365/coronavirus-disrupts-food-supply-chains-who-will-feed-china
A good time to be invested in agri sector?
Always a good idea to be part invested anyway but PGG Wrightson?

[Snow Leopard]

Might have something to do with this
"Due to the outbreak of African swine fever last year and the resulting supply disruption amid efforts to contain Covid-19, food prices in China jumped 21.4 per cent in February, largely driven by a 135.2 per cent hike in pork prices – the biggest increase on record"
"China’s consumption of meat jumped from 7 million tonnes in 1975 to 75 million tonnes in 2017; the country now consumes roughly 50kg of meat per capita"
https://www.scmp.com/week-asia/opinion/article/3079365/coronavirus-disrupts-food-supply-chains-who-will-feed-china
A good time to be invested in agri sector?
Always a good idea to be part invested anyway but PGG Wrightson?

There is a saying 'When you're in a gold rush sell picks and shovels'.

So I presume that the thinking is 'When in a bacon shortage sell pigs*** shifting shovels'


Interestingly due to my portfolio rebalancing and SP movements PGW is, at the time of writing, my largest NZX holding, but that will change.

[Balance]

Might have something to do with this
"Due to the outbreak of African swine fever last year and the resulting supply disruption amid efforts to contain Covid-19, food prices in China jumped 21.4 per cent in February, largely driven by a 135.2 per cent hike in pork prices – the biggest increase on record"
"China’s consumption of meat jumped from 7 million tonnes in 1975 to 75 million tonnes in 2017; the country now consumes roughly 50kg of meat per capita"
https://www.scmp.com/week-asia/opinion/article/3079365/coronavirus-disrupts-food-supply-chains-who-will-feed-china
A good time to be invested in agri sector?
Always a good idea to be part invested anyway but PGG Wrightson?

I doubt that BABL is buying PGW for what it is today.

PGW arguably has the best interface with the agribusiness sector in NZ.

PGW under the right owner with deep pockets and market access will be able to be used very effectively to leverage into various sectors of agribusiness.

Think of Synlait - pre and post the entry of Bright Foods.

[kiwidollabill]

Collapsing oil prices not good for PGW

Didn’t I read that on here somewhere

Correlation with the milk price... https://www.dairybusiness.com/dairy-and-crude-oil-prices-correlation-or-causation/

Causation not entirely explained but surmised to be associated with elasticity of purchasing from ME customers + Russia

[Balance]

The linkages between our agricultural fortunes to China's fortunes - never more glaringly clear.

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12327039

"The New Zealand-China meat trade has returned to pre-coronavirus levels but markets in North America and Europe have been hit hard by the pandemic, Invercargill-based Alliance Group says.
Chief executive David Surveyor said trade with China was back to where it was before the outbreak - "China is going well. It is in a good space."

[Balance]

https://www.msn.com/en-in/news/world/instead-of-coronavirus-the-hunger-will-kill-us-a-global-food-crisis-looms/ar-BB133Gzv?li=AAggbRN

Global Crisis looms due to impact of virus.

You can be very very sure China will never allow itself to be short of food and the misery of famine ever again.

Why China will continue to invest billions of dollars to position itself in the agricultural & food industries.

[winner69]

Hope NZ follows India and makes it really hard for China to take over NZ companies

[Balance]

Hope NZ follows India and makes it really hard for China to take over NZ companies

Get them to pay a full price.

[nztx]

Hope NZ follows India and makes it really hard for China to take over NZ companies

Haven't Australia done something on this already ?

[Balance]

Haven't Australia done something on this already ?

Yup - all foreign investments irrespective of size will now require federal government approval.

Really an extension of their current foreign investment approval regime.

https://www.abc.net.au/news/2020-03-29/foreign-investment-restrictions-australian-assets-coronavirus/12101332

[kiwidollabill]

Yup - all foreign investments irrespective of size will now require federal government approval.

Really an extension of their current foreign investment approval regime.

https://www.abc.net.au/news/2020-03-29/foreign-investment-restrictions-australian-assets-coronavirus/12101332

They got really burnt with the Van Dieman Co buyout, the final chapter of that story has yet to be written...

[nztx]

They got really burnt with the Van Dieman Co buyout, the final chapter of that story has yet to be written...

I know that one - originally Tasman Ag - I think then takeover by Taranaki District Council, from memory going back a while?

[tim23]

Strong close Friday - might bode well for tomorrow.

[sb9]

Strong close Friday - might bode well for tomorrow.

Getting interesting now as to how this plays out...

[Balance]

Getting interesting now as to how this plays out...

BABL is close to building up a 10% blocking stake - means Agria will have no option to deal with BABL and the two potential Australian bidders (Elders & Ruralco) are locked out at this stage.

Be very surprising if informal discussions or approaches are not taking place.

Nobody pays $2.75 (20% above market) for a non-controlling stake.

[sb9]

BABL is close to building up a 10% blocking stake - means Agria will have no option to deal with BABL and the two potential Australian bidders (Elders & Ruralco) are locked out at this stage.

Be very surprising if informal discussions or approaches are not taking place.

Nobody pays $2.75 (20% above market) for a non-controlling stake.

Those are my thoughts too, something's cooking behind scenes by the looks.

[nztx]

Those are my thoughts too, something's cooking behind scenes by the looks.

Yep .. highly likely IMO - especially with REL / Cushing interests selling out too ..

[sb9]

BABL is close to building up a 10% blocking stake - means Agria will have no option to deal with BABL and the two potential Australian bidders (Elders & Ruralco) are locked out at this stage.

Be very surprising if informal discussions or approaches are not taking place.

Nobody pays $2.75 (20% above market) for a non-controlling stake.

Bang on, they've just upped their stake to just over 10% as per notice issued today. As expected, they've been buying on market over past few days, GAME ON!!!

[iceman]

Bang on, they've just upped their stake to just over 10% as per notice issued today. As expected, they've been buying on market over past few days, GAME ON!!!

They better hurry up before Winston stops them in their tracks after talking the hard nationalistic talk in Parliament yesterday about protecting our industries and food production. Elections coming up !!

[Balance]

They better hurry up before Winston stops them in their tracks after talking the hard nationalistic talk in Parliament yesterday about protecting our industries and food production. Elections coming up !!

Good point - and rightly so that NZ assets and businesses should not be sold cheap to overseas interests. That happened of course post 1987 Crash and 2007 GFC.

Not an issue however with PGW as already majority foreign owned.

[Balance]

Bang on, they've just upped their stake to just over 10% as per notice issued today. As expected, they've been buying on market over past few days, GAME ON!!!

So they have got their blocking stake which puts BABL in pole position to gain control - just needs to buy Agria's stake of 44% and make a full takeover bid.

Meanwhile, they seem happy to keep accumulating at under $2.75 which means that they can accumulate another 7m shares before they hit the 20% ceiling.

[percy]

We looked forward to something like this happening.
Now that it is I find I have mixed feelings.
Thought I had found a solid company with the capacity to keep paying me great diviies.
If we do get taken over, I guess I will find somewhere else for the funds.
Should be plenty of bargains around in a few months.

[iceman]

We looked forward to something like this happening.
Now that it is I find I have mixed feelings.
Thought I had found a solid company with the capacity to keep paying me great diviies.
If we do get taken over, I guess I will find somewhere else for the funds.
Should be plenty of bargains around in a few months.

Ditto. Exactly the same here and has become my 2nd biggest holding. I hope we don't lose it

[Balance]

We looked forward to something like this happening.
Now that it is I find I have mixed feelings.
Thought I had found a solid company with the capacity to keep paying me great diviies.
If we do get taken over, I guess I will find somewhere else for the funds.
Should be plenty of bargains around in a few months.

Yes, heck of a pity in a way as PGW's dividend yield of over 10% should see the share price easily spike to $2.50 anyway when savers react to the unprecedented falls in interest rates (1 year government rate this morning is 0.19% !!!!) as term deposits mature.

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/351847/321004.pdf

I am going to be like the Cushings, who still hold 2m odd shares.

Keep a few if I can (as a majority shareholder) to enjoy the upside from PGW being used by BABL to introduce best farm servicing practices into China.

As we have seen from Synlait, the right China partner makes all the difference to tapping the real upside in China.

[Snoopy]

From AR2019 p7, we now have an indication of how the 'corporate structure review' will affect earnings going forwards.

"We expect to see the benefit of reduced costs flowing through progressively with savings in excess of $2.5m expected in FY2020"

With the seed business gone, expectations are reset. As an exercise I have gone through the last few years results and removed 'Seed & Grain' EBITDA from the Operating EBITDA. This time, I have added back in the recently announced 'corporate savings'.

Here is the multi-year earnings picture that results:




Combined EBITDA
less Seed & Grain EBITDA
add Corporate Savings
equals PGWRR EBITDA


FY2014$58.747m$33.965m$2.500m
$27.282m


FY2015$69.631m$40.506m$2.500m
$31.675m


FY2016$70.181m$41.862m$2.500m
$30.819m


FY2017$64.499m$37.045m$2.500m
$39.974m


FY2018$70.174m$35.607m
$2.500m
$37.067m


FY2019$2.500m
$26.925m


Average
$32.290m



1/ This period covers the 'modern' era where Mark Dewdney's 'One PGW' philosophy started to permeate the group.
2/ I have used only 'Operating EBITDA'. That metric Leaves out all 'Equity Accounted Investee Profit', and consequently removes the profit contribution from 'Agimol', representing the 50% interest in 'Agricentro' in Uruguay, an equity investment that was subsequently fully taken in house (FY2019) and latterly sold (EOFY2019). Equity accounted New Zealand based investments retained, being a 50% interest in 'Canterbury Saleyards' and a now 33% interest in 'Agri Optics New Zealand', I do not consider have contributed materially to EBITDA.


For FY2020 the EBITDA forecast for PGW is for $30m (26th March market Update). I heard that under lockdown, Farmlands Retail Division is down 10-15% on turnover. I would expect the profit reduction to be deeper than that, and expect PGW Retail to be showing a similar downturn. FY2020 does look to be a 'low point' in an historical context. So if a takeover bid eventuates, it could be seen as opportunistic.



Yes, heck of a pity in a way as PGW's dividend yield of over 10% should see the share price easily spike to $2.50 anyway when savers react to the unprecedented falls in interest rates (1 year government rate this morning is 0.19% !!!!) as term deposits mature.


Exactly. So why accept an opportunistic offer? You can say no.



I am going to be like the Cushings, who still hold 2m odd shares.

Keep a few if I can (as a majority shareholder) to enjoy the upside from PGW being used by BABL to introduce best farm servicing practices into China.


I think the Cushings are completely out (both H&G and Rural Equities). The Chinese have bought out the potential troublemakers. Next operation is to herd up the sheep shareholders.

SNOOPY

[percy]

Ditto. Exactly the same here and has become my 2nd biggest holding. I hope we don't lose it

Hello,hello,hello.???????????
My second largest shareholding too..!!!
Guess our largest is the same too.?...lol.

[Snow Leopard]

Hello,hello,hello.???????????
My second largest shareholding too..!!!
Guess our largest is the same too.?...lol.

At the end of today PGW is back as my biggest holding.

If your biggest is what I think it is then that is my 4th biggest,
but if it is not what I think then it is probably my 5th biggest.

Anyway I am treating myself by scraping out a jar of crunchy peanut butter with a small spoon, hours of pure joy!

[clearasmud]

What's your biggest holding Percy?
I need to know, you're my no 1 guru on this site.

[percy]

What's your biggest holding Percy?
I need to know, you're my no 1 guru on this site.

Sorry I was having fun guessing Iceman's largest holding was PAZ [Pharmazen]on NZ Unlisted market.
It is my largest holding,[then cash],and then PGW.

[clearasmud]

Sorry I was having fun guessing Iceman's largest holding was PAZ [Pharmazen]on NZ Unlisted market.
It is my largest holding,[then cash],and then PGW.

Oh OK, was hoping it was HGH or TRA.

[iceman]

Oh OK, was hoping it was HGH or TRA.

Percy is certainly a guru with his guesses. A man of many talents he is :-)

[sb9]

Article in NBR today titled..."Wrightson's reticence does shareholders no favors". Anyone kind enough to provide a little synopsis.

[kiwidollabill]

Article in NBR today titled..."Wrightson's reticence does shareholders no favors". Anyone kind enough to provide a little synopsis.

Lack of info (comments from Chair) around recent share trades between REL and China bring no confidence to other shareholders that the business is being used as a playing by overseas interests.

[Snoopy]

What about this?

https://www.bloomberg.com/profile/company/BJHLDZ:HK

Beijing Holdings Ltd

"Beijing Holdings Limited operates as an investment holding company. The Company operates in Hong Kong."

Director Lei Zhengang is in the "Offshore Leaks Database"

https://offshoreleaks.icij.org/nodes/103687?e=true

"This database contains information on more than 785,000 offshore entities that are part of the Paradise Papers, the Panama Papers, the Offshore Leaks and the Bahamas Leaks investigations."

and Chang Ling

http://hkmdb.com/db/people/view.mhtml?id=4743&display_set=eng

A retired Kung Fu movie actress. If the takeover gets off the ground, I wouldn't want to be part of the management team to 'get the chop' from her!


I see from the 23rd April Announcement by PGW

-------

Beijing Holdings BAIC Ltd Investment in PGW

PGG Wrightson Limited (PGW) Chairman, Rodger Finlay today noted that “Beijing Holdings BAIC Ltd. (BAIC) announced earlier this week that it has acquired approximately 6.8 million shares in PGW giving it a 9.019% stake.”

“BAIC’s Managing Director, Meizhan Yan has been in contact with us and has outlined that BAIC is a Hong Kong domiciled investment company that has interests in international agricultural and food investments. We understand that BAIC is ultimately owned and controlled by Beijing Capital Agribusiness and Foods Group (BCAG).”

-------

So maybe no Kung Fu needed to sort this out after all? Can we assume that because the declared stake on April 23rd was 9.019%, a further declaration is not needed until the stake is 10.019%. IOW BAIC may already have a blocking stake without having to make another declaration?

SNOOPY

[Snoopy]

I was scratching my head to try and find out why the Cushings might sell. Did they want to repay 'Rural Equities' debt? No, the sale of dairy farms during FY2019 saw all 'Rural Equities' debt paid back.

I noticed that Rural Equities has also sold their equity stake in Websters in Australia. So the reason given for Rural Equities putting money into both PGW and Websters originally - diversification - must no longer be current.

How about this for a wildcard? David Cushing has fallen out with Alan Lai (pure speculation). So Lai has found another 'mate' to buy the stake so that he can maintain defacto controller of PGW! That might be worth paying a premium to do!


A very 'matter of fact' 17th April announcement on the sale of REL's 3,158,313 PGG Wrightson Limited shares.

https://www.usx.co.nz/symbol/rel (Click 'Announcements')

No clues on why REL's 'diversification' strategy has been wound back.

There are offers in the market to buy 17,550 REL shares at $4, about $70k worth. Chump change if you had an $8m cash war chest from the sale of your PGW shares and the bid was part of a buyback.

No subsequent mention of what happened to the REL banking facilities due to be renewed on 3rd May either.



It would seem an odd time to launch a hostile takeover of PGW, with most supporting banks (the big Aussie ones) seemingly wanting to reduce their rural exposures and fearful for the strength of their loan books.


BAIC would have no need to use Aussie banks to finance any PGW purchase.



Lack of info (comments from Chair) around recent share trades between REL and China bring no confidence to other shareholders that the business is being used as a playing by overseas interests.


Would Rodger Finlay (of REL and PGW) even know what the fate of REL's PGW stake might be in the hands of new Chinese owners? Would he be expected to know? The REL stake was only 5% of PGW after all. Wouldn't it be more likely that REL was just offered a good price for their PGW stake and took the opportunity to sell 'no questions asked'?

SNOOPY

[percy]

Well the chairman and a fellow director selling their stake [ie REL's] at above market, price sends a clear message,to the market.
Pity they did not tell us what that message was,?

[Balance]

Well the chairman and a fellow director selling their stake [ie REL's] at above market, price sends a clear message,to the market.
Pity they did not tell us what that message was,?

Message is as clear as can be for those who read between the lines.

The Cushings still hold 2m odd shares.

I would also if I can keep a few to enjoy the upside from PGW being used by BABL to introduce best farm servicing practices into China.

As we have seen from Synlait, the right China partner makes all the difference to tapping the real upside in China.

[percy]

Message is as clear as can be for those who read between the lines.

The Cushings still hold 2m odd shares.

I would also if I can keep a few to enjoy the upside from PGW being used by BABL to introduce best farm servicing practices into China.

As we have seen from Synlait, the right China partner makes all the difference to tapping the real upside in China.
Agreed......................................

[Balance]

Lack of info (comments from Chair) around recent share trades between REL and China bring no confidence to other shareholders that the business is being used as a playing by overseas interests.

NBR has had a bee in the bonnet about the Chinese presence on PGW's register for a while - and rightly so. Agria was the wrong majority & controlling shareholder but that's now history.

BAIC's intention will become clear once they have bought Agria's stake in PGW. It's then up to minority shareholders to accept or reject BAIC's offer.

[Snoopy]

Can we assume that because the declared stake on April 23rd was 9.019%, a further declaration is not needed until the stake is 10.019%. IOW BAIC may already have a blocking stake without having to make another declaration?


Blocking stake for BAIC confirmed by 29th April 2020 NZX announcement.

"Between 20 April 2020 and 28 April 2020, BHBL acquired an interest in 754,841 fully paid ordinary shares in PGW." Total stake held as at 29-04-2020 is 10.019%.

SNOOPY

[Snoopy]

Message is as clear as can be for those who read between the lines.

The Cushings still hold 2m odd shares.


This business about the Cushings still holding PGW shares keeps coming up (not just from Balance). So it is time for me to once again recheck the press releases to see if I have missed anything.

From my post 4789



First disclosure from David Cushing regarding H&G stake in PGW made on 1st May 2019, a purchase from Agria, for a post consolidation equivalent of 2.007m shares. That balance is consistent with the number of shares held by H&G prior to today's announcement. This followed the NZX declaration made on 10th April of the equivalent of 1.7m shares being acquired for $1.80 from Agria , a total cost of $8.33m. I assume there must have been an historically H&G owned 0.307m PGW shareholding balance that made the total up to 2.007m at the time.

Today's (20-08-2019) announcement showed that H&G were also buying PGW shares on market:

(1) On 15 August 2019, through on-market trades, REL acquired 72,238 PGW shares for $158,121.76. That is an average price of $2.19
(2) On 16 August 2019, through on-market trades, REL acquired 27,035 PGW shares for $61,647.91. That is an average price of $2.28
(3) On 19 Aug 2019 came the Ngai Tahu purchase, REL acquired 2,743,463 PGW shares for $6,447,138.05. That is an average price of $2.35

Latest purchases from the Cushings means that 2.842m additional shares have been acquired since 15th August 2019.

This total purchase value of this increased holding was:

$158.1m + $61.6m + $6,447.1m = $6.667m.

So total holding by H&G (including shares held by REL which is more than 20% controlled by the Cushings, which in turn means the REL stake is consolidated within the H&G stake for reporting purposes) is:

2.007m (H&G) + 2.842m (REL) = 4.849m shares, amounting to

4.849m/75.484m = 6.424% of PGW.



Subsequent to these purchases, REL went to the market again. A top up purchase of 316,157 shares was advised to the market on 3rd October 2019 and brought the total REL shareholding to:

2.842m + 0.316m = 3.158m

Next look at my post 4789




17-04-2020. Rural Equities Limited has this morning sold its parcel of 3,158,313 PGG Wrightson Limited shares.

However, the single sale through the market was reported as being for 5,628,450 shares. (from Stocknessmonster)

It does look like both H&G and Rural Equities have both now sold out of PGW. That is the only way I can make sense of the figures. Will David Cushing stay on the PGW board I wonder?


The 17th April 2020 disclosure shows only the REL PGW stake while the 2.07% H&G stake remains. I am guessing this is the origin of the 'Cushings still retaining 2%' rumour. However, I would like to point out that as soon as the REL stake was sold, the Cushings were no longer substantial shareholders in PGW. So they could do whatever they liked with their remaining 2% stake without informing the market. And PGW shareholders would be 'none the wiser'.

This report of one 'off market share sale' of 5,628,450 shares is more than the total holding of PGW shares owned by REL, just before the sale occurred. So some other share parcel must have been bundled up with this share sale. And if you add the known H&G stake to the declared REL stake you get:

2.007m +3.158m = 5.165m.

Even this total is still a little short of the 5.628m reported total share sale. So if my theory is correct, then H&G must have bought more PGW shares on market, prior to this sale, to make up the difference. This is the only way I can get to 'add up a market value' of 5.628m shares PGW shares being sold from one owner.

SNOOPY

[sb9]

Seller at 270 is all but taken out, next big resistance at 271 with current depth volume of 100k...let's see when we can rid of that volume.

[Balance]

Seller at 270 is all but taken out, next big resistance at 271 with current depth volume of 100k...let's see when we can rid of that volume.

Looks like the 100k for sale at $2.71 has disappeared now that buyers are paying up.

Wondering whether it was just for show to keep the sp under check before the inevitable takeover offer from BAIC imo.

[Balance]

NZ agribusiness continues to attract investment interest - in this case, the Canadians. The Canadians are of course the second biggest player in the rural servicing industry in Australia.

Meanwhile, the tug of war of PGW's sp at $2.70 continues - notice how buyer(s) are paying up at $2.70 while seller(s) are attempting to keep it at $2.70?

Smells to me like Agria keeping the sp at $2.70+ while BAIC wants to keep it below as they negotiate an acceptable takeover price oil the background?

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12344393

"A Canadian pension fund has bought a major stake in New Zealand's biggest corporate dairy farmer, Dairy Holdings. Sooke Investments, a subsidiary of giant Quebec public service pension fund manager PSP Investments, has bought 24.9 per cent of South Island-based Dairy Holdings. PSP has also been increasing its investments across the Tasman. In October last year, through Sooke and another subsidiary, BidCo, it bought listed Australian agribusiness Webster for $854 million."

[arekaywhy]

I've noticed this sort of thing before, where there is MASSIVE bid or ask. Is there a name for that sort of behavior?

I find it quite frustrating sometimes, so would like to work out when to stay away from it.

[sb9]

NZ agribusiness continues to attract investment interest - in this case, the Canadians. The Canadians are of course the second biggest player in the rural servicing industry in Australia.

Meanwhile, the tug of war of PGW's sp at $2.70 continues - notice how buyer(s) are paying up at $2.70 while seller(s) are attempting to keep it at $2.70?

Smells to me like Agria keeping the sp at $2.70+ while BAIC wants to keep it below as they negotiate an acceptable takeover price oil the background?

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12344393

"A Canadian pension fund has bought a major stake in New Zealand's biggest corporate dairy farmer, Dairy Holdings. Sooke Investments, a subsidiary of giant Quebec public service pension fund manager PSP Investments, has bought 24.9 per cent of South Island-based Dairy Holdings. PSP has also been increasing its investments across the Tasman. In October last year, through Sooke and another subsidiary, BidCo, it bought listed Australian agribusiness Webster for $854 million."

Agree totally, someone is keeping temporary cap around that $2.70 mark, once that resistance is gone, we should see it inch close to $3 mark as reporting time is nearby.

[mfd]

Well, they're still buying on market.

Beijing Holdings BAIC Ltd. now up to 11.105% vs 10.019% in April. On market, average price about $2.68.

https://www.nzx.com/announcements/355622

[Balance]

Well, they're still buying on market.

Beijing Holdings BAIC Ltd. now up to 11.105% vs 10.019% in April. On market, average price about $2.68.

https://www.nzx.com/announcements/355622

Interesting - guess they are happy to pick up as many under $2.75 at this stage as they can.

[Snow Leopard]

Probably worth keeping them in the portfolio for a while longer then :cool:

[iceman]

Probably worth keeping them in the portfolio for a while longer then :cool:

Most definitely and continue collecting the juicy dividend while watching how this plays out. I do hope PGW stays on the NZX and does not get taken over. We need more agribusinesses and primary industry operators to invest in, not less.

[percy]

Most definitely and continue collecting the juicy dividend while watching how this plays out. I do hope PGW stays on the NZX and does not get taken over. We need more agribusinesses and primary industry operators to invest in, not less.

I too would like to see them stay listed on NZX.
As for the divies.I love them.
Primary sector is what I think NZ does well,so is a good sector to invest in.

[sb9]

Well, they're still buying on market.

Beijing Holdings BAIC Ltd. now up to 11.105% vs 10.019% in April. On market, average price about $2.68.

https://www.nzx.com/announcements/355622

Now that BAIC have shown their hand again, it'll be interesting to see how the sellers react now, keeping offloading at current levels or dry up volume to move price higher.

[Snoopy]

Now that BAIC have shown their hand again, it'll be interesting to see how the sellers react now, keeping offloading at current levels or dry up volume to move price higher.


BAIC have no particular reason for the latest increase in their holding, as they had a blocking stake already. Unless that is they just saw it as a good investment, or they really are planning to launch a takeover bid. I am not expecting a good result from PGW for the year because of the effects of drought and the shut down of the live livestock auctions through Covid. Maybe a poor result will be weakness that BAIC is looking for before pouncing? What I did find interesting was that the latest 1% block of shares acquired looks like it has not come from Agria (unless Agria make a counter declaration in the next few days I suppose). I worked out my own holding price for PGW shares is now $1.70. That is mainly through owning the shares for a long time rather than any clever Covid scare buying. I reckon $2.70 is near fair value for an average year of trading. So I won't be accepting a takeover offer at $2.70, despite the potential gains I would crystallise by doing so. Like others have commented, I prefer to see PGW remain listed on the NZX. BAIC could make a 'lowball' offer to take out the Agria stake that would be rejected as inadequate by an independent valuation report. That would in turn mean that minority shareholders would be foolish not to continue holding their shares at today's prices. This would be my preferred outcome.

SNOOPY

[Balance]

BAIC have no particular reason for the latest increase in their holding, as they had a blocking stake already. Unless that is they just saw it as a good investment, or they really are planning to launch a takeover bid. I am not expecting a good result from PGW for the year because of the effects of drought and the shut down of the live livestock auctions through Covid. Maybe a poor result will be weakness that BAIC is looking for before pouncing? What I did find interesting was that the latest 1% block of shares acquired looks like it has not come from Agria (unless Agria make a counter declaration in the next few days I suppose). I worked out my own holding price for PGW shares is now $1.70. That is mainly through owning the shares for a long time rather than any clever Covid scare buying. I reckon $2.70 is near fair value for an average year of trading. So I won't be accepting a takeover offer at $2.70, despite the potential gains I would crystallise by doing so. Like others have commented, I prefer to see PGW remain listed on the NZX. BAIC could make a 'lowball' offer to take out the Agria stake that would be rejected as inadequate by an independent valuation report. That would in turn mean that minority shareholders would be foolish not to continue holding their shares at today's prices. This would be my preferred outcome.

SNOOPY

Good assessment, Snoopy.

My thoughts are very much that negotiations are taking place between Agria & BAIC even while we watch the sp action from the sidelines.

Agria's stance imo will be very much that they have 44% and will deliver control to BAIC when they sell to them. So there is CONTROL PREMIUM which must be paid.

Why would they be willing to settle at $2.75 initial offer when BAIC was prepared to pay $2.75 for a 10% blocking stake? A Control premium is worth a lot more!

One suspects that $3.00+ will be a more acceptable figure to Agria.

Meanwhile, that being the case, BAIC is happy to pick up stock in the market at $2.70 or thereabouts - still 9% to go before it triggers a takeover offer at 20%.

Like many of you, I do prefer Wrightson to continue to be listed as well - excellent exposure to NZ's real #1 industry (Agriculture) and what an outstanding dividend yield!

[Balance]

https://www.nzherald.co.nz/the-country/listen/news/article.cfm?c_id=600&objectid=12342319

Real estate side looks like doing well post the lockdown.

[sb9]

Could well be $3+ by the time FY results are in. Current sell side has been dried up for whatever reason..

[Balance]

Could well be $3+ by the time FY results are in. Current sell side has been dried up for whatever reason..

BAIC and Agria could reach a deal any day. As mentioned before, Agria is delivering control to BAIC with its 44% so expect at least $3.

[Balance]

BAIC and Agria could reach a deal any day. As mentioned before, Agria is delivering control to BAIC with its 44% so expect at least $3.


Could well be $3+ by the time FY results are in. Current sell side has been dried up for whatever reason..

$2.80 bid - if it's BAIC buying, they are showing their hand.

If it's not BAIC, then BAIC/Agria deal could be very close.

[sb9]

$2.80 bid - if it's BAIC buying, they are showing their hand.

If it's not BAIC, then BAIC/Agria deal could be very close.

Either way win win :t_up:

[percy]

Either way win win :t_up:

I would go so far as to say we are "well positioned."................................lol.

[Balance]

Sell side looks extremely thin indeed.

Looks like the institutions may be canvassed as to what a fair takeover price is?

Meanwhile, government is going to be pumping a lot of funds and resources into the agricultural sector - after putting the sector into the back burner in its first 2 years in office.

https://www.stuff.co.nz/business/farming/122055134/prime-minister-jacinda-ardern-reveals-10year-plan-to-boost-primary-sector-by-44b

[black knat]

A fair takeover offer would be?.....$3.25?

[Balance]

A fair takeover offer would be?.....$3.25?

Could be.

The agribusiness sector in Australasia is back in favor and you just have to look at Elders on ASX - its share price is at a 10 year high and YTD is up 59%.

Happy to run with the PGW story, takeover or no takeover.

[Snoopy]

$2.80 bid - if it's BAIC buying, they are showing their hand.

If it's not BAIC, then BAIC/Agria deal could be very close.


Closed at $2.87 but on tiny volume of just 5151 shares traded all day. Looks like the largest parcel was something like 200 shares, so likely all the trading was Sharsies' speculators. Don't read into trading prices what you want to see. If there is an offer my pick is it will be pitched at $2.75, which was an above market price when it was accepted by the Cushings for their stake. The Cushings were not forced sellers. You really think the Cushings would leave 20% on the table a couple of months down the track? Winston might have a say on such a 'strategic asset' passing to the Chinese as well. But maybe he wouldn't object to a parcel of shares passing from one Chinese shareholder to another. A below market bid at $2.75 would achieve that and the rest of the NZ shareholders could stay on the register.

SNOOPY

[Balance]

Closed at $2.87 but on tiny volume of just 5151 shares traded all day. Looks like the largest parcel was something like 200 shares, so likely all the trading was Sharsies' speculators. Don't read into trading prices what you want to see. If there is an offer my pick is it will be pitched at $2.70, which was an above market price when it was accepted by the Cushings for their stake. The Cushings were not forced sellers. You really think the Cushings would leave 20% on the table a couple of months down the track? Winston might have a say on such a 'strategic asset' passing to the Chinese as well. But maybe he wouldn't object to a parcel of shares passing from one Chinese shareholder to another. A below market bid at $2.70 would achieve that and the rest of the NZ shareholders could stay on the register.

SNOOPY

Disagree.

Stated before and will state again - BAIC paid $2.75 ,well above market in order to secure just 7 % of the stock.

Agria are not fools - their 44% delivers control so commands a healthy control premium.

And Agria are not forced sellers now - PGW is actually a great investment so no big hurry to sell without control premium.

Plus, if BAIC is looking to make a bid at under $2.70 - why would they have been buying on market at above $2.70? Rather dumb and counter-strategic, don’t you think?

It’s very clear Agria is wanting a much higher price and the market action reflects that reality.

[Snoopy]

Pretty dismal milk price forecast for next season, $5.60 or something? Did REL need to sell to shore up their own balance sheet?


How quickly things can change in the 'wholesale milk price' auction from my above 17th April 2020 post.

From:

https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=12346307

"The GDT price index jumped by 8.3 per cent - its biggest lift since November 2016 and the fourth consecutive gain at the twice-monthly auction.
WMP prices - which have the biggest bearing on Fonterra's farmgate milk price - leapt by 14 per cent to US$3208 a tonne and back to where they were in late January of this year."

IMO the jump in the PGW share price over the last two days can be better explained by the suddenly improved forecast position of dairy farmers. Of course there is no guarantee this price rise will last. Dairy farmers are not really benefitting yet. Peak milk production months are October and November. But it is certainly a positive signal, that it looks like the 'Sharesies' crowd has taken to heart.

The volume in the 'breakout' above $2.70 is tiny. Less than 20,000 shares traded over two days. Largest single sale under five grand. Not even an economically marketable parcel at full service broker rates.


Disagree.

Stated before and will state again - BAIC paid $2.75 ,well above market in order to secure just 7 % of the stock.

Agria are not fools - their 44% delivers control so commands a healthy control premium.

And Agria are not forced sellers now - PGW is actually a great investment so no big hurry to sell without control premium.

Plus, if BAIC is looking to make a bid at under $2.70 - why would they have been buying on market at above $2.70? Rather dumb and counter-strategic, don’t you think?


BAIC have not confirmed any on market purchases above $2.70. The last disclosure on 30th June was for trades between 28th April and 29th June. At no stage during that period did the on market price rise above $2.70. I misremembered the Cushing buyout price as $2.70. As you point out it was actually $2.75. All the confirmed BAIC market action so far would be consistent with a BAIC bid being pitched at $2.75.

Rural Equities Limited were certainly not forced sellers when they unloaded their shares at $2.75. There was no need for them to sell as they had just cashed up their Australian listed investment as well. The only investment that REL has made of late that has stuck is buying back their own shares. There was/is absolutely no pressure on them to do this. Why would REL sell out of PGW if they thought a bid for the whole company was imminent at a significantly higher price? More likely David Cushing was given advance knowledge of any ceiling price that BAIC would pay and sold to get his cash early while the plebian shareholders are forced to wait for any real bid at the same price later.


It’s very clear Agria is wanting a much higher price and the market action reflects that reality.

Of course Agria would like a much higher price, but the rules for business acquisitions have changed.

https://www.tvnz.co.nz/one-news/new-zealand/foreign-investment-rules-tightened-amid-covid-19-fallout

"A new emergency notification regime will mean the Government needed to be notified of certain investments with a controlling stake in an existing business or business assets. The Government would then "consider whether they are contrary to New Zealand's national interest". If it decides it goes against national interests, the Government can impose conditions or block the transaction."

If BAIC make a bid and are refused under a national interest test, then Agria may end up accepting a much lower price for their stake than is available on the market today. They may have to place their stake among multiple institutions at a discount. I wonder if that is why David Cushing sold out early? Cushing is far too canny to miss out on an easy profit. Perhaps he foresaw the government stamping on a potential takeover deal as a significant risk?

SNOOPY

[Agrarinvestor]

Hi, still owning 70.000 ordinary shares of AGRIA. Agria has not been helpful in finding a solution for teir remaining shareholders? Is there perhaps a manager at BAIC that i should add into the email list?

[percy]

This appears on their substantial shareholder notices.
Additional information
Address(es) of substantial product holder(s): Rm2912 Shun Tak Centre, West Tower, 200
Connaught Road C., Hong Kong
Contact details: Tammy Mok, tammy@bidco.com.hk, +852 31018512

[Balance]

Hi, still owning 70.000 ordinary shares of AGRIA. Agria has not been helpful in finding a solution for teir remaining shareholders? Is there perhaps a manager at BAIC that i should add into the email list?

Learnt the lesson the hard way over the years - don’t buy the cow when you only want some of the milk.

[Balance]

Of course Agria would like a much higher price, but the rules for business acquisitions have changed.

https://www.tvnz.co.nz/one-news/new-zealand/foreign-investment-rules-tightened-amid-covid-19-fallout

"A new emergency notification regime will mean the Government needed to be notified of certain investments with a controlling stake in an existing business or business assets. The Government would then "consider whether they are contrary to New Zealand's national interest". If it decides it goes against national interests, the Government can impose conditions or block the transaction."

If BAIC make a bid and are refused under a national interest test, then Agria may end up accepting a much lower price for their stake than is available on the market today. They may have to place their stake among multiple institutions at a discount. I wonder if that is why David Cushing sold out early? Cushing is far too canny to miss out on an easy profit. Perhaps he foresaw the government stamping on a potential takeover deal as a significant risk?

SNOOPY

PGW is already overseas owned between Agria & offshore institutions and BAIC.

And you read it here - paying $3.25 to takeover PGW is hardly buying NZ assets on the cheap, which is the primary intent of the new emergency notification regime!

https://www.minterellison.co.nz/our-view/urgent-overseas-investment-law-changes-announced-in-response-to-the-covid-19-pandemic

"This power is intended to stop vulnerable New Zealand assets being subject to foreign takeover during the economic fallout of the pandemic. Once in force, the power will be reviewed every 90 days and will only remain in place while the COVID-19 pandemic and its associated economic impacts continue to have a significant effect in New Zealand."

[Balance]

Rural Equities Limited were certainly not forced sellers when they unloaded their shares at $2.75. There was no need for them to sell as they had just cashed up their Australian listed investment as well. The only investment that REL has made of late that has stuck is buying back their own shares. There was/is absolutely no pressure on them to do this. Why would REL sell out of PGW if they thought a bid for the whole company was imminent at a significantly higher price? More likely David Cushing was given advance knowledge of any ceiling price that BAIC would pay and sold to get his cash early while the plebian shareholders are forced to wait for any real bid at the same price later.

SNOOPY

And there is now no pressure for Agria to sell out unless it gets the price it wants for a strategic stake which transfers control. The dividend yield is fantastic (>5%), one of the few NZ companies to pay and maintain the payment of dividends and globally, certainly a high yielder much in demand by the unprecedented super low yield interest rate environment.

PGW now is a financially sound and well managed company in arguably the salvation industry for NZ in the covid-19 economic environment. What is there not to like for Agria to hold on?

[Norwest]

All but one seller below $3 ($2.96) has been bought out.

Looks like it is heading to $3 and higher again very soon.

[Agrarinvestor]

@Percy, thanks for the information
"Contact details: Tammy Mok, tammy@bidco.com.hk, +852 31018512"

[Balance]

All but one seller below $3 ($2.96) has been bought out.

Looks like it is heading to $3 and higher again very soon.

Have a look at Elders on ASX - up 58% YTD as investors accumulate agriculture shares due to improving trading conditions and their defensive qualities.

In contrast, PGW is only up 24% YTD so you could very well be right that there's another 80 cents for PGW sp to go and keep pace with the steady uptrend in Elders sp.

Then, there's the takeover appeal from BAIC.

Got to say that I am very pleased to have PGW in my portfolio and it is better that it is kept on the NZX rather than be taken over - NZ can ill afford the loss of another listed company, especially an agricultural one.

Interesting times ahead!

[sb9]

Have a look at Elders on ASX - up 58% YTD as investors accumulate agriculture shares due to improving trading conditions and their defensive qualities.

In contrast, PGW is only up 24% YTD so you could very well be right that there's another 80 cents for PGW sp to go and keep pace with the steady uptrend in Elders sp.

Then, there's the takeover appeal from BAIC.

Got to say that I am very pleased to have PGW in my portfolio and it is better that it is kept on the NZX rather than be taken over - NZ can ill afford the loss of another listed company, especially an agricultural one.

Interesting times ahead!

Couldn't agree more, either way its win win for holders :t_up:

[Balance]

This appears on their substantial shareholder notices.
Additional information
Address(es) of substantial product holder(s): Rm2912 Shun Tak Centre, West Tower, 200
Connaught Road C., Hong Kong
Contact details: Tammy Mok, tammy@bidco.com.hk, +852 31018512

Bidco?

That's a dead giveaway of what they are about!

[iceman]

Bidco?

That's a dead giveaway of what they are about!

My thoughts exactly when I saw that :-)

[Snoopy]

PGW is already overseas owned between Agria & offshore institutions and BAIC.


Being overseas owned already does not preclude the NZ government checking out any new overseas owners being of good character. In fact the government will be required to check out just who is behind BAIC. If they are of better character that Agria, then a bid by BAIC at whatever price might be welcomed. But there is no guarantee that a takeover offer from BAIC would be approved. And if Alan Lai has come to some cosy arrangement with BAIC to regain control of PGW by stealth, Agria may yet be required to divest their remaining PGW shareholding to local institutions at a discount.



And you read it here - paying $3.25 to takeover PGW is hardly buying NZ assets on the cheap, which is the primary intent of the new emergency notification regime!


The problem is a bid for the company won't introduce any new capital into PGW. It just transfers ownership from one shareholder to another. In terms of PGW operations, such a deal would be of no help to PGW whatsoever. If it doesn't help out with saving the company, then there is no reason the government would look favourably on such a deal.

SNOOPY

[Snoopy]

Have a look at Elders on ASX - up 58% YTD as investors accumulate agriculture shares due to improving trading conditions and their defensive qualities.

In contrast, PGW is only up 24% YTD so you could very well be right that there's another 80 cents for PGW sp to go and keep pace with the steady uptrend in Elders sp.


What improving trading conditions?

Dairy farmers in NZ have been rescued , ostensibly anyway, from going out the back door in the last month by rising milk prices. But the season has only just started so actual milk production volumes are low. And it is far to early to know if a glut of milk from northern hemisphere producers will spoil the party. Demand for meat is good but only at the low end of the market with most high end restaurants around the world closed. Grinding up those fillet steaks to go into McDonalds burgers isn't going to make a great return for our beef farmers. Venison has crashed in price as it is also restaurant trade dependent. Forestry crashed went up and has crashed again. For PGW's livestock division, live animal auctions were cancelled during Covid-19 restrictions, and I'll bet on-line didn't make up for everything lost. PGGW real estate will be suffering (read loss making) with rural land prices are under pressure. Dairy farm sales in Canterbury for example are so low (no sales at all) that property sales statistics have become meaningless. Banks are still wanting out of rural property loans, and that puts pressure on the cashflow from farmers (less money to spend in PGGW Retail Supply stores). Oh , and before last month the North Island in particular was suffering one of the worst droughts in history. Rain has come now, but the temperatures are too low for grass to grow. And to top it all off, the NZD to USD exchange rate is climbing. Horticulture is probably the only bright spot. But when vineyard owners smile, it is usually bad for the rest of the farming sector. I think right now is the worst macro environment for farmers in NZ for at least ten years.

To top all that off there are the ongoing problems with the in house PGW superannuation scheme which, despite assurances at last years AGM, is almost guaranteed to need another bail out IMO.



Then, there's the takeover appeal from BAIC.

Got to say that I am very pleased to have PGW in my portfolio and it is better that it is kept on the NZX rather than be taken over - NZ can ill afford the loss of another listed company, especially an agricultural one.

Interesting times ahead!


So am I. But I have been accumulating PGW since the capital payout at prices far less than if I had bought those shares today, as have you Balance. But to encourage 'sucker' investors into PGW at this stage to swallow some super defensive story at a point where PGW is looking stretched by any conventional valuation metric? Then justify things by saying it will be a bargain if taken over? I couldn't think of a better financial recipe for a new investor to lose money!

SNOOPY

[sb9]

All but one seller below $3 ($2.96) has been bought out.

Looks like it is heading to $3 and higher again very soon.

Asks at $3.01 is all but gone. next stop ???

[Balance]

Being overseas owned already does not preclude the NZ government checking out any new overseas owners being of good character. In fact the government will be required to check out just who is behind BAIC. If they are of better character that Agria, then a bid by BAIC at whatever price might be welcomed. But there is no guarantee that a takeover offer from BAIC would be approved. And if Alan Lai has come to some cosy arrangement with BAIC to regain control of PGW by stealth, Agria may yet be required to divest their remaining PGW shareholding to local institutions at a discount.



The problem is a bid for the company won't introduce any new capital into PGW. It just transfers ownership from one shareholder to another. In terms of PGW operations, such a deal would be of no help to PGW whatsoever. If it doesn't help out with saving the company, then there is no reason the government would look favourably on such a deal.

SNOOPY


Everyone knows who is behind BAIC! Been fully disclosed & discussed and they have made it clear why they are interested in PGW.

https://www.nzx.com/announcements/352113

You make it sound like the government can willy nilly reject any deal just because it is an overseas buyer - it does not work like that as you should know.

It cannot as OIO decisions can be appealed as they have been in the past, and any unjustifiable rejection creates a precedent which is the last thing a government wants.

Not sure why you are attempting to make mountains out of molehills, Snoopy - as has been the case now with PGW for the last 7 months. All cool though as it has certainly helped me get more PGW shares at very very nice prices!

[Balance]

So am I. But I have been accumulating PGW since the capital payout at prices far less than if I had bought those shares today, as have you Balance. But to encourage 'sucker' investors into PGW at this stage to swallow some super defensive story at a point where PGW is looking stretched by any conventional valuation metric? Then justify things by saying it will be a bargain if taken over? I couldn't think of a better financial recipe for a new investor to lose money!

SNOOPY

Watch what you insinuate, Snoopy - it is one thing to for us holders to discuss & disagree but entirely different thing to accuse anyone of trying to encourage suckers into investing into anything.

What I can say is that some of us have been positive on PGW for a while while you have been relentlessly negative even as the sp trends higher. Should we imply that investors have lost the opportunity to invest in PGW & missed good gains because you have scared them off with your relentless negative postings? We don’t because it is understood we all write about why we feel about stocks we hold or don’t want to invest.

[tim23]

Have a look at Elders on ASX - up 58% YTD as investors accumulate agriculture shares due to improving trading conditions and their defensive qualities.

In contrast, PGW is only up 24% YTD so you could very well be right that there's another 80 cents for PGW sp to go and keep pace with the steady uptrend in Elders sp.

Then, there's the takeover appeal from BAIC.

Got to say that I am very pleased to have PGW in my portfolio and it is better that it is kept on the NZX rather than be taken over - NZ can ill afford the loss of another listed company, especially an agricultural one.

Interesting times ahead!

Its nice to agree for a change I'm a happy holder and like others topped back up with my capital return @ $2.19.

[Snoopy]

Everyone knows who is behind BAIC! Been fully disclosed & discussed and they have made it clear why they are interested in PGW.

https://www.nzx.com/announcements/352113

You make it sound like the government can willy nilly reject any deal just because it is an overseas buyer - it does not work like that as you should know.
It cannot as OIO decisions can be appealed as they have been in the past, and any unjustifiable rejection creates a precedent which is the last thing a government wants.


“BAIC have advised that their investment in PGW is strategic in nature and has been made with the aim of exploring future closer ties between New Zealand and China as a major export market for agriculture."

PGW is a retailer selling supplies to NZ farmers. All the IP went out of the door with the sale of the seed division. How will China owning a share of PGW help develop China as an export market for NZ farmers? To me the reason for acquisition by BAIC of the now 11% stake in PGW is vague and doesn't really stand up to scrutiny.

Beijing Capital Agribusiness and Foods Group (BCAG) is the parent of BAIC

I see information Beijing Capital Agribusiness Inc is to be found on the CITIC website.

http://www.agri.citic/html/en/AnimalBreeding/BeijingCapitalAgribussiness/

"CITIC Group was established in 1979 by Mr. Rong Yiren with the support of late Chinese leader Deng Xiaoping. Since its inception, CITIC Group has been a pilot for national economic reform and an important window on China's opening to the outside world. It has blazed a new trail of development for China's Reform and Opening-up by raising foreign capital, introducing advanced technologies, and adopting advanced international practice in operation and management, thus building up good reputation both home and abroad."

So BAIC is for all effective investment purposes an arm of the Chinese government. Would our government be happy with the Chinese government controlling a large chunk of NZ's agricultural supply chain? What benefit to NZ would that offer?



Not sure why you are attempting to make mountains out of molehills, Snoopy - as has been the case now with PGW for the last 7 months. All cool though as it has certainly helped me get more PGW shares at very very nice prices!


I never knew I was powerful enough to control the market for PGW shares! But let's rewind the situation. The recent peak in PGW share price prior to the seed division divestment was 71c on 8th June 2018. Following the sale of the seed division, a 31cps capital distribution was made. So the equivalent highest PGG Rural Rump price was: 71c - 31c = 40c. There has been a 10:1 share consolidation since. So the PGG Rural Rump price at its highest was the equivalent of $4. At the time it was speculated that Elders might be interested in buying PGW. But that price was judged too high and no bid came.

I find it doubtful that BAIC would pay an equivalent price to what Elders would have paid as I can see fewer synergies. Take 20% off $4 (a price that Elders was not prepared to pay) and I get $3.20. To me that would be the upper bound of any takeover price from BAIC for PGW. With no takeover bid we might expect PGW to trade at a price 15-20% below $3.20. That translates to an indicative price range of $2.56 to $2.72. With PGW shares trading at $2.98 today, the risk/reward buying in at that price looks marginal.

SNOOPY

[Balance]

https://www.nzx.com/announcements/356553

One of the few companies to provide a positive update for F2020.

PGG Wrightson Limited* (PGW) announced today that it expected to report an Operating EBITDA** result for the full year to 30 June 2020 in the $23 to $24 million range (excluding the application of the new accounting lease standard, NZ IFRS 16).

PGW Chairman, Rodger Finlay said that “Whilst our results remain subject to completion and audit, this is a pleasing financial result in what has been an extraordinary year. To record a trading performance similar to last year in these circumstances demonstrates remarkable resilience given the very challenging operating conditions we have seen over the second half of the year including a global pandemic.”

“The business has responded to these challenges and has performed well through our dedicated staff who have risen to the challenges and supported our customers and the sector through the lock-down and the various alert levels we have seen over recent months.”

[winner69]

That’s a real positive announcement eh Balance

[percy]

Yes a reassuring update.
Rural community and suppliers certainly have a great deal to be proud of.
Never a easy sector,but will help lead NZ through Covid 19.

[Balance]

That’s a real positive announcement eh Balance

It's a good announcement against the backdrop of most of NZX companies going backwards, deferring/cancelling dividend payments and tapping shareholders for more capital.


Yes a reassuring update.
Rural community and suppliers certainly have a great deal to be proud of.
Never a easy sector,but will help lead NZ through Covid 19.

This government swallowing hard and attempting to embrace & acknowledge the rural sector as the backbone of NZ economy - no easy money in the sector, just hard yakka from our farmers.

[Snoopy]

For FY2020 the EBITDA forecast for PGW is for $30m (26th March market Update). I heard that under lockdown, Farmlands Retail Division is down 10-15% on turnover. I would expect the profit reduction to be deeper than that, and expect PGW Retail to be showing a similar downturn. FY2020 does look to be a 'low point' in an historical context. So if a takeover bid eventuates, it could be seen as opportunistic.


Here is the 21st July EBITDA update.

"PGG Wrightson Limited (PGW) announced today that it expected to report an Operating EBITDA result for the full year to 30 June 2020 in the $23 to $24 million range (excluding the application of the new accounting lease standard, NZ IFRS 16)."



That’s a real positive announcement eh Balance


Not really. The announcement is down $6m-$7m from what was anticipated in March. So that $6-7m shortfall occurred over the COVID-19 period. However farrmers were rather less affected by COVID-19 with most carrying on 'as normal'. Livestock sales being the exception of something that was definitely disrupted. So I suspect much of that sudden downturn was due to drought, and shows the very difficult position in which farming finds itself.

Let's just remind ourselves of the multi year picture:




Combined EBITDA
less Seed & Grain EBITDA
add Corporate Savings
equals PGWRR EBITDA


FY2014$58.747m$33.965m$2.500m
$27.282m925m


FY2015$69.631m$40.506m$2.500m
$31.675m


FY2016$70.181m$41.862m$2.500m
$30.819m


FY2017$64.499m$37.045m$2.500m
$39.974m


FY2018$70.174m$35.607m
$2.500m
$37.067m


FY2019$2.500m
$26.925m


FY2020f
$23.500m


Average
$31.035m



1/ This period covers the 'modern' era where Mark Dewdney's 'One PGW' philosophy started to permeate the group.
2/ I have used only 'Operating EBITDA'. That metric Leaves out all 'Equity Accounted Investee Profit', and consequently removes the profit contribution from 'Agimol', representing the 50% interest in 'Agricentro' in Uruguay, an equity investment that was subsequently fully taken in house (FY2019) and latterly sold (EOFY2019). Equity accounted New Zealand based investments retained, being a 50% interest in 'Canterbury Saleyards' and a now 33% interest in 'Agri Optics New Zealand', I do not consider have contributed materially to EBITDA.

So you can see we are right at the bottom of the multi-year picture. I also note that announcement today was for the 'Operating Result'. No mention of the difficult position that I believe the pension scheme to be in. There is no way to sugar coat this result. It is a bad one.

SNOOPY

[iceman]

It's a good announcement against the backdrop of most of NZX companies going backwards, deferring/cancelling dividend payments and tapping shareholders for more capital.




I think you will find winner69 was being facetious Balance, as you will see if you click on the link you posted.
But agree this looks like a decent result that we can be happy with.

[Balance]

I think you will find winner69 was being facetious Balance, as you will see if you click on the link you posted.
But agree this looks like a decent result that we can be happy with.

Haha - good catch, W69! Hard to get one pass the ever vigilant W69! :scared:

[winner69]

I think you will find winner69 was being facetious Balance, as you will see if you click on the link you posted.
But agree this looks like a decent result that we can be happy with.

Ha ha. ...I’m sure that link about Falloon wasn’t there when I replied ...well spotted

Only referring to the NZX announcement

[Balance]

Ha ha. ...I’m sure that link about Falloon wasn’t there when I replied ...well spotted

Only referring to the NZX announcement

What would we ever do without your sense of humour around here? 🤣

[Snow Leopard]

Half year Operating EBITDA was $23.6M (excl IFRS16) so nothing added, nothing taken away for the second half.

No room for a final dividend then :(.

[Snoopy]

Takeover deals are usually done on EBIT and EBITDA multiples, rather than PE ratios. If we look at where PGWRR is forecast to sit for FY2020:

EBITDA = $30m

EBIT = $30m - $9.632m = $20.638m

If we use today's PGWRR share price of $2.49. This means the market capitalisation of PGWRR is:

$2.49 x 75.484mm = $188m

This gives an EBITDA multiple of: $188m / $30m = 6.3

This gives an EBIT multiple of: $188m / $20.632m = 9.1

'Enterprise Value' = Market Capitalisation + Total Debt − Cash
= $188m + ($3.920m+$31.742m) - $1.160m
= $223m

Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:



Company
Enterprise value NZD
EBITDA Multiple
EBIT Multiple


Ruralco Holdings (Oz) (FY2019)
$465m
5.8x
7.1x


Elders (Oz) (FY2019)
$853m
9.0x
9.6x


PGW Rural Rump (NZ) (FY2020f)
$223m
6.3x
9.1x






Half year Operating EBITDA was $23.6M (excl IFRS16) so nothing added, nothing taken away for the second half.

No room for a final dividend then :(.

The stage is now set for a Chinese low ball offer. The kiwi shareholder wants their money now. A cash offer for their shares goes straight to dollar signs in the eyeballs, by passing the brain. The kiwi grabs the cash on offer without thinking, then moans about the ever shrinking NZ sharemarket, with valuations of alternative investments being too high. Nowhere to put their proceeds!

By contrast, the Chinese shareholder thinks inter-generation-ally. They are able to look through the business cycle, and see the true value of a business going out many years into the future. They understand business cycles. And they know that the best time to strike is when the business cycle is at its low.

Takeover deals are usually done on EBIT and EBITDA multiples, rather than PE ratios. If we look at where PGWRR is forecast to sit for FY2020:

EBITDA = $23.5m

EBIT = $23.5m - $9.632m = $13.868m

If we use today's PGWRR share price of $2.92. This means the market capitalisation of PGWRR is:

$2.92 x 75.484mm = $220m

This gives an EBITDA multiple of: $220m / $23.5m = 9.4

This gives an EBIT multiple of: $220m / $13.868m = 15.9

'Enterprise Value' = Market Capitalisation + Total Debt − Cash
= $220m + ($3.920m+$31.742m) - $1.160m
= $255 m

Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:



Company
Enterprise value NZD
EBITDA Multiple
EBIT Multiple


Ruralco Holdings (Oz) (FY2019)Optional
$465m
5.8x
7.1x


Elders (Oz) (FY2019)
$853m
9.0x
9.6x


PGW Rural Rump (NZ) (FY2020f2)
$255m
9.4x
15.9x



I can see it now. A takeover offer of $2.75 put on the table. An independent report citing the 'fairness' of the price given the Covid-19 uncertainty going forwards and the fat EBIT/EBITDA multiples on offer. Shareholders should 'sell sell sell'. And thus ends the tenure of PGW on the NZX.

SNOOPY

[Getty]

This site is very lucky to Have someone like you openly share your knowledge, and opinions Snoopy.
Thanks.

[Snoopy]

This site is very lucky to Have someone like you openly share your knowledge, and opinions Snoopy.
Thanks.


In the end Getty, I only have access to the same bucket of knowledge as everyone else on this forum. It is how deep you want to dig (behind the headlines) and what you want to do with that knowledge that counts. Balance put the case for a takeover offer from BAIC at up to $3.25. I am suggesting that if Agria wants out, then a takeover offer of $2.75 will still get Agria a fair price. And at $2.75, hopefully there are enough dissenting shareholders to allow PGW to remain listed. Agria has dumped all of their other business interests (such as they were) and is solely a holding company for Alan Lai's shareholding in PGW. If the debt burden at Agria is now under control, then there is no particular reason for Lai to sell. So I don't think we can guarantee that there will be any takeover.

The reason I am predicting a 'low ball' takeover offer is that I have observed over the years is that the Chinese prefer to work in east/west partnerships. Indeed for a western company setting itself up in China, it was a legal requirement to have a Chinese partner in whatever 'joint venture' proposal was on the table. In NZ we have the example of Silver Fern Farms, 50% controlled by the Chinese. The Chinese are strong equity partner in Synlait. There is the counter example of Westland dairy which is 100% Chinese owned. But Westland is a relatively small player in the dairy market. If the Chinese had wanted to buy out Fonterra, then that level of deal would have been blocked IMO. PGW is probably the biggest rural supplies company in NZ. To see it entirely in Chinese hands I think would be politically unpalatable and unpalatable to many of its farmer customers. So the way out for Agria (if they want out) is a low ball bid by BAIC. It could be that BAIC is buying shares above $2,75 (if they are, this is not confirmed) to establish a share price floor somewhere around $3. That would allow a $2.75 full bid to fail (except for the acquisition of the Agria stake). Thus we would get a joint Chinese/NZ controlled company going forwards. This might be the end game that BAIC are after.

SNOOPY

[Balance]

Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:



Company
Enterprise value NZD
EBITDA Multiple
EBIT Multiple


Ruralco Holdings (Oz) (FY2019)Optional
$465m
5.8x
7.1x


Elders (Oz) (FY2019)
$853m
9.0x
9.6x


PGW Rural Rump (NZ) (FY2020f2)
$255m
9.4x
15.9x



I can see it now. A takeover offer of $2.75 put on the table. An independent report citing the 'fairness' of the price given the Covid-19 uncertainty going forwards and the fat EBIT/EBITDA multiples on offer. Shareholders should 'sell sell sell'. And thus ends the tenure of PGW on the NZX.


SNOOPY

Really need to update your numbers to make the comparison meaningful, Snoopy.

Elders ASX :

EBITDA multiple 13.6X

EBIT Multiple 17x

PER 16.6x

Market cap today - $1.58b
Debt - $202m
Forecast EBIT - $105m
Forecast EBITDA - $131m
NPAT - $95m

[Balance]

https://thespinoff.co.nz/business/23-07-2020/tourism-may-have-disappeared-but-demand-for-nz-food-is-stronger-than-ever/

$1 billion more in food exports despite pandemic.

[Snoopy]

Half year Operating EBITDA was $23.6M (excl IFRS16) so nothing added, nothing taken away for the second half.

No room for a final dividend then :(.


With the mid point EBITDA forecast at $23.5m I think you are being optimistic Snow Leopard. Even with EBITDA being zero for the second half, Depreciation and Amortisation are still occurring and the interest bill on a significant debt burden must be paid. So it is clear to me that PGW has made a trading loss in the second half. This is more serious than it sounds because traditionally PGW makes no money over the first quarter, a trickle in Q2 and the bulk of their earnings in Q3 and Q4. So we could be looking at PGW making no money at all for twelve months straight. I hope my previous warning saved some investors from diving in paying $2.75 and more for a business that looks to be in trouble. If I can reprise a couple of banking covenants.

Fixed Cost Coverage Ratio 2020f = [EBITDA+Lease Expenses] / [Total Interest(less interest income in cash)+Lease Expenses]

= [$23.5m + $21.904m] / [$3.826m + $21.904m] = 1.8 < 2.0 => PGW fails the FCCR test.

Using my 'forecast data' from post 4701

Senior Debt Coverage Ratio" (SDCR) 2020f =Senior Debt"/EBITDA
=( $3.920m + $31.742m ) / $23.5m = 1.6 < 3.00 (good) => PGW passes this SDCR test

That is the balance date figure. Things don't look quite so good with $70m of seasonal bank finance thrown in:

"Senior Debt Coverage Ratio" (SDCR) 2020f = "Senior Debt"/EBITDA
=( $3.920m + $31.742m + $70m ) / $23.5m = 4.5 > 3.00 (bad) => PGW fails this SDCR test

Grant has asked the banks to be forgiving of the position businesses find themselves in in a post Covid-19 world. The best I can say is that PGW will need some 'forgiveness' going forwards. The problem with my low season SDCR test (as at 30th June which is balance date) is that this will only occur if PGW has been able to pay down debt over the second half. They have made no profit in 2HY2020 so this hasn't happened. This suggests to me that PGW are in discussion with their banks right now about breaching both their 'Fixed Cost Coverage Ratio' and 'Senior Debt Coverage Ratio' covenants.

SNOOPY

[Norwest]

Before the seeds sale they had A/NZ bank facilities of:
$150m term (was to be maturing today - fully paid off)
$50m working capital (was maturing today - fully paid off)
$22.82m additional

After the seeds sale their A/NZ bank facilities:
$50m core facilities
$70m working capital

One year ago today they had $2.6m current debt + $9.58m for senior debt.

What you are saying above is that they have drawn down their entire working capital of $67.4m in 12 months. I find that preposterous. How did you come up with that figure?

[Snow Leopard]

....No room for a final dividend then :(.


With the mid point EBITDA forecast at $23.5m I think you are being optimistic Snow Leopard....

So you reckon they are going to ask for the interim dividend back?

[Balance]

Grant has asked the banks to be forgiving of the position businesses find themselves in in a post Covid-19 world. The best I can say is that PGW will need some 'forgiveness' going forwards. The problem with my low season SDCR test (as at 30th June which is balance date) is that this will only occur if PGW has been able to pay down debt over the second half. They have made no profit in 2HY2020 so this hasn't happened. This suggests to me that PGW are in discussion with their banks right now about breaching both their 'Fixed Cost Coverage Ratio' and 'Senior Debt Coverage Ratio' covenants.

SNOOPY

Seriously, Snoopy - do you know how debt covenants apply in the case of PGW with its seasonal funding profile?

[Snoopy]

Before the seeds sale they had A/NZ bank facilities of:
$150m term (was to be maturing today - fully paid off)
$50m working capital (was maturing today - fully paid off)
$22.82m additional

After the seeds sale their A/NZ bank facilities:
$50m core facilities
$70m working capital

One year ago today they had $2.6m current debt + $9.58m for senior debt.


I got my capital repayment on 14th August 2019. So 'last year', as at 30th June 2019, PGW was holding heaps of net cash. You can't get an accurate prospective picture of 'PGW Rural Rump' going forwards by studying the published 30th June 2019 PGW balance sheet in my view.



What you are saying above is that they have drawn down their entire working capital of $67.4m in 12 months. I find that preposterous. How did you come up with that figure?


Most of my figures are from page 10 in the document below.

https://www.pggwrightson.co.nz/-/media/Corporate/Documents/Investors-Centre/Shareholder-Meetings/2019-Special-Meeting/PGW-Special-Meeting-Procedural-Notes.pdf?la=en

That page contains a pro-forma balance sheet for 'PGWRR' on May 19th 2019. I have taken figures from there and used them as estimates of the financial position of a 'separated' PGWRR on June 30th 2019. The way that I understand PGW to operate is that they build up a lot of seasonal debt by filling up their retail shelves and lending money to farmers to buy animals (the GoBeef and GoLamb livestock finance schemes). So roughly, debt is at a minimum at the 30th June balance date and it ramps up to near a maximum at the 31st December half year.

I am not saying that PGW have drawn down all their working capital in twelve months. I am saying that they have banking arrangements that allows PGW to draw down up to $70m of working capital at the mid year peak, and then reduce that working capital balance down to zero again at EOFY. There is no problem with the 'Senior Debt Coverage Ratio" (SDCR) as at 30th June provided all the working capital debt is returned. But that 30th June date shows this company in its best possible light, debt wise. My 31st December balance date calculation shows the company in its worst possible light,

Balance asked:
"Do you know how debt covenants apply in the case of PGW with its seasonal funding profile? "

No I don't. But I will bet they wouldn't just look at the most favourable capital position through the farming season (the 30th June figure). Nor would they look solely at the least favourable position (the 31st December figure). Do they take some kind of averaged debt figure in the middle? I genuinely don't know. There is something I do know though.

If PGW invested a whole lot of money into stock (both stuff on the retail shelves and animals) and they didnt get what they paid for that stock back, then the company debt would go up. I admit I am being extreme when adding the working capital onto the debt to calculate SDCR.and then checking for the Senior Debt Coverage Ratio at that point. That would imply that PGW spent heaps of money on stock and lost it all. But we do know that PGW failed to make a profit in the second half. So the question of exactly how much PGW lost on stock over the year is a fair question. Thinking about it further, PGW could lose up to $70m/2 = $35m in stock over the year and still meet the end of year SDCR target. Or they could lose $35m/2 = $17.5m worth of stock and meet a between six monthly reporting dates 'middle' target. Looking at the problem with this perspective Norwest, I guess you are right in calling me out over failing PGW on the SDCR target. It could yet be a problem if a whole lot of calves PGW had funded got foot and mouth as an example. But there is no sign of that. I am prepared to let PGW off my high level SDCR hook, even if I don't understand how 'seasonal' bank covenants work.

My criticism of PGW not being able to fulfill their 'Fixed Cost Coverage Ratio' obligations stands.

SNOOPY

[Snoopy]

So you reckon they are going to ask for the interim dividend back?


Well I wasn't going to put the phrase 'cash issue' on the table. But since you have Snow Leopard....

Here is another scenario on why BAIC has been brought onto the share registry. Suppose post Covid-19, PGW has decided they need a chunk of cash to -finally- bail out their pension scheme and do some other rationisation and re-organisation. Let's say they organize a modest cash issue: 1:10 at $2 for example. That would raise :

1/10 x $2 x 75.484m = $15.090m

About the right amount. But suppose Alan Lai did not wish Agria to participate in the cash issue. He could arrange to sell his rights to BAIC. BAIC could afford to take up their own rights and the pro-forma Agria rights and still remain under the 20% shareholder thresh-hold where a full takeover offer would be triggered. Thus Alan Lai, via his mates at BAIC, still retains effective control of PGW (don't let the NZX read this!). Lai gets a small cash payment for his rights, which makes up for the soon to be cancelled final dividend. And PGW get their money to finally plug their superannuation scheme hole. Finally PGW remains listed as a 'solid New Zealand company' that farmers will be proud to support. No takeover, but winners all round. What do you think?

SNOOPY

[percy]

This is an email I sent to a friend on 27/2/2020.



Spoke to CFO Peter Scott.

Did not cover capex.

Negative cash flow is seasonal,with build up of spring grass [stock].

It is offset by the increase in receivables.

The June half sees them cash flow positive.

He said this half's cash flow was better than last year's, so is pleased with the improvement.


PS.From memory debt was $59 mil of which $37 mil was invested in their very successful "GO" products.
So their debt is not an issue.[ to me ].

[Balance]

This is an email I sent to a friend on 27/2/2020.



Spoke to CFO Peter Scott.

Did not cover capex.

Negative cash flow is seasonal,with build up of spring grass [stock].

It is offset by the increase in receivables.

The June half sees them cash flow positive.

He said this half's cash flow was better than last year's, so is pleased with the improvement.

Snoopy's numbers are way off beam like all of his other alarmist 'debt problem' postings over the last 12 months.

Firstly, bank covenants are usually measured and monitored twice a year - at the half year and on balance date.

Secondly, PGW's balance date on 30 June as you posted above is when their debt falls to a seasonal low. So to add the $70m of seasonal debt facility to total debt on 30 June makes as much sense as farmers attempting to plant corn in winter!

[Snoopy]

Using my 'forecast data' from post 4701

Senior Debt Coverage Ratio" (SDCR) 2020f =Senior Debt"/EBITDA
=( $3.920m + $31.742m ) / $23.5m = 1.6 < 3.00 (good) => PGW passes this SDCR test

That is the balance date figure. Things don't look quite so good with $70m of seasonal bank finance thrown in:

"Senior Debt Coverage Ratio" (SDCR) 2020f = "Senior Debt"/EBITDA
=( $3.920m + $31.742m + $70m ) / $23.5m = 4.5 > 3.00 (bad) => PGW fails this SDCR test


The above calculations are with forecast data from May 2019. We don't yet know what the SDCR input figures are for June 30th 2020, although we don't have much longer to wait. We do however have the half year -actual- debt position. So I am happy to recalculate SDCR using the actual figures in the half year accounts;

=( $20.000m + $40.000m - $0.682m + $10m ) / $23.5m = 2.95 < 3.00 (good, but only just) => PGW passes this SDCR test

Notes

1/ I have observed that there has been a $10m blowout between accounts payable and accounts receivable. If PGW paid their accounts in accordance with the pattern on the prior comparative periods then debt would be $10m higher. Withholding your accounts payable is not a legitimate tool to reduce debt IMO. This is why I have added $10m to the debt figure.
2/ I have not added back the GoLivestock assets to offset against debt. While PGW can expect to repaid on their investment in fattening up livestock, there is no guarantee this expectation will be met.




Snoopy's numbers are way off beam like all of his other alarmist 'debt problem' postings over the last 12 months.

Firstly, bank covenants are usually measured and monitored twice a year - at the half year and on balance date.


I am surprised at this answer Balance. It doesn't seem right to apply the same debt covenant with the same number at the time of having 'maximum stock on hand' as you would when all the stock has been sold at the end of the season and your 'stock money' is in the bank. However, I have done my calculation anyway, as per your instructions, and the result looks very marginal. If their accounts payable actually matched their accounts payable for the half year, or instance, then PGW would be in default of this covenant. That is how 'knife edge' their debt position is.



Secondly, PGW's balance date on 30 June as you posted above is when their debt falls to a seasonal low. So to add the $70m of seasonal debt facility to total debt on 30 June makes as much sense as farmers attempting to plant corn in winter!


The information I was going on with the forecast calculation was assuming PGW made full use of all their seasonal funding facilities. Obviously they have not done this which reduces their debt position. In fact if you regard the current funding position of $40m as the seasonal funding facilities actually used, then they are only borrowing at $40m/$70m = 57% of their banking syndicate allowance Given that lamb and beef farmers were largely least affected by Covid-19, this is not good news, as it means the business was operating at well below potential. But my assumption of $70m (the full bank allowance) of 'stock debt' on the PGW books at the end of the financial year was unduly pessimistic. I will grant you that. None of that fixes the mid year covenant issue though.

SNOOPY

[Snoopy]

This is an email I sent to a friend on 27/2/2020.

Spoke to CFO Peter Scott.

Did not cover capex.

Negative cash flow is seasonal,with build up of spring grass [stock].

It is offset by the increase in receivables.

The June half sees them cash flow positive.

He said this half's cash flow was better than last year's, so is pleased with the improvement.


PS.From memory debt was $59 mil of which $37 mil was invested in their very successful "GO" products.
So their debt is not an issue.[ to me ].

The real issue is the reporting period between now and the end of the FY2021 half year in December 2020. We know that the EBITDA for 2HY2020 was close to zero. We also know, as per Peter Scott's comment in your e-mail, PGW would expect negative cashflow in the first half of FY2021. So we have the very real possibility of an EBITDA of zero for the whole of calendar year 2020. We can argue what we like about the true representative level of year round debt that PGW has. But the awful truth of the situation is, if you have no EBITDA, you cannot service any debt. And if you are on the customer side of the bank managers desk and you stare him down and say:

"Well I have no money to pay any interest bills now, but all will be hunky dorey when my crops are harvested over the summer."

How would your bank manager respond? Wouldn't your bank manager be looking for a bit of security to back up your repayment promise? And how does a corporate get security? Two words: "cash issue".

SNOOPY

[Balance]

The real issue is the reporting period between now and the end of the FY2021 half year in December 2020. We know that the EBITDA for 2HY2020 was close to zero. We also know, as per Peter Scott's comment in your e-mail, PGW would expect negative cashflow in the first half of FY2021. So we have the very real possibility of an EBITDA of zero for the whole of calendar year 2020. We can argue what we like about the true representative level of year round debt that PGW has. But the awful truth of the situation is, if you have no EBITDA, you cannot service any debt. And if you are on the customer side of the bank managers desk and you stare him down and say:

"Well I have no money to pay any interest bills now, but all will be hunky dorey when my crops are harvested over the summer."

How would your bank manager respond? Wouldn't your bank manager be looking for a bit of security to back up your repayment promise? And how does a corporate get security? Two words: "cash issue".

SNOOPY

I believe you have completely miss the point of seasonal funding and seasonal debt!

Negative cashflow for the peak farming period to 31 December every year (for all rural servicing companies) like PGW is not because of negative EBITDA

but

because of the build up of receivables and inventories (as in working capital).

The situation then reverses itself as the peak season winds down to 30 June when the working capital reduces and the company becomes cashflow positive!

That's why banks have always been very very happy to provide seasonal funding and in the farming sector, why seasonal funding is an essential part of running a farm.

Go back over PGW's accounts over the years and you will see how that works.

[Balance]

Balance asked:
"Do you know how debt covenants apply in the case of PGW with its seasonal funding profile? "

No I don't. But I will bet they wouldn't just look at the most favourable capital position through the farming season (the 30th June figure). Nor would they look solely at the least favourable position (the 31st December figure). Do they take some kind of averaged debt figure in the middle? I genuinely don't know.
My criticism of PGW not being able to fulfill their 'Fixed Cost Coverage Ratio' obligations stands.

SNOOPY

For the record, banking covenants are measured against fixed points in time - always the balance date.

For companies which banks are concerned about, additional covenants will be imposed as banks lend these days principally on 'negative pledge'.

This means that companies undertake NOT to provide security to any one single banker or creditor. Instead, the companies undertake to be in compliance of an agreed set of banking covenants which the companies must adhere to.

Events of default must occur before banks can enforce remedial action - most common default event is missing interest and/or principal repayments.

There is no suggestion that banks are even remotely concerned about PGW's banking covenants - heck, the company is one of the few to actually pay a dividend this year right in the thick of NZ's pandemic & lockdown!

[Snoopy]

I believe you have completely miss the point of seasonal funding and seasonal debt!

Negative cashflow for the peak farming period to 31 December every year (for all rural servicing companies) like PGW is not because of negative EBITDA

but

because of the build up of receivables and inventories (as in working capital).

The situation then reverses itself as the peak season winds down to 30 June when the working capital reduces and the company becomes cashflow positive!

That's why banks have always been very very happy to provide seasonal funding and in the farming sector, why seasonal funding is an essential part of running a farm.


The 22nd October 2019 press release from PGW said

Guidance and dividend policy update

"PGG Wrightson Limited* (PGW) Chairman Rodger Finlay announced today ahead of the annual shareholders meeting that “Whilst it remained too soon to provide firm guidance about expectations for FY2020, the Board reaffirmed confidence that PGW would achieve Operating EBITDA in excess of $30 million (before adjusting for the impact from the new accounting standard for leases: IFRS16).”

Fast forward to 21st July 2020 and we get

PGG Wrightson Trading Update

"PGG Wrightson Limited* (PGW) announced today that it expected to report an Operating EBITDA** result for the full year to 30 June 2020 in the $23 to $24 million range (excluding the application of the new accounting lease standard, NZ IFRS 16)."

Given the half year EBITDA equivalent figure was $23.7m, it is clear that PGW has had a shocker of a second half. EBITDA was effectively zilch. NPAT figure - a loss. There is no way to sugar coat this half year result. Yes they would have had good cashflow at an operational level at least. (Some of that good cashflow may have gone into propping up the superannuation scheme yet again - we will see.) But the simple fact is, if you get good cashflow, but that cashflow doesn't cover your stock purchase outgoings, then you have less money in the kitty to stock up the shop for next year. And that means, all things being equal, you need to borrow more just to keep your business operating at a steady level. If PGW was a farmer, you could say they had a drought (of profits) year. Now one drought year does not make you a bad farmer. I have confidence that PGW has the ability to come back. But what if next year is a drought year as well? Remember PGW was not exactly debt free going into the FY2020 drought. At some point our 'farmer' must shore up his capital position. And PGW has already sold off their property assets. So it would make sense, while the PGW share price is still overvalued, to have a small cash issue to shore up their capital position to back where it was after the seed business was sold and the special dividend paid.

SNOOPY

[percy]

I expect PGW's bank will react the same way Visa did when my wife overspent her limit.
"As we did not set your limit high enough we have since increased it."...........................lol.

[Ferg]

Hello Balance

You say "Firstly, bank covenants are usually measured and monitored twice a year - at the half year and on balance date." In my experience they are measured & reported quarterly but I cannot speak for PGW. That said, all we have to go on is the interim and annual reports.

[Balance]

Hello Balance

You say "Firstly, bank covenants are usually measured and monitored twice a year - at the half year and on balance date." In my experience they are measured & reported quarterly but I cannot speak for PGW. That said, all we have to go on is the interim and annual reports.

Companies which report quarterly (like in the US)?

[Ferg]

Companies which report quarterly (like in the US)?
These were local companies either privately owned or owned by private equity. Those I have observed with banking covenants have all had quarterly covenants, none had 6 monthly. Sample size is 3 from 3 where the covenants were reported quarterly. That said, if there are seasonal fluctuations in PGW debt then I would expect the bankers and finance guys would be smart enough to build that into the covenants.

[Roberto the Brickie]

Companies which report quarterly (like in the US)?

I was at a function and a chap from the PGW finance, think his name was Bryan or Brice Harris, something like that, do remember he had black curly hair, said that PGW covenant reporting was every three months being end on March, June, Sept and Dec. If they were going close to a covenant then it switched to reporting every month for the banks.:mellow: Guess if they had to provide monthly reporting to the banks then they would have to announce that of the NZX but I didn't think to ask that question:(

[Snoopy]

I was at a function and a chap from the PGW finance, think his name was Bryan or Brice Harris, something like that, do remember he had black curly hair, said that PGW covenant reporting was every three months being end on March, June, Sept and Dec. If they were going close to a covenant then it switched to reporting every month for the banks.:mellow: Guess if they had to provide monthly reporting to the banks then they would have to announce that of the NZX but I didn't think to ask that question:(


Yikes! I wonder if it was monthly reporting that caused Mr B. Harris's hair to start curling! Are there any hairdressers on the forum that could confirm such a possible cause and effect ;-P?

SNOOPY

[Snow Leopard]

Yikes! I wonder if it was monthly reporting that caused Mr B. Harris's hair to start curling! Are there any hairdressers on the forum that could confirm such a possible cause and effect ;-P?

SNOOPY

I bought some Braun hair-clippers because we got stuck in the UK for months and the hairdressers were shut (and when they did reopen their were long queues of people who were either really shaggy or had very bad home jobs) and successfully cut my wife's hair such that her cousin who is an hairdresser was complimentary about it, so I feel I do have absolute authority on this subject.

Monthly reporting would not curl his hair, it would turn it grey.
So can RoB tell us: do you think he was dying his hair black?

[Roberto the Brickie]

I see that PGW is advertising for a Commercial Manager of their Agency Team. Is this a result of their restructure from last year that this person was a casualty, then EBITDA for that segment is Nil for the 2020 year so the PGW solution is to now re-employ that person. Does this mean the $2.5 million Corporate Restructure saving is going to disappear in the 2021 year?:confused:
Actually thinking about the $2.5 million saving, that would be say 25 people as no senior managers have left the business which seems rather strange. Previously PGW and Seeds division were both based at 57 Waterloo Road. Seeds left and have a nice new building by Lincoln University, two stories, when I drive past looks full of people. So room should be available at Waterloo Road, then Rural Rump leaves to the new palace by the airport which looks bigger than Waterloo Road and also looks very full of people. Then we have the $2.5 million savings, or 25 people. Where were all these people located at Waterloo Road? :confused:
So is the $2.5 million saving a myth, a reality, or only a one year saving that is showing to be a mistake as the departing staff would have left with some form of golden handshake.

[Snoopy]

I see that PGW is advertising for a Commercial Manager of their Agency Team. Is this a result of their restructure from last year that this person was a casualty, then EBITDA for that segment is Nil for the 2020 year so the PGW solution is to now re-employ that person. Does this mean the $2.5 million Corporate Restructure saving is going to disappear in the 2021 year?:confused:
Actually thinking about the $2.5 million saving, that would be say 25 people as no senior managers have left the business which seems rather strange. Previously PGW and Seeds division were both based at 57 Waterloo Road. Seeds left and have a nice new building by Lincoln University, two stories, when I drive past looks full of people. So room should be available at Waterloo Road, then Rural Rump leaves to the new palace by the airport which looks bigger than Waterloo Road and also looks very full of people. Then we have the $2.5 million savings, or 25 people. Where were all these people located at Waterloo Road? :confused:
So is the $2.5 million saving a myth, a reality, or only a one year saving that is showing to be a mistake as the departing staff would have left with some form of golden handshake.


Roberto there is one senior manager who has left: Ian Glasson. Look on page 90 of AR2019 and you will see that one employee earned between $3.830m and $3.940m for the year FY2019. I'll bet you anything that wasn't current CEO Stephen Guerin. With the saving on that one salary, there is still plenty of cash to splash around on new building leases and still meet the $2,5m savings target!

SNOOPY

[Roberto the Brickie]

So the announcement by Stephen Guerin the then CEO on 13 August said:

Corporate Structure Review
“Following the divestment of the Seed & Grain business in May, the PGW Board commenced a review of the corporate service model for the business. Outcomes from the review are now being implemented in a staged manner as we recalibrate our corporate structure to capture efficiencies while also configuring our back office to best serve our customers and our re-sized operation. We expect to see the benefit of cost savings flow through progressively with savings in excess of $2.5 million expected in FY2020,” said Mr Guerin.

If the only person going was Ian Glasson why would that review still be ongoing? That reads to me to be more 1 person. Also on Page 90 of the annual report it showed Ian Glasson receiving $2.3 million in termination payments and bonuses:eek2:. I am hopeful that the management of publicly listed company would not include those "savings" in a restructure.:scared: Hopefully those payments are included in extraordinary expenses below EBITDA and the $2.5 million are additional savings.:t_up:Otherwise some of your calculations may need reviewing. And I would be interested in knowing what is in included in the $4.5 million of Non-operating expenditure. I had previously assumed $2.3 million was the golden handshake to Ian Glasson.

[Snoopy]

So the announcement by Stephen Guerin the then CEO on 13 August said:

Corporate Structure Review
“Following the divestment of the Seed & Grain business in May, the PGW Board commenced a review of the corporate service model for the business. Outcomes from the review are now being implemented in a staged manner as we recalibrate our corporate structure to capture efficiencies while also configuring our back office to best serve our customers and our re-sized operation. We expect to see the benefit of cost savings flow through progressively with savings in excess of $2.5 million expected in FY2020,” said Mr Guerin.

If the only person going was Ian Glasson why would that review still be ongoing? That reads to me to be more 1 person. Also on Page 90 of the annual report it showed Ian Glasson receiving $2.3 million in termination payments and bonuses:eek2:. I am hopeful that the management of publicly listed company would not include those "savings" in a restructure.:scared: Hopefully those payments are included in extraordinary expenses below EBITDA and the $2.5 million are additional savings.:t_up:Otherwise some of your calculations may need reviewing. And I would be interested in knowing what is in included in the $4.5 million of Non-operating expenditure. I had previously assumed $2.3 million was the golden handshake to Ian Glasson.

After a good start to FY2020, Steve and the team have worked very hard not to add to that EBITDA figure in the second half. It is only by doing this that less bonuses would be paid and the $2.5m in incremental savings made. As for Ian Glasson, departure isn't a question of 'walking out the door'. First the physical body is escorted from the building. Only then is the gold leaf carpet Ian walked out on re-polished and inspected for damage. This time the golden carpet is still in PGWs possession may be used to make sure the price of gold is not unnervingly high for shareholders when the carpet is finally written out of the PGW books. So you can see that Ian's departure is a stage managed theatrical event which does require ongoing consideration. There is no hurry to send on the carpet because it must wait to take its ultimate place many years down the track. A barrel of Marlborough red wine and a dried Canterbury lamb (fortunately these aren't costly enough to make a future provision for in the accounts) will ultimately be supplied for 'provisions in the afterlife' on Ian's death. At this point the beautifully sheened and rolled golden carpet will will lined up with the food trinkets alongside Ian 's sarcophagus. This is how gratitude and respect is reflected in the 'PGW' (Pre-eminant Gold World).

SNOOPY

[Roberto the Brickie]

Sorry Snoopy, I will re ask my question. Do you believe the payments to Ian Glasson of $2.3 million in addition to his to base salary are included in operating expenditure or non-operating expenditure in the published 2019 annual report?:confused:

[Snoopy]

Sorry Snoopy, I will re ask my question. Do you believe the payments to Ian Glasson of $2.3 million in addition to his to base salary are included in operating expenditure or non-operating expenditure in the published 2019 annual report?:confused:


Neither. I would think Ian Glasson's $2,332m payments above base salary would be classified under 'Employee Expenses'.

Of course the seeds division, despite the branding, is no longer owned by PGW. That's why they moved out to a new premesis. As you observed that would leave plenty of space at Waterloo road. I don't know why 'PGW Rural Rump' left Waterloo Road. It may have been the lease was up. It may have been new CEO Steve Guerin wanting to stamp his mark on the business. It may be that the Christchurch International Airport park offered them a great rental deal. The move was all pre Covid-19. So it could be that Stephen was expecting a constant stream of representatives from overseas suppliers that he had to meet and entertain. It would be easy to do that from the Airport premesis with the Sudima hotel across the road. And of course Chrischurch Airport is a good access point if you are regularly flying around the country checking out your subordinates, or alternatively if you need to summon them to head office!

With the sale of the Australian and Uruguayan arms, executives will no longer have to travel between those countries. Some of the $2.5m annual savings will come from that. That August review that you commented on said the findings were being implemented. It didn't say the review itself was ongoing.

As for the position of 'commercial manager' for the Agency 'division'. That doesn't sound like a head of department job to me. 'Agency' is a creation of a previous CEO Mark Dewdney, aka 'The Dude'. Agency combines 'Livestock', 'Real Estate' and 'Wool' which are really quite disparate business segments each with their own head. To me 'Commercial manager' sounds more like a mid level accounting job to figure out how to streamline the reporting from these three disparate entities come reporting time. It doesn't sound like a 'head of the whole Agency shebang' . I am expecting Agency to have had a dismal year when the divisional results are released. So when someone asks Stephen at the AGM what he is doing about it, Stephen can say: " I have just hired a new commercial manager.'

Anyway I am not sweating on the $2.5m+ cost reduction figure just yet. I too would have expected some downsizing of the management team at the head table, more than is obvious today. But sometimes it is better to just let these people work out their contracts, rather than get into employment disputes. I look forward to your tough questioning of Stephen at the upcoming AGM!

SNOOPY

[DDog]

The Commercial Manager is not a new role but one that has been around for many years. The current one is moving to a new challenge. But as you say, the Commercial Manager is the accountant for the three business units. He supports the GMs in all things accounting and commercial. The accountants report to the Commercial Manager. There is also a Commercial Manager for Retail & Water.

[Roberto the Brickie]

Sorry but now I am getting a little bit confused.:confused: Several questions probably due to a couple of assumptions that I have been making.
1. I thought PGW changed to segmented reporting to pass out Corporate costs a couple of years earlier. So costs for Australian and Uruguay expenses related to the now sold Seeds division, so no savings for remaining Rural Rump.
2. The commercial manager role for Agency is paying greater than $200k in the advert on Seek. If that is a mid level accounting job then I really made a crappy career choice when I left school. Maybe Mum and Dad were right after all.
3. If the "additional" payments to Ian Glasson above his base salary are included in Employee expenses, what is the amount of $4.5 million as Non-operating expenses?

I purchased shares in PGW last year for the dividends and from reading that they could reduce Corporate costs due to restructure of $2.5 million being an increase in EBITDA of 10% that would be ongoing over years. This would be a way to continue providing that dividend stream and not a saving for one year. Nowhere in their announcements did I get the impression it was a one off saving.:(
Sorry will not be attending the AGM, travelling back to NZ for an AGM and isolating for a month is not enough incentive to visit home. Hopefully the Shareholder's Association or someone attending the AGM will ask about the $4.5 million spend. Results for 2020 year must be due shortly which may help understand that spending.

[percy]

Result will be released at 8.30 am on Tuesday 18th August.

[Snoopy]

Sorry but now I am getting a little bit confused.:confused: Several questions probably due to a couple of assumptions that I have been making.
1. I thought PGW changed to segmented reporting to pass out Corporate costs a couple of years earlier. So costs for Australian and Uruguay expenses related to the now sold Seeds division, so no savings for remaining Rural Rump.


PGW has had segmented reporting since -forever- I think. The Australian division has always been 'seeds only'. The Uruguayan business was both seeds and 'rural supplies'. The Danish outfit that purchased it all seemed happy to take the rural supplies business in Uruguay as well. But when it was all 'One PGW' all the businesses were under a single corporate umbrella with the pointed tip at the top being 'Pharaoh Ian'. At that point PGW was a complex kingdom, requiring many bureaucrats to keep the wheels running. They had to keep tabs on international tax regimes and worry about inter country borrowing and currency hedging. At the high level, a lot of time would have been put into into evaluating the business potential of overseas business units that were still years away from producing specific cultivars that would lift these overseas business units out of their commodity bottom of the bathtub price bases. It is by getting rid of these corporate umbrella roles, specific to looking after those overseas businesses, that I understood to be where the $2.5m in corporate savings was coming from.



2. The commercial manager role for Agency is paying greater than $200k in the advert on Seek. If that is a mid level accounting job then I really made a crappy career choice when I left school. Maybe Mum and Dad were right after all.


Yep, you should have listened to your Mum. Although having a career that gives you a lesser income but more enjoyment and a better work life balance has something to be said for it.



3. If the "additional" payments to Ian Glasson above his base salary are included in Employee expenses, what is the amount of $4.5 million as Non-operating expenses?


Payments to consultants connected with the seeds division split. Fees associated with renegotiating funding with PGW's banking syndicate. Expenses incured in recruiting new high level staff. Legal expenses figuring out how to break Pharaoh Ian's long term employment contract. Stuff like that. It is possible that Ian's 'break fee', however that is defined, is included as a non-operating expense. I can't be absolutely sure.



I purchased shares in PGW last year for the dividends and from reading that they could reduce Corporate costs due to restructure of $2.5 million being an increase in EBITDA of 10% that would be ongoing over years. This would be a way to continue providing that dividend stream and not a saving for one year. Nowhere in their announcements did I get the impression it was a one off saving.:(


All jesting aside, I do believe the $2.5m in savings will be ongoing. But if you think rurally based shares will give you a 'steady income' you need to think again. All the rurally based shares that I can think of have their and downs. I adjust for that before I invest by seeking a relatively greater dividend yield over the business cycle.

SNOOPY

[percy]

http://business.scoop.co.nz/2020/08/06/red-meat-exports-record-seven-per-cent-increase-year-on-year/

[Snoopy]

http://business.scoop.co.nz/2020/08/06/red-meat-exports-record-seven-per-cent-increase-year-on-year/


A glaring omission in that article was that the word 'drought' was not mentioned. If you don't have enough feed to get your stock through the winter then you arrange to have them killed before winter arrives. So it is no surprise that red meat exports are on the up in the year to June 2020. Come this year those cash strapped farmers will need to rebuild when funds allow. That means lower trade through the PGW livestock division as farmers breed up their own replacement stock and the discretionary spending power of farmers coming under real pressure will be felt a PGW Retail. The issues highlighted in this article are not good news for PGW shareholders!

SNOOPY

[percy]

https://www.heartland.co.nz/rural-loans/livestock-finance/fortnightly-market-update

[Snoopy]

https://www.heartland.co.nz/rural-loans/livestock-finance/fortnightly-market-update


Interesting to take information from this 'Heartland' article and combine it with information in your 'Scoop' referenced article.

The Heartland article shows beef prices down around 7% on a year ago and lamb prices down about 10%. The Scoop article says that revenue from the red meat sector is up 7% on last year. That means the number of cattle slaughtered year on year. That means the number of cattle slaughtered this year is up by approximately : 1.07/0.93 = +15% and the numbers of lamb slaughtered is up approximately : 1.07/0.90 = +19%. That is a very large increase in the number of animals slaughtered year on year. I suspect drought was the key reason stock slaughter was brought forward, But such action will have a consummate negative effect in the ensuing year,

A deluge of rain after a drought is all very well. But soil temperatures still have to be high enough for the grass to grow and in the South Island this isn't happening.

China took 24% more value in beef exports from us in the June year (Scoop). But beef consumption is very low in the Chinese summer (Heartland). So we are currently in a limbo land wondering if such record consumption will be sustained. At the height of the Chinese summer beef consumption is down 13% (Scoop).

I joked in a previous post about grinding down our high quality meat to make burgers. I was somewhat perturbed to read in the Heartland article that this is actually happening; mixing in our beef, as a way to make low cost high fat US grown beef palatable in burger patties.

SNOOPY

[iceman]

Interesting to take information from this 'Heartland' article and combine it with information in your 'Scoop' referenced article.

The Heartland article shows beef prices down around 7% on a year ago and lamb prices down about 10%. The Scoop article says that revenue from the red meat sector is up 7% on last year. That means the number of cattle slaughtered year on year. That means the number of cattle slaughtered this year is up by approximately : 1.07/0.93 = +15% and the numbers of lamb slaughtered is up approximately : 1.07/0.90 = +19%. That is a very large increase in the number of animals slaughtered year on year. I suspect drought was the key reason stock slaughter was brought forward, But such action will have a consummate negative effect in the ensuing year,

A deluge of rain after a drought is all very well. But soil temperatures still have to be high enough for the grass to grow and in the South Island this isn't happening.

China took 24% more value in beef exports from us in the June year (Scoop). But beef consumption is very low in the Chinese summer (Heartland). So we are currently in a limbo land wondering if such record consumption will be sustained. At the height of the Chinese summer beef consumption is down 13% (Scoop).

I joked in a previous post about grinding down our high quality meat to make burgers. I was somewhat perturbed to read in the Heartland article that this is actually happening; mixing in our beef, as a way to make low cost high fat US grown beef palatable in burger patties.

SNOOPY

This from SFF marketing update yesterday:
"Beef
Activity is subdued in the US market due to the large domestic kill, as processors catch up on a backlog of cattle that built up during Covid-19 shutdowns.
Domestic demand for beef in the US remains firm which is keeping the market stable for both domestic and imported lean grinding beef.
Australian exports for July were down 23% compared with 2019, as Australia enters a cattle rebuilding phase after a prolonged drought.
Globally our value-added programmes have been performing well and gaining mainstream attention, as health and food safety is at the
forefront of consumers minds.
Our bolstered relationships with New Zealand retailers are paying off, and we’re seeing strong demand for chilled beef as domestic
consumers continue to embrace cooking at home.
The European market has improved with very good outlook for chilled steak cuts. Unfortunately frozen steak cuts are not as
buoyant. The high exchange rate continues to balance any market positivity"

[kiora]

Some surpluses around
https://finance.yahoo.com/news/u-farmers-leave-fields-fallow-135907536.html

[Snoopy]

Some surpluses around
https://finance.yahoo.com/news/u-farmers-leave-fields-fallow-135907536.html

Huh? The article talks about a reduction in new plantings in the USA of corn due to a Coronavirus induced reduction in demand for motor fuel and less soy being planted due to worries about the USA-China trade relationship. So it is saying that surpluses have been removed. Not sure what point you are trying to make re PGW operating in New Zealand. A somewhat confused...

SNOOPY

[Roberto the Brickie]

I have increased admiration of the accountants at PGW and wonder if they read this forum. I have raised the question of what is $4.5 million of non operating expenses in the 2019 annual report, but now notice that this figure is not showing in the 2019 comparative figures of the 2020 result. Looking further I see they have netted the gain from over provisioning of the Holidays Act with this expenditure. Well done to the PGW accounting team as a way of deflecting this question.
Looking at the 2020 result it is as expected, I am still happy with my shareholding in this company. My one slight concern would be cash management. Why have $16 million in cash and yet have debt?

[percy]

Thought the result would not be great, so sold most of my holding yesterday.
As the result was worse than I expected, and with no divie, I sold the balance of our holdings this morning.

[Snow Leopard]

Thought the result would not be great, so sold most of my holding yesterday.
As the result was worse than I expected, and with no divie, I sold the balance of our holdings this morning.

I do not understand.
Why did you not sell on or soon after 22-July when they first told us what the result would be ?

[percy]

I do not understand.
Why did you not sell on or soon after 22-July when they first told us what the result would be ?

Took my eye off the ball.

[Balance]

Took my eye off the ball.

Think BAIC have their eyes off the ball too?

Or are they getting ready to pounce?

[Snoopy]

Think BAIC have their eyes off the ball too?

Or are they getting ready to pounce?


The narrative is playing out as I expected. PGW deliver a bad result and a doubtful outlook. Shares get sold down. BAIC rides in to 'save' shareholders from their losses by offering a 'very generous' $2.75 per share, as pre-agreed with David Cushing. And having sold all his shares, for $2.75 no less, David is the best qualified 'fully independent director' to recommend such an offer. Alan Lai makes his gracious exit. Other shareholders, if they have any long term vision of where agriculture is going in NZ, won't.

SNOOPY

[Snoopy]

The $235m capital repayment we shareholders got was well down on the $292m proposed in the Korda Mentha report (detailed on p36). I would have thought the suggested capital repayment we didn't get would have boosted the PGWRR balance sheet to the extent that all medium term worries were removed. Yet, somehow millions of dollars worth of capital must have been leaking from PGW in recent years, out of the headline sight of shareholders, to bring them to the precarious capital position that PGW is in today. So how did it all unfold?




Year 2020 forecast equity ratio is 46%. Very sound.


Actual Equity Ratio at balance date: Total Equity / 'Total Liabilities + Equity' = $156.702m / $459.453m = 34% "Not so Sound" Hmmmm.

SNOOPY

[percy]

Actual Equity Ratio at balance date: Total Equity / 'Total Liabilities + Equity' = $156.702m / $459.453m = 34% "Not so Sound" Hmmmm.

SNOOPY
Agree.34% equity ratio. "Not so sound." Hmmm indeed.Difference between total assets and total equity is liabilities,So more debt.
Neither was receiving $4.1mil from the Govt.
Only positive was the operating cash inflow of $34mil

[Rossimarnz]

Agree.34% equity ratio. "Not so sound." Hmmm indeed.
Neither was receiving $4.1mil from the Govt.
Only positive was the operating cash inflow of $34mil

Percy this is a business that has a strong seasonality to it. Is the positive cashflow a function of the seasonality rather than a reflection of the core business?

[percy]

Percy this is a business that has a strong seasonality to it. Is the positive cashflow a function of the seasonality rather than a reflection of the core business?

Yes...........................
Half year cash flow negative.
Full year cash flow positive.
I really only brought it up as posters were concerned at the negative cash flow at the half year.
PGW's CFO told me at the time it would correct at the full year, as it did.

[Snoopy]

Of all the NZX listed companies that have in house pension plans, I don't know of one in a worse position than the PGG Wrightson plan. It has been underwater for the entire existence of PGG Wrightson. The ten year picture is shown below.

In the table below, I am effectively looking at the pension schemes as a 'black box' and observing the cashflow that comes in and out. The information in this table can be found in the respective annual reports under the header "Defined Benefit Asset/Liability" (e.g. Note 20 in AR2017).

PGW Pension Plan(s) External Cashflows



Financial YearPension Plan Deficit EOFYPGW Contribution {A}Members Contribution {B}Total Contribution {A}+{B}Benefit Paid {C}Net Cash Movement {A}+{B}-{C}


2009-$13.680m$1.709m$1.556m$3.265m($11.111m)($7.846m)


2010-$18.206m$3.127m$1.651m$4.778m($5.631m)($0.853m)


2011-$16.970m$3.622m$1.378m$5.000m($4.980m)$1.398m


2012-$26.264m$2.727m$1.363m$4.090m($3.819m)$0.271m


2013-$20.819m$1.402m$1.364m$2.766m($6.412m)($3.646m)


2014-$13.528m$1.427m$1.337m$2.764m($4.709m)($1.945m)


2015-$14.665m$1.301m$1.300m$2.601m($5.304m)($2.703m)


2016-$20.715m$1.204m$1.254m$2.458m($3.482m)($1.024m)


2017-$12.271m$5.920m$1.199m$7.119m($6.010m)$1.109m


2018-$7.722m$3.011m$1.170m$4.181m($8.914m)($4.773m)


2019-$5.883m$8.455m$1.268m$9.723m($14.044m)($4.321m)


Bold Total$17.386m



Why have I highlighted the contributions of PGW to the pension plan over the last three years only? In the FY2017 report, PGW states:

"Previous expensing of the return on plan assets for the 2014 through to the 2016 year (Snoopy note: if this 'expense' ends up being negative then profits increase) have now been recognised through other comprehensive income."

So for the years 2016 and older, the money that PGW have pushed into supporting the pension plan has been taken out of the headline profits. To show what has happened, 'Basic Earnings Per Share (Continuing Operations)' was listed as 5.3cps in the AR2016 'Statement of Profit & Loss'. Yet the equivalent comparative figure, also relating to FY2016 in AR2017 was 5.8cps. This difference was solely due to the removal of a $5.835m 'Remeasurement of Profit and Loss' (offset by a $1.634m 'Deferred tax on remeasurements of defined benefit liability') making a net -$4.201m 'item that will never be classified to profit and loss'. [see my post 4135 on this thread for more detail]

Yet this $4.201m pension plan propping is 'real cash' that otherwise would have been available to shareholders to pay higher dividends, or shore up the capital position of the company. If we study the cashflow statements for the last three years, the actual cash required to prop up the pension plan is more than finds its way into the pension plan:




Cashflow Lump Sum Contribution to Plan {A}Contributions paid into Plan {B}
{A}-{B}
({A}-{B})/{A}


2017$7.551m$5.920m$1.631m21.6%


2018$2.842m$3.011m-$0.169m-5.9%


2019$10.274m$8.455m$1.819m17.7%


Total$20.667m$17.386m



I do not understand why the 'cash flow attributed to propping up the pension plan' is not the same as the 'contributions paid into the plan'. Anyone know? But whether the cash lost by shareholders doing this is $20.667m or $17.386m, it is still a lot of money. The lions share of PGWs base bank debt of $30m going forwards in fact.

Still, at least this hidden cash drain behind the scenes has shored up the pension plan at long last -right?
Unfortunately not, because the ten year government bond rate, a key driver in calculating the required pension fund asset position since the balance date of 30th June has declined further from 1.69% to 1.23% as I write this. Also the earnings capacity of the company has approximately halved due to the sale of the seeds division. That means the record low pension scheme deficit of $5.883m (approximately $6m) will still require an equivalent percentage of profits to be raked off as the $12m deficit at EOFY2017. And that means, after approximately $20m has been spent propping up the pension plan, the effective position of the pension plan for PGW shareholders now is no better than it was at EOFY2017!


As I predicted, the PGW pension plan continues to career out of balance. The ten year picture is shown below.

In the table below, I am effectively looking at the pension schemes as a 'black box' and observing the cashflow that comes in and out. The information in this table can be found in the respective annual reports under the header "Defined Benefit Asset/Liability" (e.g. Note 20 in AR2017).

PGW Pension Plan(s) External Cashflows



Financial YearPension Plan Deficit EOFYPGW Contribution {A}Members Contribution {B}Total Contribution {A}+{B}Benefit Paid {C}Net Cash Movement {A}+{B}-{C}


2010-$18.206m$3.127m$1.651m$4.778m($5.631m)($0.853m)


2011-$16.970m$3.622m$1.378m$5.000m($4.980m)$1.398m


2012-$26.264m$2.727m$1.363m$4.090m($3.819m)$0.271m


2013-$20.819m$1.402m$1.364m$2.766m($6.412m)($3.646m)


2014-$13.528m$1.427m$1.337m$2.764m($4.709m)($1.945m)


2015-$14.665m$1.301m$1.300m$2.601m($5.304m)($2.703m)


2016-$20.715m$1.204m$1.254m$2.458m($3.482m)($1.024m)


2017-$12.271m$5.920m$1.199m$7.119m($6.010m)$1.109m


2018-$7.722m$3.011m$1.170m$4.181m($8.914m)($4.773m)


2019-$5.883m$8.455m$1.268m$9.723m($14.044m)($4.321m)


2020-$9.838m$0.692m$0.832m$1.524m($5.031m)($3.377m)


Bold Total$18.078m



Why have I highlighted the contributions of PGW to the pension plan over the last four years only? In the FY2017 report, PGW states:

"Previous expensing of the return on plan assets for the 2014 through to the 2016 year (Snoopy note: if this 'expense' ends up being negative then profits increase) have now been recognised through other comprehensive income."

So for the years 2016 and older, the money that PGW have pushed into supporting the pension plan has been taken out of the headline profits. To show what has happened, 'Basic Earnings Per Share (Continuing Operations)' was listed as 5.3cps in the AR2016 'Statement of Profit & Loss'. Yet the equivalent comparative figure, also relating to FY2016 in AR2017 was 5.8cps. This difference was solely due to the removal of a $5.835m 'Remeasurement of Profit and Loss' (offset by a $1.634m 'Deferred tax on remeasurements of defined benefit liability') making a net -$4.201m 'item that will never be classified to profit and loss'. [see my post 4135 on this thread for more detail]

Yet this $4.201m pension plan propping is 'real cash' that otherwise would have been available to shareholders to pay higher dividends, or shore up the capital position of the company. If we study the cashflow statements for the last four years, the actual cash required to prop up the pension plan is more than finds its way into the pension plan:




Cashflow Lump Sum Contribution to Plan {A}Contributions paid into Plan {B}
{A}-{B}
({A}-{B})/{A}


2017$7.551m$5.920m$1.631m21.6%


2018$2.842m$3.011m-$0.169m-5.9%


2019$10.274m$8.455m$1.819m17.7%


2020$0.0m$0.692m-$0,692mNM


Total$20.667m$18.078m



I do not understand why the 'cash flow attributed to propping up the pension plan' is not the same as the 'contributions paid into the plan'. Anyone know? I suppose it is the same in FY2020 ;-P. But whether the cash lost by shareholders doing this is $20.667m or $18.078m, it is still a lot of money. It accounts for all of PGWs long term bank debt of $20m going forwards in fact.

Still, at least the long term cash drain behind the scenes has shored up the pension plan at long last -right?
Unfortunately not, because the ten year government bond rate, a key driver in calculating the required pension fund asset position since the balance date of 30th June 2019 has declined from 1.57% in AR2019 to 0.91% in FY2020. The pain hasn't stopped either because as of today, nearly two months on from the balance date, the ten year cash rate is down to just 0.67%!

Very importantly, the earnings capacity of the company has approximately halved due to the sale of the seeds division. In this drought year in particular, earnings have collapsed to just $5m. That means the pension scheme deficit of $9.838m (approximately $10m) will need two years of PGW profits to be diverted to close the funding gap. The effective position of the pension plan for PGW shareholders, and even pension plan beneficiaries, must now be of significant concern. Yet in June 2019, the Group announced that they had brought the Plan to an 'actuarial equilibrium position', because they have their own calculation standards that are better than IFRS standards (apparently).

SNOOPY

[winner69]

Hey Snoops ......probably a few guys in this photo still collecting their pension from PGW

I’d hazard a guess that most of the pensioners worked for companies PGW no longer own but generous current shareholders keep paying their pensions ...cool eh

[Snoopy]

Note 18 of AR2019 contains a very interesting disclosure:

------

Corporate Structure review

Following the divestment of the Seed & Grain business the PGW Board commenced a review of the corporate service model for the business. The Group has recognised costs of $3.02 million, expensed through non-operating items, in respect of the recalibration. As at 30 June 2019, a provision of $1.74 million was held and is included within accruals and other liabilities above.

-------

Once again a recognised cost of $3.02m has been diverted through 'non-operating items'. That is fair, but it does keep a very significant loss of money for shareholders out of the limelight. Putting the remaining balance in 'Accruals and other liabilities' will obfuscate this loss in a basket to be forgotten in future years. Yet it is real cash that shareholders have lost, and a real contribution to the weakening of the company structure going forwards.


Note 6 in the annual accounts show the company's response to Covid-19

"The Group's financial performance for 2020 has been significantly impacted by COVID-19. Whilst the Group's retail stores and warehouse supplies facilities continued operating as an "essential service" during all of New Zealand's alert levels, the Group's Water, Wool, Real Estate and Livestock saleyard businesses were closed at alert level 4 and only reopened under alert level 3 following strict protocols. The Group received $4.11 million under the Government’s COVID-19 wage subsidy scheme which is aimed at supporting employers affected by the COVID-19 lockdown to continue to employ staff. $3.15 million of this subsidy has been recognised in the profit or loss within the Employee Expenses line, with the remaining $0.96 million being recognised as deferred income on the balance sheet as at balance date."

Sure enough , if we turn to note 17 in the annual accounts, there is $0.958m in 'wage subsidy waiting to be paid out' sitting on the balance sheet as a liability.

If we want to remove the effect of the government subsidy from operating performance, we might consider that $4.11m 'grant provided by Grant' as a debt, albeit a 'virtual debt' that doesn't have to be repaid. This is because if the government had not come up with the money, then PGW would have had to borrow $4.11m to pay those wages. Next year 'virus willing' PGW will not be receiving $4.11m in wage subsidies. The exact amount of subsidy they will receive we can probably glean from half year report to December 2020, when it comes out. But right now a new $4.11m in cost is built into the operating cost of the company. And as soon as the government stops paying that, corresponding debt will appear on the PGW books that will have to be offset by a permanent incremental improvement in earnings, or cost cutting.

This isn't a debt issue yet for PGW, but it is something to keep an eye on.

SNOOPY

[percy]

Actual Equity Ratio at balance date: Total Equity / 'Total Liabilities + Equity' = $156.702m / $459.453m = 34% "Not so Sound" Hmmmm.

SNOOPY

Equity ratio.?
Tricky.
34.1% or 44.81%..?
Big difference.
Excluding the impact of NZFRS 16 leases [ as clearly pointed out on page 6 of the annual report] it is a very healthy 44.81%
ie Total assets $354,071 and total equity $158,650
Yet under NZFRS 16 leases. 34.1%
Total assets $459,453 and total equity $156,702.
Something we will have to get used to.

[Balance]

Snoopy has been writing doom & gloom about PGW for over a year.

I would be selling the hell out of the stock if I write the same doom and gloom!

Yet he claims to still be a shareholder in PGW?

DYOR.

[Getty]

Hey Snoops ......probably a few guys in this photo still collecting their pension from PGW

I’d hazard a guess that most of the pensioners worked for companies PGW no longer own but generous current shareholders keep paying their pensions ...cool eh

So these hard working gents are now costing us circa $10M?
If anybody can supply me their names and addresses, I will visit them, thank them for their service, and shall we say, pension them off.
All in the interests of fiscal responsibility of course.

Dr JPG.

Profits before people.

[Roberto the Brickie]

I am more concerned with the cash management practices at PGW than the pension scheme. The pension scheme is a problem but not one that the current management were responsible for implementing, they just inherited the problem. However I can't understand why a New Zealand domiciled company with no overseas subsidiaries would have $17 million :) cash on hand, yet still have $30 million short term debt:(. I can forgive the long term debt of $20 million as break fees would probably apply for early repayment. This makes no sense to me, surely the banking syndicate are charging a higher interest rate for borrowing than investing. Common sense would say this cannot be the case as why would they continue trading and losing money.
So I can only conclude that the cash management team of PGW have been asleep at the helm. In my business, cash is always king, and the first thing that I am looking at every day especially in tough times. I have lost some faith in PGW thinking about this, especially on a reporting date. I would have assumed that this would have been a focus area for management ahead of the pension scheme.
Would be really happy if people have a different opinion to me to share as this really causing me some concerns.

[Balance]

So these hard working gents are now costing us circa $10M?
If anybody can supply me their names and addresses, I will visit them, thank them for their service, and shall we say, pension them off.
All in the interests of fiscal responsibility of course.

Dr JPG.

Profits before people.

Is it really such a huge problem as it is made up to be?

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/358149/328574.pdf

Go to Note 18 - Defined Benefit Liability

Points to note :

1. Liability was $21.7m in 2016, it is now $9.8m

2. The Group expects to pay $0.85 million in contributions to defined benefit plans in 2021 (2020: expected $1.01 million and paid $0.69 million). Member contributions are expected to be $0.59 million in 2021 (2020: expected $0.65 million and paid $0.83 million).

2 above has to be viewed in the context of a group with EBITDA of over $45m.

[Balance]

Equity ratio.?
Tricky.
34.1% or 44.81%..?
Big difference.
Excluding the impact of NZFRS 16 leases [ as clearly pointed out on page 6 of the annual report] it is a very healthy 44.81%
ie Total assets $354,071 and total equity $158,650
Yet under NZFRS 16 leases. 34.1%
Total assets $459,453 and total equity $156,702.
Something we will have to get used to.

PGW is a rural servicing company & a broker - so a high level of working capital will and has always be a big part of its financial position.

Have a good look at Elders in Oz and you will see the same picture :

https://www.asx.com.au/asxpdf/20200518/pdf/44hx36rh1ts7qb.pdf

$615m equity vs total assets of $1.625m = 37.8%

Anyone hearing equity inadequacy alarm bells ringing with the institutional appetite for Elders shares?

[Snow Leopard]

I am more concerned with the cash management practices at PGW than the pension scheme....

The pension scheme is not particularly a worry, every year we get a short-term re-evaluation of a long-term commitment.
The easiest and also most-sensible thing to do is to factor in the possible yearly drain into your valuation of the company and then just get on with it.

As for the cash position I will suggest that the $30M [nice round number that :)] is a interest only loan for a fixed amount with a fixed repayment date.
It may not be, but would that settle your concerns.

May your cash flow always be bountiful.

[Snoopy]

The pension scheme is not particularly a worry, every year we get a short-term re-evaluation of a long-term commitment.


Quite right. But look at what the short term revaluations have been. From the 'Statement of Consolidated Income' for each respective year:



Year
Re-measurements of Defined Benefit Liability {A}
Total Comprehensive Income {B}
Defined Benefit Liability Proportion of NPAT {A}/{B}


FY2016
($10.666)$35.820m-30%


FY2017
$3.121m$44.646m
+7.0%

FY2018
$2.746m$27.080m
+10%

FY2019
($6.101m)
$124.948m
-4.9%


FY2020($3.942m)]$5.002m-79%



From a minor adjustment to profit (debatable), last years adjustment was almost equivalent to the whole profit!



The easiest and also most-sensible thing to do is to factor in the possible yearly drain into your valuation of the company and then just get on with it.


New Rule of Thumb: Take Expected Profit from normal operations and halve it! Not really an adjustment you can dismiss.

SNOOPY

[Snoopy]

Snoopy has been writing doom & gloom about PGW for over a year.

I would be selling the hell out of the stock if I write the same doom and gloom!

Yet he claims to still be a shareholder in PGW?

DYOR.


Balance has been widely promoting a potential formal offer for PGW at $3 to $3.30 per share.



BAIC and Agria could reach a deal any day. As mentioned before, Agria is delivering control to BAIC with its 44% so expect at least $3.


I warned readers at the time I believed this to be unrealistically optimistic. Since that time the share price of PGW has fallen by 20%. That was a pretty good get out of jail call I made to traders who listened. Balance may yet get the last laugh. A takeover offer may come. But I am picking if it does happen it will be pitched at $2.75 and no more.

Observations like this from Balance....



https://www.nzherald.co.nz/the-country/listen/news/article.cfm?c_id=600&objectid=12342319

Real estate side looks like doing well post the lockdown.


.....were well wide of the mark. Post result it became clear that PGW Real Estate staff were only surviving on government subsides. The complete opposite of 'doing well'.

I am a long term holder in PGW, since the beginning in fact, and I held Wrightsons before that. I see a good future for PGW, but not an outrageously good future. Since the capital return I have purchased PGW shares in four tranches at: $2.46, $2.45, $2.38 and $2.12. These purchases were made at points where I considered the share 'good value'. I have not changed my view on these 'price purchase points', despite the emergence of Covid-19 and the cutting of the dividend, (the potential for the loss of the dividend being part of my pre-purchase valuation process).

I am a happy holder of the shares I have bought, but will not be seeking to increase my holdings at $2.60, a price level I consider elevated, rather than obviously overvalued. I don't believe in investing in a share just because you are convinced a takeover is likely to happen. The problem with that logic is that you can convince yourself that almost any share price looks like a bargain. From an operational perspective at PGW, there are very uncertain times ahead.

SNOOPY

[Snoopy]

This one caught out more than one company, but the cost of putting it right for PGW was nevertheless severe! At least this faux pas was not hidden from shareholders. It was up front in the profit and loss statement. From AR2018, Note 20 explains:

-----

Holidays Act 2003 - Remediation Costs

During the period the Group recognised an $8.06 million provision for remediation costs of historical liabilities under the Holidays Act 2003. The Group has engaged the services of an external advisor and a law firm to assist in determining the level of the provision. Work on determining the final liability is not yet complete. The provision is included within Employee entitlements above, and represents the Management’s best estimate of the remediation costs.

----

Note 20 goes on to list employee entitlements rising from $31.163m at EOFY2018 from $22.946m at EOFY2017, a rise in value of $8.217m, most likely almost entirely due to the Holiday's Act debacle.

Then one year later, from note 18 in AR2019, we learn:

-----

The Group has now completed the remediation work and has made remediation payments to current staff and those terminated staff for which the Group has been able to make contact with. Following these payments the remaining provision has been released apart from an amount of $1.20 million which continues to be held in respect of terminated employees for which the Group is yet to make contact with.

------

From the 'Statement of Profit and Loss' for FY2019, the amount written back was $2.303m. So the original provisioning was conservatively generous and the final capital used to sort out this sorry affair was:

$8.060m - $2.303m = $5.757m

Nevertheless that was a not inconsiderable capital ejection that otherwise might have been available to shore up the capital position of the company.

At EOFY2019, $16.821m was the amount listed under 'Employee Entitlements' under 'Trade and Other Payables' at EOFY2019. This represents 'Employee Entitlements' from the NZ based rural retail and livestock operation only, the 'Employee Entitlements' from the seed division having been hived off. If we take the FY2018 'Employee Entitlements' for the whole operation, including seeds, and subtract the holiday act entitlements accounted for at the time -and today's remaining total- we get:

$31.163m - $16.821m - $8.060m = $6.282m

This figure gives some indication of the 'Employee Entitlements' that might have been transferred to the 'Seed Division' after its sale.


Time for another episode in the much anticipated, controversial, yet wildly popular 'Shortage of Capital' series. This time the 'Trade & Other Payables' note throws up a brand new debt: the 'Make Right' provision for leased properties of $2.680m.

Like others I am still trying to come 'fully to grips' with the new standard for treating leased assets. $2.690m is to be "amortized over the life of the right-of-use assets". This $2.690m provision seems to be listed simply as part of the unspecified 'long term provision' in the balance sheet. 'Making good a property' is something that would normally happen at lease end. So it seems odd that the accounting treatment is to gradually write this figure off. I would have thought it would make more sense to keep this debt on the balance sheet as a 'lump sum', as a reminder that on lease end, this 'lump sum' must be spent. It is clear to me that this 'lump sum' must remain in a PGW bank account until it needs to be spent, regardless of what accounting conventions demand. This means it must end up as 'off balance sheet capital', ready to spend on termination of the lease. It is a confirmed 'future expense' that gradually becomes invisible to shareholders as it is amortized. When the lease is terminated, and the premises is vacated, then the accounts for that year will show next to nothing of the 'put back' refurbishment expenses. That doesn't seem right to me. But the upside of this policy is that PGW will have up to $2.690m of 'off balance sheet capital' to call on in an emergency. And that will have a positive, albeit transient, effect on any 'Shortage of capital' going forwards.

The above is my interpretation of what is going on. I hope if I am wrong one of the accounting gurus on this is forum will correct me!

SNOOPY

[Snoopy]

Equity ratio.?
Tricky.
34.1% or 44.81%..?
Big difference.
Excluding the impact of NZFRS 16 leases [ as clearly pointed out on page 6 of the annual report] it is a very healthy 44.81%



Total AssetsTotal EquityEquity ratio


Pre NZFRS 16$158,650m
$354,071
44.81%


Post NZFRS 16$156,702m
$459,423
34.1%



Something we will have to get used to.



A horrifying result of post NZ-IFRS16 corruption!

But seriously, something strange is going on here. I had thought when NZ-IFRS16 was adopted two things were going to happen:

1/ A new asset was going to appear on the balance sheet: "A right of use of Leased Asset' entry. This would then be offset by a new liability incorporated within
2/ 'Lease Liabilities'

Then as the company continued to operate over the years, leases would be paid each year (thus reducing lease liabilities) and at the same time the 'Right of Use Asset' would be reduced in step. Thus 'Right of Use Assets' and 'Lease Liabilities' would shrink in tandem, causing minimal net change in equity or liability ratios. This seems to be confirmed in Note 15 of the accounts:

Right of Use Assets: $104.625m
Lease Liabilities: $106.904m

I was struggling to understand how a change in balance sheet presentation of the same cashflows could cause the equity ratio of PGW to shrink by ten points! The flaw in my thinking was that causing minimal net change in asset or liability values does not mean that there will be minimal net change in equity or liability ratios.

As illustrated on page 4 of the stand alone accounts for FY2020:



Old Total AssetsIncremental AssetsNew Total Assets


Pre NZFRS 16
$354.071m




Post NZFRS 16

$105.382m
$459.453m





Old Total LiabilitiesIncremental LiabilitiesNew Total Liabilities


Pre NZFRS 16
$195.421m




Post NZFRS 16

$107.330m
$302.751m



The company equity is the difference between the assets and liabilities at any time. And if the assets and liabilities go up by roughly the same amount then the difference between those two numbers remains roughly the same. Thus with NZ IFRS16, we have the numerator of the equity ratio - the company shareholder equity- staying about the same BUT the denominator of the equity ratio - the company assets - going up significantly. It stands to reason therefore that in post NZ IFRS16 circumstances, with equity the same and assets up, the equity ratio must go down, even though nothing substantially about the company has changed. Weird but true!.

SNOOPY

[percy]

A horrifying result of post NZFRS16 corruption!

But seriously, something strange is going on here. I thought when NZFRS16 was adopted two things were going to happen:

1/ A new asset was going to appear on the balance sheet: "A right of use of Leased Asset' entry. This would then be offset by a new liability incorporated within
2/ 'Lease Liabilities'

Then as the company continued to operate over the years leases would be paid each year (thus reducing lease liabilities) and at the same time the 'Right of Use Asset' would be reduced in step. Thus 'Right of Use Assets' and 'Lease Liabilities' would shrink in tandem, causing minimal net change in equity or liability ratios. I am struggling to understand why a change in balance sheet presentation of the same costs can cause the equity ratio of PGW to shrink by ten points!

SNOOPY

I think I/we have often not thought enough about leases and their liability .
A retailer like Michael Hill/SCY etc who does not own any property, and has long leases, have/had a huge liability off balance sheet.
So it means they are now out in the open.
How I/we account for them,as in the case of PGW I am not sure.
Just have to compare Apples with Apples,yet keeping in mind those leases are a huge liability for some companies.
In the case of SCY, it looks as though the rump of lease liabilities were left with SCY .From memory about $6mil ,which meant some landlords will be paid leaving nothing for shareholders.Yet nta was stated at over 70cps.

[nztx]

A horrifying result of post NZ-IFRS16 corruption!

But seriously, something strange is going on here. I thought when NZ-IFRS16 was adopted two things were going to happen:

1/ A new asset was going to appear on the balance sheet: "A right of use of Leased Asset' entry. This would then be offset by a new liability incorporated within
2/ 'Lease Liabilities'

Then as the company continued to operate over the years leases would be paid each year (thus reducing lease liabilities) and at the same time the 'Right of Use Asset' would be reduced in step. Thus 'Right of Use Assets' and 'Lease Liabilities' would shrink in tandem, causing minimal net change in equity or liability ratios. This seems to be confirmed in Note 15 of the accounts:

Right of Use Assets: $104.625m
Lease Liabilities: $106.904m

I am struggling to understand why a change in balance sheet presentation of the same costs can cause the equity ratio of PGW to shrink by ten points!

The answer of course is that if before the NZ IFRS16 standard change, the assets and liabilities of PGW had been in balance, then the equity ratio would not have changed with the adoption of NZ IFRS16! But assets and liabilities were not in balance at PGW. So, as illustrated on page 4 of the stand alone accounts for FY2020:



SNOOPY

Check out the TLL Transport Logistics thread

Something similar has happened with the new Bean Counter's fanciful Lease Assets Add-ons on both sides there with relatively little change to SHF between most recent periods reported.

As was expected the % Equity Ratio has been shot to hell there too, with hefty Capital Equipment Leases I guess thrown into the mix

[Balance]

Check out the TLL Transport Logistics thread

Something similar has happened with the new Bean Counter's fanciful Lease Assets Add-ons on both sides there with relatively little change to SHF between most recent periods reported.

As was expected the % Equity Ratio has been shot to hell there too, with hefty Capital Equipment Leases I guess thrown into the mix


Here's another : The Warehouse

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/WHS/350034/318878.pdf

Equity ratio pre NZFRS 16 48.9%

Equity ratio post NZFRS 16 22.5%

Implications are worth thinking carefully about.

[nztx]

Here's another : The Warehouse

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/WHS/350034/318878.pdf


http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/WHS/350034/318878.pdf

Equity ratio pre NZFRS 16 48.9%

Equity ratio post NZFRS 16 22.5%

Implications are worth thinking carefully about.


The real consideration should be - is an 'Accountant's concoction in front of a Dart Board' of a Lease / Right to Occupy/Use etc $ value really an Asset ?

Similarly on Liability side an actual quantifiable Liability - or just a Contingent one (as in the past before this nonsense landed) ?

On the Asset side - is there some right to own the asset on conclusion or at some point written into the Lease Contract(s) ?

Try selling / realising the Leases at Beancounter's Assessment of Value & what will the answer be ?

If the Outfit has no dough in kitty to pay a periodic lease - what happens to the liability ?

Looking at things overall - how close to the mark can Company Auditors get in still stating that
Lease Asset / Right to Use etc values in balance sheets equate a fair or market value at Balance Date ?

Many will have already guessed the likely answer on that one ;)

[Balance]

The real consideration should be - is it really an Asset ?

Similarly on Liability side an actual quantifiable Liability - or just a Contingent one (as in the past before this nonsense landed) ?

On the Asset side - is there some right to own the asset on conclusion or at some point written into the Lease Contract(s) ?

Try selling / realising the Leases at Beancounter's Assessment of Value & what will the answer be ?

If the Outfit has no dough in kitty to pay a periodic lease - what happens to the liability ?

Looking at things overall - how close to the mark can Company Auditors get in still stating that
Lease Asset values in balance sheets equate with fair or market value at Balance Date ?

Many will have already guessed the likely answer on that one ;)

Accounting sleight of hand?

[nztx]

Accounting sleight of hand?

Is the current practice by listed Rest Home Operators to include internal property development margins above the Line in their P&L accounts & reported as part of their profits not more of the same sort of thing ? ;)

Probably the reason why most of them pay little tax & have little imputation credits available ..

Is this sort of thing (not being a sale to a third party) just generating a revaluation gain or loss instead
which previously was taken direct to Revaluation Reserve in Shareholders Funds ?

[nztx]

Accounting sleight of hand?


Try telling your local Dairy or Car Repair Workshop that they have 5 years forward Property Leases reported
as a Liability and just to balance things out a corresponding asset (just because it can't go anywhere else
if the same yardstick was applied to the range of other SME's the same Beancounters probably look after
& the response back could be interesting

The point is Accounting Reports fit for purpose & Reporting Usability

Listed Company Reports are widely used - why for larger ones have this sort of confusing standards prevailing ?

Perhaps the Top Shelf was open well before the "Accounting Creativity Committee" had finished what they were looking at ?

[Snoopy]

Perhaps the Top Shelf was open well before the "Accounting Creativity Committee" had finished what they were looking at ?


For those that came in late, there was some historical logic in bringing in IFRS19

https://www.pwc.com/gx/en/audit-services/ifrs/publications/ifrs-16/ifrs-16-implications-for-the-airlines-industry.pdf

--------

The initiative to develop a new leases standard goes back to the time when Sir David Tweedie was the chairman of the International Accounting Standards Board. He joked that he wanted to fly in an aircraft that actually existed on an airline's balance sheet. For decades, financing aircraft through off-balance lease models has been a well-established practice in the Airline industry. In addition, airport facilities which are essential to run airline operations are typically rented from the respective airport owner.

Under IFRS 16 substantially all lease contracts will be on the balance sheet of the lessee. Estimates suggest this change will mean that trillions of additional lease obligations will be added to the balance sheets of Airlines world-wide. As most lease obligations are denominated in US-Dollar, many airlines will also be exposed to additional foreign currency volatility into their profit or loss.The recently published PwC study on the impact of lease capitalisation concludes that the Airline industry will be the second most impacted sector after the Retail industry. The median increase in on-balance debt is projected to be +47%.

-----------

In the case of PGW, the debt went up by: $107.330m / $195.421m = +55%

Compare that to what happened with debt at 'The Warehouse' as referenced by Balance below: $990,213m / $568,788m = +174%

By this comparative measure, PGW is doing a great job transitioning to IFRS19, albeit a job not as good as a 'median airline'! PGW sold off their retail premises back in the Mark Dewdney days. I remember thinking it was a bit of a croc at the time, effectively cashing up assets now, with a sum that would largely be paid out again to new premises owners in future years, with interest. It may be that Mark was being foresighted and cashing up assets today in full realisation that down the track, with more remote selling of product, these 'prime rural sites' would crash in value when PGW exited their lease at rent contract end. But I suspect raising cash to pay a larger dividend to shareholders, and in particular one large controlling shareholder, was the real reason for these asset sales. I think this new IFRS standard does indeed shed light on the somewhat shonky practice of cashing up today and leaving no trace of any future consequential downside on the balance sheet.

Another positive consequence of IFRS19 is that shareholders get a good picture of how 'locked in' a company is to the assets it uses today. A very low equity ratio might mean the company is intransigent and unable to adapt to changing market conditions, because of fixed lease terms (not sure if that is what Balance meant when he brought up WHS in this PGW context). But is this any worse than a company not selling assets, and then being stuck with 'stranded assets'? IIRC PGW has stakes in some secondary centre sale yards which may not survive. But these assets are probably not worth serious money on the books today anyway (in PGW corporate terms). Even if such surplus sale yard assets were written down to zero, it might not affect the PGW balance sheet that much.

On the whole, I am starting to think that Percy's advice of "just getting used to the new picture" is the way to go. Shopping may have changed. But I can't see courier vans dispatched from a warehouse in Auckland to deliver bags of fertilizer to a farm in rural central Otago. I get the impression that, despite their lonely lifestyle, most farmers quite enjoy the occasion of 'firing up the ute' to collect their supplies from the big smoke of Middlemarch. That means I don't see too many changes in the PGW rural network going forwards and I am not concerned by any intransigence in the balance sheet that the adoption of IFRS16 has highlighted.

SNOOPY

[Snoopy]

In note 18 of AR2019, we learn of another capital loss shuffled into non-operating earnings.

-----

Onerous lease

The Group has recognised a provision in respect of property leases entered into that are now considered onerous. An onerous provision of $1.88 million has been expensed within non-operating items and represents the Directors’ best estimate of the expected excess of costs over benefits for the remaining term of the lease contracts.

-----

This doesn't seem consistent with the treatment of lack of holiday pay. Workers are employed to operate the company and building's are leased so that workers can operate out of them. I would have thought that both should be operating expenses or alternatively, because both adjustments are in theory one offs, both should be non-operating expenses. I don't see the logic in having different treatments for both. But let's carry on.

$1.88m is not a huge loss on its own. Yet this loss comes in the context of PGW owning a huge swag of their retail premises, and selling them off to raise capital, while consummately entering lease back arrangements to reduce debt. Of course, the net effect of all this will be undone by the new IFRS accounting rules for leases in the next accounting period. The new rules means that operating leases will now appear on the balance sheet as capitalised debt. The point I am making is that this particular lease loss looks like it could be a back flip on a very recent lease deal. And that doesn't inspire confidence in the short to medium term planning from the company.


All the leases now appear on the balance sheet as debt, as forecast last year, and as discussed above in my last post

More write off of onerous leases has occurred (p14 FY2020 stand alone accounts):

"The Group reviewed its right-of-use assets for indicators of impairment and has recognised an impairment of $2.25 million in respect of three leased properties. Most of the impairment relates to the Water Force business following the Group’s decision to restructure that business. The Group also recorded an impairment reversal of $1.40 million on a leased property previously treated as an onerous lease, as there is no longer an indication that site is impaired. The net impairment loss recognised in the profit or loss is $0.85 million."

The net effect is a capital loss of: $0.85m for the year.

SNOOPY

[Snoopy]

I am not quite sure why our savvy farmers are keen to outlay cash for goods or services that they have not received. But it looks like they have woken up as over the last two years these deposits are down. From the 'Trade and Other Payables' (Note 18 AR2019) sections of the respective annual reports.



FY2017FY2018FY2019


Deposits Received in Advance$3.589m$3.196m$1.042m



This drop off could be related to the sale of the seed division. It is possible that farmers would be OK with putting up money for seeds in advance, in return for a guarantee of supply on the dates they want. Or perhaps the other retailers of wholesale seeds were the ones putting up the cash in advance? This is just a theory of mine. Perhaps someone who is closer to the farm community on the ground could confirm or deny. Yet the figures in the accounts do not lie If deposits are down by:

$3.589m - $1.042m = $2.547m

and that capital is needed. Then it must be borrowed. A $2.547m reduction in deposits is another brick in the PGW debt wall.


Deposits from farmers up a bit, albeit half what they were two years ago. From the 'Trade and Other Payables' (Note 17 AR2020) sections of the respective annual reports.



FY2017FY2018FY2019FY2020


Deposits Received in Advance$3.589m$3.196m$1.042m$1.474m



I am still undecided if this drop off is related to the sale of the seed division. It is true that 'PGW Seeds' has something unique (there is a lot of IP tied up in the NZ cultivars at least), so farmers might be prepared to stump up some money in advance to secure supply. OTOH there shouldn't be too much of a problem with supply. Even in a bad growing year, stored seed from the previous year should still be viable. Furthermore although PGW Seeds has spent a lot of money developing cultivars, the incremental creation cost of seed stock, once a cultivar has been developed, should be low. This means there is no 'holding capital pressure' at the PGW seeds division that would require them to demand advance payments from farmers and so allow the seed division to continue to operate.

Now that PGW Seeds is no longer owned by PGW Rural Rump, PGW Seeds might be in a position to demand an upfront payment from PGWRR? I still think it curious that the deposits in advance figure has gone down so much. Because although the seed division itself has been sold, those same seeds are still being sold through PGWRR outlets. IOW the turnover between supplier (PGWRR) and end user (farmer) has not changed, despite the change in ownership of the PGW Seed Division.

One thing we can rule out now is other retailers of wholesale seeds paying a deposit and that deposit money ending up on the books of PGWRR.

The figures in the accounts do not lie and deposits in advance are assets on the PGW books and those are down from three years ago by:

$3.589m - $1.474m = $2.115m

This is a reduction in capital that is needed by PGWRR. If farmers are not supplying this capital then it must be borrowed. A $2.115m reduction in deposits is another brick in the PGW debt wall.

SNOOPY

[Snoopy]

PGW was making much needed capital by selling their company owned premises to third parties and leasing them back. So what is all this about PGW losing money on property? PGW have certainly been vocal around the sell down of their property portfolio, but rather less forthcoming about their 'IMPAIRMENT AND FAIR VALUE ADJUSTMENTS' (Note 4 AR2019):



FY2017FY2018FY2019


Impairment Property Plant & Equipment$0.0m$1.070m$2.260m



A clue to what is going on is that the referenced FY2018 comparative figure is unchanged from when it was reported in the FY2018. Since the FY2019 reports are prepared from the point of view of a wholly owned New Zealand perspective, this indicates the 2018 write downs also solely relate to the New Zealand business. The only thing I can find in the verbal commentary of each year which even hints at NZ based property losses is the continued rationalisation of surplus stock sales yards. This rationalisation is not quantified in the text. The impairment figures quoted are not explained further in the annual report notes. I think it is reasonable to link the two (the missing quantification of the losses in the text with the unexplained effect of dollar losses in AR2019 Note 4.)

All up capital losses from property plant and equipment in the last couple of years come to:

$1.070m + $2.260m = $3.330m


PGW have released some commentary about the 'IMPAIRMENT AND FAIR VALUE ADJUSTMENTS' this year (Note 4 AR2020):



FY2017FY2018FY2019FY2020


Impairment Property Plant & Equipment$0.0m$1.070m
$2.260m($0.253m)


Impairment Right of Use Assets
$0.852m




"During the year, the Group reviewed the status of each saleyard as strategic or non-strategic, and tested them for impairment. The Group recognised impairments of $0.41 million on two saleyards which management no longer considers strategic. The Group also reversed $0.66 million of previously recognised impairment losses on five saleyards based on updated valuations. The net impairment reversal recognised in the profit or loss is $0.25 million."

The net effect is a 'capital gain' of $0.25m for the year (that's good). A negative impairment 'write down' is actually a 'write back'. Good news for shareholders.

A $0.253m 'write back' is a result of a net change in the collective value of stockyards (two dropped in value and five improved). I had speculated about changes in stockyard value being at least a substantial contributor to the equivalent impairment figure the previous year, so it was nice to have my last year's speculation confirmed.

All up capital losses from property plant and equipment in the last three years come to:

$1.070m + $2.260m - $0.253m = $3.095m

(Note that the impairment of underused assets of $0.852m has already been dealt with under Point 5, my post 4986).

SNOOPY

[Snoopy]

PGW has on the accounts a 'Bad Debt Provision' in which management judgement is used to provide for debts that are unlikely to be fully repaid. The treatment of bad debts was changed over FY2019 with the adoption of IFRS9. From p50 in AR2019.

-------

NZ IFRS 9 Financial Instruments

The Group has applied NZ IFRS 9 from 1 July 2018. The new standard changes how the impairment of financial assets are calculated from an ‘incurred credit loss’ model to an ‘expected credit loss’ model. Based on the Group’s assessment of historical provision rates and forward looking analysis, the Group has recognised an additional provision of $0.45 million as at 30 June 2018 which is expensed directly to Retained Earnings upon adoption of NZ IFRS 9.

------

In non accounting terms:

'expensed directly to Retained Earnings upon adoption of NZ IFRS 9'

means they have taken shareholder capital without telling them. Or at least they have excised this loss from the company's 'Profit & Loss' statement, which takes it away from plain view. That doesn't make the loss any less real though!

An increase in bad debts caused by this accounting rule change in consistent with what other NZ companies have experienced on adoption of IFRS9. There is nothing unique to PGW here.

Each year, whatever the particular standard is in place, a doubtful debt expense is used to add to the bad debt provision and there is an additional expense of bad debts actually written off. This information can be found under note 3 and note 11 of AR2019:




FY2019FY2018


Increase in Provision for Doubtful Debts
$1.072m$0.529m

[/TR]

Bad Debts Written Off
$0.485m($0.543m)


IFRS 9 Standard Adjustment
$0.450m $0m


Total
$2.007m($0.014m)



Sometimes bad debts are unexpectedly are recovered. Evidence of that was the 'negative expense' (i.e. a net debt recovery) that took place in FY2018. Yet even if we exclude that the doubling of the bad debt provision expense and the extra capital loss adjustment means an extra:

($1.072m - $0.529m) + $0.450m = $0.993m

or nearly $1m of extra hard earned shareholder capital has gone down the drain mitigating bad debts in FY2019 compared to the previous year.



Each year, whatever the particular standard is in place, a doubtful debt expense is used to add to the bad debt provision and there is an additional expense of bad debts actually written off. This information can be found under note 3 of AR2020. I present a table of these losses for the last three years:




FY2020
FY2019
FY2018


Increase in Provision for Doubtful Debts
$0.343m
$1.305m
$0.529m

[/TR]

Bad Debts Written Off
$0.147m
$0.298m
($0.543m)


IFRS 9 Standard Adjustment
$0m
$0.450m
$0m


Total
$0.490m
$2.053m
($0.014m)



Sometimes bad debts are unexpectedly are recovered. Evidence of that was the 'negative expense' (i.e. a net debt recovery) that took place in FY2018.

This is equivalent to a capital loss adjustment over three years of capital loss adjustment of:

(($0.343m+$1.305m)-$0.529m) + $0.450m = $1.569m

or over $1.5m of extra hard earned shareholder capital has gone down the drain mitigating bad debts in FY2019 and FY2020 compared to the reference year.

SNOOPY

[Balance]

Bought more last week - thanks Snoopy! 👍

[Roberto the Brickie]

I spoke to a friend in the Commercial Real Estate business who said that PGW were looking to sublease part of their new head office. They have not been able to find a subtenant and have instead moved staff from other offices into this site. :mellow: Therefore I suspect that the accountants at PGW would have taken an impairment on the part of the new head office they were looking to subtenant in the 2019 financial statements. Not having fulfilled this plan and having staff move in would reverse the impairment provision:) It would be useful to the readers of financial statements if each site they impaired was shown in full. I would also prefer the accounting team were focusing on cash management $17 million cash at balance date rather than finding ways to manipulate profits through fancy impairment provisioning.:p

[winner69]

I spoke to a friend in the Commercial Real Estate business who said that PGW were looking to sublease part of their new head office. They have not been able to find a subtenant and have instead moved staff from other offices into this site. :mellow: Therefore I suspect that the accountants at PGW would have taken an impairment on the part of the new head office they were looking to subtenant in the 2019 financial statements. Not having fulfilled this plan and having staff move in would reverse the impairment provision:) It would be useful to the readers of financial statements if each site they impaired was shown in full. I would also prefer the accounting team were focusing on cash management $17 million cash at balance date rather than finding ways to manipulate profits through fancy impairment provisioning.:p

That $18m is really bugging you eh Roberto

Probably only a snap shot at a point in time .....working capital of a seasonal nature

You concerned about the $45m in GO livestock receivables?

[Balance]

That $18m is really bugging you eh Roberto

Probably only a snap shot at a point in time .....working capital of a seasonal nature

You concerned about the $45m in GO livestock receivables?

As my ex-boss kept reminding us when we were evaluating investment banking proposals - don’t lose focus on the big picture!

What’s the big picture here?

BAIC, China, Agria - they will determine what happens next with PGW.

[Roberto the Brickie]

Yes I have to say Winner that the $17 million is really bugging me. PGW said they had renegotiated their banking arrangements after the sale of the Seeds business. Hopefully they would have organised a call facility for short term borrowing and set tranches for the longer term borrowings:). So whoever is responsible for the daily cash management at PGW did not plan to have a spare $17 million in cash at a reporting date while having short term borrowings of $30 million. I know commentators here have said this should not be a problem and is either seasonal or poor timing of a tranche. I can partially accept this, but for it occur on a day that they airing their underpants to the world to see:ohmy:, in my mind smacks of incompetence:t_down:.
Not as concerned about the $45 million in GO money as this would be spread across many farmers and the risk of them all defaulting is not that great. If they do all default then wider New Zealand has got some rather serious problems.

[Snoopy]

Yes I have to say Winner that the $17 million is really bugging me. PGW said they had renegotiated their banking arrangements after the sale of the Seeds business. Hopefully they would have organised a call facility for short term borrowing and set tranches for the longer term borrowings:). So whoever is responsible for the daily cash management at PGW did not plan to have a spare $17 million in cash at a reporting date while having short term borrowings of $30 million. I know commentators here have said this should not be a problem and is either seasonal or poor timing of a tranche. I can partially accept this, but for it occur on a day that they airing their underpants to the world to see:ohmy:, in my mind smacks of incompetence:t_down:.


PGW may have an offset arrangement where 'cash on the books' is offset against the 'short term loans' when calculating interest rates. That would address your concerns Roberto. But whether they have or not, we now have enough information (with some limitations) to calculate the interest rate paid over FY2020. So let's do that.

The problem with estimating an 'interest rate equivalent paid' for the PGW debt is that company debt is quite seasonal. Shareholders were presented with a picture of this in Figure 6.1 on page 34 of the "PGG Wrightson Independent Report, (outlining the case for divesting the seed division, and dated October 2018). Disclosure to this level of detail is not available in the annual report. But we can make a 'triangulated approximation' to the variability of the debt via three data points that are in the annual and half year reports:

1/&2/ End of year net debt position of the current year and the previous year AND
3/ The half year net debt position in between.

In this instance I have inserted a fourth reference date data point of 14th August 2019.




EOFY2020
EOHY2020
14 Aug 2019
EOFY2019


Cash
$16.868m
$0.684m
$0m
$210.491m


less Short Term Debt
$30.000m
$40.000m
$6,189m
$2.680m


less Long Term Debt
$20.000m
$20.000m
$20.000m
$0m


equals Total Net Debt
$33.132m
$59.316m
$26.189m
$(207.811)m


Half Year Increment from EOFY

+$NMm



Half Year Increment from 24th Aug

+$33.127m




The 14th August date was the date of the capital repayment of $234m to shareholders. The figures in the 14th August column are my estimates. Those estimates have been derived from the EOFY2019 figures by subtracting that $234m from those previous totals.

From this table we can now imagine three funding periods. The first up until 24th August of 45 days where no interest is paid, because there was no debt until the capital repayment was done. A second period of 139 days from 24th August to 30th December where debt ramps up in order to finance the growing season. Finally a third period of 181 days running down to 30th June 2020 where the debt taken on to fund the seasonal business is repaid.

The weighted average debt estimated over the whole year of all these three periods added together may be calculated as follows:

45/365 x $0m + 139/365 x ($26.189m+$59.316m)/2 +181/365 x($59.316m-$33.132m)/2 = $0m + $16.281m + $22.922m = $39.203m

From note 5 of the FY2020 annual accounts the interest paid and the facility fees to maintain those loans add up to $1.606m.

We can now work out the equivalent interest rate paid by PGW over FY2020.

$1.606m / $39.203nm = 4.1%

On 15th October 2019, in my post 4369 I wrote



CEO Stephen Guerin has negotiated the new banking facilities so that there is an incremental seasonal funding amounts to $70m. Considering the business has now been roughly 'half sized', this seems a lot, although I guess it is prudent to allow for less than ideal weather circumstances. The reduction in interest rate paid also announced must be meaningful for Stephen Guerin to crow about it. A 10% reduction might be more in line with what is happening in the markets as a matter of course. I am picking Stephen has got a 20% reduction. That would take PGW net interest rates down to: 0.8 x 7% = 5.6% for FY2020.


I am very happy that Steve Guerin and the management team has apparently negotiated an interest rate deal at a rather more competitive rate that I had thought likely. Well done!

SNOOPY

[sb9]

Bought more last week - thanks Snoopy! 

Looks like Chair Mr Finlay did the same as you...

[Balance]

Looks like Chair Mr Finlay did the same as you...

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/358582/329172.pdf

IMO, stock is underwritten by BAIC at $2.75 so $2.60 is good buying.

[Snoopy]

Parts 2 to 8 of this series have outlined the capital that has disappeared in 'extraordinary circumstances' since the sale of the seed division was contemplated. All of these events were left out of the Korda Mentha analysis, probably because they were not easy to cost out with accuracy. But now events have unfolded, the 'extra capital bill' has come in.




FY2018 to FY2019


Part 2: Cash to Fix Pension Plan Deficit (All Other Income)
$20.677m


Part 3: Corporate Restructuring
$3.020m


Part 4: Holiday Back Pay Reassessment
$5.757m


Part 5: Impaired Lease Losses
$1.880m


Part 6: Reduction in Customer Deposits
$2.547m

[/TR]

Part 7: Unusual Property Plant and Equipment Impairment
$3.330m


Part 8: Unusual Increase in Bad Debts (Other Income $0.450)
$0.993m


Total
$38.204m



Here at last in one place is a tally of capital that shareholders have lost since the whole seed sale deal was mooted.

Observe that the total capital lost ( $38m) exceeds the base bank debt of circa $30m at balance date for PGW today. If none of these losses had occurred, then PGW could be debt free now (at EOFY balance date anyway, we know that working capital of up to $70m is needed during the year). The circa $30m actual core debt, which may yet balloon out to $50, represents a perpetual interest bill to shareholders, at an interest rate of 5% (say) of:

$30m x 0.05 = $1.5m per year

This 'perpetual bill' is something that the Korda Mentha report didn't tell any shareholders about!



My previous summary post had the objective of showing the cumulative damage that activity, outside the continuing practices of the core business has done to the balance sheet. There was an opportunity to fix any debt issues with the sale of the seed division. However, what emerged out of that sale, the entity that I call 'PGW Rural Rump', still carries significant debt. Management are obviously not unhappy about this because they chose this capital structure. Rather than rehash the tale of where the lost capital went, I think it is more important to look at the 'non-core' capital changes since the last balance date. It is these charges that will help us to see how far PGWRR has deviated from its post restructure capital position, which we have to assume management considered 'ideal'.

Parts 2 to 8 of this series have outlined the capital that has disappeared in 'extraordinary circumstances' since the sale of the seed division was contemplated, and the capital that has disappeared over the current year. It is the latter that I wish to concentrate on in this table, as the numbers in the table here are what is moving PGWRR away from its 'ideal' post seed division separation position. The exception to this is the pension plan deficit that has accumulated over many years, and is a total 'worry figure' the IFRS standards people consider has not gone away.




Over FY2020


Part 2: Incremental Capital Pension Plan Deficit (All Other Income)
$3.955m


Part 3: Unpaid balance of government wage subsidy
$0.958m


Part 4: End of Lease Make Right Provision
($2.680m)


Part 5: Net Impaired Water Force Lease Losses
$0.850m


Part 6: Gain in Customer Deposits
($0.432m)

[/TR]

Part 7: Net Rationalisation of Stockyard Property Plant and Equipment
($0.253m)


Part 8: Increase in Bad Debt Provision above Bad Debt Expense
$0.196m


Total
$2.202m



Notes

Item 3/ The balance of the wage subsidy not paid out is supporting PGW's balance sheet. Once this has been paid out to staff, PGW will need to borrow this amount to keep funding the assets on the books. Next year there is unlikely to be a wage subsidy, as PGW stands on its own in a post Covid-19 environment (fingers crossed!). So next year this amount will have to be added to the company borrowings.

Item 4/ This 'make right' amount is capital needed to fix up incidental damage to a leased property at the end of a lease period. The make right expense is amortized over the length of the lease. But actually the money does not have to be paid out until PGW 'moves out' and the make right work is done. Therefore I see 'make right' capital as off balance sheet capital that could be utilized in a cashflow emergency. An asset PGW has when the books say it is not there.

Item 5/ Netting calculation: $1.40m - $2.25m = -$0.85m

Item 6/ Netting calculation: $1.474m - $1.042m = $0.432m

Item 7/ Netting calculation: $0.66m - $0.41 = $0.25m

Item 8/ Netting calculation: -$0. 147m - $0.343m = -$0.196m

In my opinion PGW has a new net $2.202m worth of 'hidden debt' that it needs to clean up.

SNOOPY

[Snoopy]

Let's start by working out some normalized profit figures:

PGW 'Rural Rump' for FY2019



EBITDAless D&Aless Net Interestless Income Taxequals NPAT
less Property salesequals Adjusted NPAT {A} No. Shares on Issue {B} eps {A}/{B}


FY2019$28.725m (1)$9.362m (2)$3.826m (3)$4.350m (4)$11.187m
$0.200m (5)$10.987m75.484m14.6c



(1) I have boosted the declared EBITDA of $24.425m by $2.5m, this being the amount of cost savings expected from head office reduction costs AND $1.8m from a supplier claim event of which this represents an unrecovered portion: $24.425m + $2.5m + $1.8m = $28.725m

(2) AR2019 p31

(3) Interest is calculated on the new capital structure of PGWRR. As at May 19th 2019 the total bank net debt post capital return was estimated to be: $3.920m + $31.742m = $35.662m. I have taken this figure as indicative of the 'low season debt' for FY2019. PGW have stated that they plan to borrow up to an additional $70m in working capital during the year. I will therefore estimate the 'high season debt' as: $35.662m +$70.000m = $105.662m. The average incremental debt I am modelling for the year is therefore:

$105.662m / $35.662m = 2.96 = +196%

Using a linear triangulated debt over time distribution model to adjust for the average debt increase over the entire year, the average increase in incremental debt is only half this: +98%. Throw in my indicative borrowing rate for the year of 5.6% (my post 4640) and I estimate the interest bill for the year would have been:

0.056x [$31.742m+$3.920m-$1.160m] x 1.98= $3.826m

(4) Income tax is calculated at a rate of 28%: 0.28( $28.725m - $9.362m - $3.826m ) = $4.350m

(5) AR2019 p55




PGW 'Rural Rump' for FY2020



EBITDAless D&Aless Net Interestless Income Taxequals NPAT
add Property devaluationequals Adjusted NPAT {A} No. Shares on Issue {B} eps {A}/{B}


FY2020$23.446m (1)$9.303m(2)$1.906m (3)$3.426m (4)$8.811m
$0.200m (5)$9.011m75.484m11.9c




(1) AR2020 "Impact of NZIFRS Leases"

(2) Depreciation & Amortisation: ($5.113m + $0.181m -$60m) + ($4.086m - $0.017m) = $9.303m

(3) Interest is calculated on the new capital structure of PGWRR.

a/ As at June 30th 2020 the total bank net debt was: $30.000m + $20.000m -$16.868m = $33.132m.
b/ As at December 31st 2019 the total bank net debt was: $40.000m + $20.000m - $0.682m = $59.318m.
c/ As at June 30th 2019 the total bank net debt was modelled as: $3.920m + $31.742m - $1.160m= $34.502m.

The average low season debt I am therefore modelling as: ($33.132m+$34.502m)/2 = $33.817m

The average incremental debt I am modelling for the year is therefore:

$59.318m / $33.817m = 1.75 = +75%

Using a linear triangulated debt over time distribution model to adjust for the average debt increase over the entire year, the average increase in incremental debt is only half this: +37.5%. Throw in my indicative borrowing rate for the year of 4.1% (my post 4995) and I estimate the interest bill for the year would have been:

0.041x [$33.817m] x 1.375 = $1.906m

(4) Income tax is calculated at a rate of 28%: 0.28( $23.446m - $9.303m - $1.906m ) = $3.426m

(5) AR2020 Note 16A

More comparative company performance statistics are revealed below:




PGW Rural Rump (FY2019)
PGW Rural Rump (FY2020)
Last edited by Snoopy; Today at 10:03 AM. Reason: Work In Progress

Share Price 30th September {A}Last edited by Snoopy; Today at 10:03 AM. Reason: Work In Progress
$2.55
$2.75 (*)
(5) AR2020 p55

eps {B}
14.6c
11.9c


PE Ratio {A}/B}
17.7
23.1


Normalised Profit {C}
$10.987m
$9.011m


Shareholder Equity {D}
$165.902m
$156.702m


ROE {C}/{D}As
6.62%
5.75%


Revenue {E}
$809.295m
$788.036m


Net Profit Margin {C}/{E}
1.36%
1.14%


Gross Earnings Yield {B}/ 0.72x{A}
8.0%
6.0%



(*) Estimated

SNOOPY

[nztx]

Yes I have to say Winner that the $17 million is really bugging me. PGW said they had renegotiated their banking arrangements after the sale of the Seeds business. Hopefully they would have organised a call facility for short term borrowing and set tranches for the longer term borrowings:). So whoever is responsible for the daily cash management at PGW did not plan to have a spare $17 million in cash at a reporting date while having short term borrowings of $30 million. I know commentators here have said this should not be a problem and is either seasonal or poor timing of a tranche. I can partially accept this, but for it occur on a day that they airing their underpants to the world to see:ohmy:, in my mind smacks of incompetence:t_down:.
Not as concerned about the $45 million in GO money as this would be spread across many farmers and the risk of them all defaulting is not that great. If they do all default then wider New Zealand has got some rather serious problems.

The $17 Mil might just be 1 or 2 days cashflow surplus though
They may have little way of forecasting inflow / outflow for a day ahead - particularly in stockfirm business
& need to carry a certain buffer in current accounts to cater for this