PGW - PGG Wrightson

[couta1]

Just wondering if Cushing still off loading his stake...got stuck in the 4.40s range for a while now. Could be but being fairly illiquid he can't offload many at once, 4.40 was the base level it started to rise from last Oct so should hold and looking oversold to boot. Nice fully imputed divvy arriving tomorrow just 1 week after going Ex so can't complain about that, should be 18c for next one making it one of the best divvy stocks on the NZX.

[sb9]

Could be but being fairly illiquid he can't offload many at once, 4.40 was the base level it started to rise from last Oct so should hold and looking oversold to boot. Nice fully imputed divvy arriving tomorrow just 1 week after going Ex so can't complain about that, should be 18c for next one making it one of the best divvy stocks on the NZX.

Yes, this is one of best income stocks in my portfolio. Bottom drawer stock, check every now and then.

[Master98]

Yes, this is one of best income stocks in my portfolio. Bottom drawer stock, check every now and then.
exactly, bought under two bucks at first lockdown, div return is amazing, can't be happier.

[couta1]

Nice divvy in the bank already and yes its looks like Cushing still selling.

[sb9]

Nice divvy in the bank already and yes its looks like Cushing still selling.

Noticed that fat juicy divvy hit the bank a/c this morning. As per last disclosure filed in Sep last year, he still had further 1.3mln shares under his belt. Will have to wait for next notice to figure out if its him that's doing all the selling.

[winner69]

Whatsup wih PGW share price .... the post Xmas party and celebrations all over are they

Falling from 576 to 418 in 2 months is some effort --- that's nearly 30% down

52 week is 327 so still doing OK

Must be oversold at the moment

[couta1]

Whatsup wih PGW share price .... the post Xmas party and celebrations all over are they

Falling from 576 to 418 in 2 months is some effort --- that's nearly 30% down

52 week is 327 so still doing OK

Must be oversold at the moment Yep way oversold but I think Cushing is still feeding his stake onto the market, the pattern of loading on the sell side lately indicates such (Bigger volume days he manages to offload quite a few but days like today its slim pickings) Goes to show an excellent result and outlook can't override a big fish seller in an illiquid stock.

[iceman]

Agree and am surprised how far it has fallen, but was also surprised how high it rose. But winner and couta, please just don't draw Beagle's attention to it. I can't deal with any more of his negativity and daily tantrums !

[couta1]

Agree and am surprised how far it has fallen, but was also surprised how high it rose. But winner and couta, please just don't draw Beagle's attention to it. I can't deal with any more of his negativity and daily tantrums ! Haha classic, yeah we don't need any double top and moving average nonsense over here do we.

[BlackPeter]

Mmh - I guess normally this would be a case of smart money selling, wouldn't it? ... but who knows, maybe the money is this time actually dumb? Exceptions confirm the rule and Reef-fish have limited intelligence, do they?

Trend does not look flash either - SP below MA200, but hey - the market is only right if we agree, isn't it?

Share Clarities DCF value (which is as often right or wrong as any blind dart thrower hitting the target) at $3.80;

PGW used to be one of these cylclicals - and what to do they say about leopards and their spots?


On the other hand ...

The dividend yield is beautiful as long as it stays ...

forward PE of 14 (ok-ish) but stunning in combination with a forward earnings CAGR of 12 (if it is true - remember the blind dart board thrower).

For sure - there is only one way for agriculture, and this is up, isn't it? It always was .... Oops.

Sigh ... investing is so difficult ... but given KW's famous saying I better wait for the trend to turn and reassess at that time.

[couta1]

Mmh - I guess normally this would be a case of smart money selling, wouldn't it? ... but who knows, maybe the money is this time actually dumb? Exceptions confirm the rule and Reef-fish have limited intelligence, do they?

Trend does not look flash either - SP below MA200, but hey - the market is only right if we agree, isn't it?

Share Clarities DCF value (which is as often right or wrong as any blind dart thrower hitting the target) at $3.80;

PGW used to be one of these cylclicals - and what to do they say about leopards and their spots?


On the other hand ...

The dividend yield is beautiful as long as it stays ...

forward PE of 14 (ok-ish) but stunning in combination with a forward earnings CAGR of 12 (if it is true - remember the blind dart board thrower).

For sure - there is only one way for agriculture, and this is up, isn't it? It always was .... Oops.

Sigh ... investing is so difficult ... but given KW's famous saying I better wait for the trend to turn and reassess at that time. Not difficult, just buy them and hold them, agriculture isn't going to disappear anytime soon.

[couta1]

Cushing continuing to sell off dragging the price down, he should have less than 1 mill shares left now (Shame he can't arrange an off market deal) will be the best yield on the NZX pretty soon, going to start buying more in a little while.

[Balance]

Cushing continuing to sell off dragging the price down, he should have less than 1 mill shares left now (Shame he can't arrange an off market deal) will be the best yield on the NZX pretty soon, going to start buying more in a little while.

Shhhhhh …..

The older one was not impressed with how the young one sold down (cheap) previously so young one is aggressively selling down to prove a point?

[sb9]

Cushing continuing to sell off dragging the price down, he should have less than 1 mill shares left now (Shame he can't arrange an off market deal) will be the best yield on the NZX pretty soon, going to start buying more in a little while.

Yeah, bidders keep lowering their prices to get them cheap off him. He’s probably pumping sale proceeds to fund SVR’s working capital requirements 😜

[winner69]

The old share price taking a tumble so lets raise guidance trick

Always works - share price heading back to $4.50 in next month or so

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/391416/369758.pdf

[winner69]

Last year ebitda was $56m ....firstly they said 'around $58m' for FY22...and then its going to be 'around $62m' ,,, and now its going to be $66m

I said a month or so ago it will probably end up at $66m

I now raise my guidance to $70m

Eodger is the man

[percy]

Last year ebitda was $56m ....firstly they said 'around $58m' for FY22...and then its going to be 'around $62m' ,,, and now its going to be $66m

I said a month or so ago it will probably end up at $66m

I now raise my guidance to $70m

Eodger is the man

Very positive trading leading to the increased guidance.
Pleasing seeing the rural economy so strong.

[couta1]

The old share price taking a tumble so lets raise guidance trick

Always works - share price heading back to $4.50 in next month or so

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/391416/369758.pdf Would be $5 after this excepting Cushing and his sell down.

[Balance]

Would be $5 after this excepting Cushing and his sell down.

Let him sell down and let’s hope he keeps selling down to zero - it is good for the stock long term.

[sb9]

Easy pickings here at current price levels to make this decent income stock for long run, only people with rocks in their head sell so cheap.

[couta1]

Easy pickings here at current price levels to make this decent income stock for long run, only people with rocks in their head sell so cheap. For sure, im surprised more punters aren't lining up on this one with the great results/outlook and yield.

[mike2020]

Todays list of gainers isn't exactly a great crowd to be in but I'm happy to take it.

[Davexl]

6.1% is a very useful response, but I'm still a long way underwater - may the re-rating continue...

[couta1]

6.1% is a very useful response, but I'm still a long way underwater - may the re-rating continue... Once Cushing finishes his selling the thing will accelerate quickly i reckon.

[mike2020]

Yesterday's market report had fonterra as the largest rise with 2 percent. We had 6. I think it would have been worth a mention.

[couta1]

Yesterday's market report had fonterra as the largest rise with 2 percent. We had 6. I think it would have been worth a mention. Undervalued share right here, Cushing must have offloaded quite a few yesterday with a 200k volume going through, in more rational times this would be $5 right now IMO.

[Balance]

Undervalued share right here, Cushing must have offloaded quite a few yesterday with a 200k volume going through, in more rational times this would be $5 right now IMO.

That’s good.

Last time he sold down at $3.45, I helped myself to a few.

[percy]

That’s good.

Last time he sold down at $3.45, I helped myself to a few.

Pity PGW shares have slipped a bit today,as there was a window of opportunity to swap one PGW for one DGC.

[Balance]

Pity PGW shares have slipped a bit today,as there was a window of opportunity to swap one PGW for one DGC.

Switch quality for a company whose CEO is obsessed with cleavage? Yours.

[percy]

Switch quality for a company whose CEO is obsessed with cleavage? Yours.

You are best to stick with Udders.

[Balance]

You are best to stick with Udders.

Yup - good one! :D

[Balance]

Pity PGW shares have slipped a bit today,as there was a window of opportunity to swap one PGW for one DGC.

You missed the opportunity to swap one DGC share for one PGW share yesterday, Percy?

[Davexl]

Another 4.2 % - steadily higher...

[couta1]

Another 4.2 % - steadily higher... Cushing taken his foot off the accelerator today so easily drifts up on low volume.

[Balance]

Cushing taken his foot off the accelerator today so easily drifts up on low volume.

He may have finished.

[Davexl]

He may have finished.

Does Cushing have to file a SPH or D&O notice at the end ? How soon after the event ? The last D&O showed he had about 1.3 m left (Sep 21)

[Balance]

Does Cushing have to file a SPH or D&O notice at the end ? How soon after the event ? The last D&O showed he had about 1.3 m left (Sep 21)

It’s been a year+ since he retired from the Board so my understanding is that he dies not have to.

[Davexl]

It’s been a year+ since he retired from the Board so my understanding is that he dies not have to.

Thanks Balance, must try and find where you get that kind of info too...ask the NZX, or is there a Rules listing somewhere ?
(Haven't come across it yet...)

[couta1]

Sell depth shrinking, buyers waking up to a true value play here. TA turnaround for those who are interested in that.

[sb9]

Sell depth shrinking, buyers waking up to a true value play here. TA turnaround for those who are interested in that.

We could assume that Cushing may have finished selling his lot or close to it, going by trade depth.

[couta1]

We could assume that Cushing may have finished selling his lot or close to it, going by trade depth. At least for now anyway. On another note stock is up 14% over a week in a very crappy week ,star of the NZX and a GM buys a few shares to boot

[couta1]

Cushing is back after a short break, enjoyed his absence.

[couta1]

Cushing needs to change his broker, trying to sell large volume into no volume doesn't work, great yield at these prices though and expecting the next result to be stellar, my biggest divvy paying holding but need to top it up before the result in August.

[percy]

https://www.stuff.co.nz/business/farming/128927184/farm-exports-boom-despite-war-pandemic-inflation-and-everything-else

[RGR367]

https://www.stuff.co.nz/business/farming/128927184/farm-exports-boom-despite-war-pandemic-inflation-and-everything-else

Unfortunately, it's not showing on the sp. So what do we do? I don't hold crypto and old enough to experience a lot of downturns so this bear market is just the right time to be buying more of this stock.

[couta1]

Unfortunately, it's not showing on the sp. So what do we do? I don't hold crypto and old enough to experience a lot of downturns so this bear market is just the right time to be buying more of this stock. Just buy it, I intend to once I get some more funds, it run back up over $4.70 in the absence of Cushing selling so that tells you the true story IMO.

[percy]

Unfortunately, it's not showing on the sp. So what do we do? I don't hold crypto and old enough to experience a lot of downturns so this bear market is just the right time to be buying more of this stock.

Do not tell any one.
Look on it as though we have inside information..........lol.

[kiora]

Any profits from ALL types of livestock farming look like they are going to be syphoned off by this Woke government policy
"Without recognition of existing sequestration even an 11c/kg methane price had significant financial implications on sheep and beef farms. At a methane price of 35c/kg, there would be significant impacts on sheep and beef farmers’ profits even if credit for all existing sequestration was included."
https://www.stuff.co.nz/business/farming/128890620/cost-of-greenhouse-gas-scheme-may-slash-farm-profits

[winner69]

Rural sector ….some making zillions while others fighting to survive

But as long as they keep buying from PGW no worries …..and if they need to sell there’s always the real estate division

https://www.rnz.co.nz/news/country/469207/kpmg-finds-mixed-fortunes-and-increasing-demands-within-rural-sector-industries

[couta1]

Rural sector ….some making zillions while others fighting to survive

But as long as they keep buying from PGW no worries …..and if they need to sell there’s always the real estate division

https://www.rnz.co.nz/news/country/469207/kpmg-finds-mixed-fortunes-and-increasing-demands-within-rural-sector-industries Many more strings to their bow than just the real estate as well, better yield the GNE (Fully imputed) and doesn't burn dirty coal to boot.

[couta1]

Bargin hunters stepping in today, one of the stars of the bourse.

[Balance]

Rural sector ….some making zillions while others fighting to survive

But as long as they keep buying from PGW no worries …..and if they need to sell there’s always the real estate division

https://www.rnz.co.nz/news/country/469207/kpmg-finds-mixed-fortunes-and-increasing-demands-within-rural-sector-industries

PGW is certainly reaping the benefits of supplying the farming sector although the sector is not as profitable as some would think.

Farmer friend tells me that his input costs (fertiliser, diesel, wages, parts, freight, etc) have gone through the roof. On top of that, the government has been imposing all sort of regulations and costs as well and they have had issues with the supply chain as well - input & output.

So net net, his farm is only marginally more profitable than before. Still, better than going backwards.

[Snoopy]

The reason I am predicting a 'low ball' takeover offer is that I have observed over the years, 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.


So much for the low ball takeover offer I predicted in 2020! But in a surprise announcement to the market today, the Chinese government have reduced their holding over the period 26th February 2021 to 26th July 2022, from 12.928% of shares held down to 11.924% of shares held as of today.

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/395867/375259.pdf

$5.924m / 1.317m = $4.50 (average price at which shares were sold)


Old Conclusion
-------------------

Judging by the average share sale price (wrong number $5.21), it looks like most share sales were when the price peaked in January/February 2022. Not sure what to make of this, except to say "smart trading by BCA New Continent Agri Holding".

-------------------

The $4.50 average sell down price changes things. In February 2021 the share price hit a local peak of around $3.50. It did not surpass that price level again until August 2021. So if the average share price of shares sold was $4.50, the bulk of those sales must have occurred after August 2021. There was a large volume spike of sales at $4.50 in what looks like late October. So if that $4.50 average sales price is accurate, most of those share sales must have occurred between August 2021 and April 2022. If that is true, then the volume sales picture shows that there was not an excessive dump of shares on any one day. Those shares look to have dribbled onto the market in a spread out and planned way. Make no mistake the Chinese government has made money on these sold shares. But not as much as I had hinted at in my previous erroneous conclusion.

As is well known I am not a trader so don't usually follow the movement in price of sold shares like this. But if my observations are accurate, what does this mean?

SNOOPY

[Snow Leopard]

A couple of corrections for you:
The number of shares are 9M8 (12.928%) down to 9M0 (11.924%)
and
They sold 1.317M shares for $5M924 or approx $4.50 average.

Disc: a major part of the portfolio.

[Snoopy]

A couple of corrections for you:
The number of shares are 9M8 (12.928%) down to 9M0 (11.924%)
and
They sold 1.317M shares for $5M924 or approx $4.50 average.

Disc: a major part of the portfolio.

Whoops yes now corrected, thank you. No doubt you are enjoying the divvies as I am. I follow farming but I don't follow Chinese politics. Do you have a theory as to what might be going on behind the scenes SL?

SNOOPY

discl: holder

[Snow Leopard]

....Do you have a theory as to what might be going on behind the scenes SL?....

Here is a nice picture of a Snow Leopard to distract you from the fact that I have no idea at all:

14012
Top 10 facts about Snow Leopards (https://www.wwf.org.uk/learn/fascinating-facts/snow-leopards)

[sb9]

Predictions for FY divvy? 18c or 20c..

[Davexl]

Predictions for FY divvy? 18c or 20c..

Final or Full Year ?

[sb9]

Final or Full Year ?

Final for this FY. Last year final was 16c

[Davexl]

Final for this FY. Last year final was 16c

Thanks sb9, was thinking combined divs for a second, bit low !

[mike2020]

Predictions for FY divvy? 18c or 20c..

I expect 18 cents. 20 would have seen some further update I think. Seems slightly illiquid lately. Anyone have a theory?

[Louloubell]

Yep, more people keen to sell than people wanting to buy. I think it is that simple in this case.

[winner69]

Chairman says 'exceptional results' so they must be

But what the heck is '▪ Achieved CPI normalised EBIT growth of 29%' when according to the accounts EBIT increased by 7.5%

Maybe they might explain when/if they put up a presentation

[winner69]

An overload of superlatives in this full year announcement - had to stop reading it

EPS up 7% to 32.2 cents

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/397000/376581.pdf

[BlackPeter]

An overload of superlatives in this full year announcement - had to stop reading it

EPS up 7% to 32.2 cents

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/397000/376581.pdf

Pretty amazing announcement. Sounds like pretty everything worked out well. Unusual to happen in an agricultural environment, but nearly unheard of that these things happen several times in a row :):

Just wondering, whether this is what peak performance looks like ... and what happens when they leave this peak?

BTW: Mainfreight would have called the results "satisfactory" at best, but for PGW this is "exceptional". Sort of telling, isn't it? It is an exception. What a message to shareholders ...

[BlackPeter]

Hmm .... after getting all these warm fuzzies from the announcement, reality in the financials appears nearly like a cold shower:

ROE 14% ... I guess better than the recent years, but exceptional?

Debts (liabilities) at an all time high (66.2%) to total assets. Not that flash, is it?

Yes, revenue grew not too bad (+12%), but earnings did grow on a significantly lesser rate (+6.3%). Is this really exceptional as the chair says?

These naughty cost of sales, if anything, then they deserve the attribute "exceptional" (+12.74%), is this what the chair meant?

Somewhat disappointing ...

[sb9]

Happy with the results, can understand why there's no increase in divvy under current economic environment. Happy to keep collecting dividends along the way.

[Davexl]

In these volatile times with everyone second guessing trends everywhere, steady as she goes is fine with me too...

[Snow Leopard]

Hmm .... after getting all these warm fuzzies from the announcement, reality in the financials appears nearly like a cold shower:

ROE 14% ... I guess better than the recent years, but exceptional?

Debts (liabilities) at an all time high (66.2%) to total assets. Not that flash, is it?

Yes, revenue grew not too bad (+12%), but earnings did grow on a significantly lesser rate (+6.3%). Is this really exceptional as the chair says?

These naughty cost of sales, if anything, then they deserve the attribute "exceptional" (+12.74%), is this what the chair meant?

Somewhat disappointing ...

Did your hear about the masochist who liked nothing better than a cold shower every morning?
He had a hot shower every morning. :)

The secret with any accounts, especially these days is to read and understand and adjust for those little details that add a few million here and remove a different few million there.
And of course everybody has their own filter through which they intepret things.

But these are, especially given the circumstances, a good set of results from where I am sitting.
So I will keep holding them.

[BlackPeter]

Did your hear about the masochist who liked nothing better than a cold shower every morning?
He had a hot shower every morning. :)

...


I suspect the mental picture with the cold shower is somewhat context driven. For somebody spending his life in the tropics a cold shower might have a totally different conotation then for somebody enduring the - well, less than tropical, NZ winter :) ;

[nztx]

Happy with the results, can understand why there's no increase in divvy under current economic environment. Happy to keep collecting dividends along the way.


ditto .. with you there

[sb9]

Holding up very nicely here...

[Davexl]

Holding up very nicely here...

Especially after Powell managed to clobber the Aussi market...

[winner69]

Chairman says 'exceptional results' so they must be

But what the heck is '▪ Achieved CPI normalised EBIT growth of 29%' when according to the accounts EBIT increased by 7.5%

Maybe they might explain when/if they put up a presentation

I asked them what this meant and credit to them I got a detailed explanation.

They adjust EBIT for non operating gains/losses and impairment/fair value gains/losses - that shows EBIT increasing from $28.7m in F21 to $391m in F22 - an increase of 36.1% and then they deduct CPI of 7.3% to get the 29%

Adjusting profits for CPI quite meaningful .....if other companies did it it might embarrass some

[sb9]

I asked them what this meant and credit to them I got a detailed explanation.

They adjust EBIT for non operating gains/losses and impairment/fair value gains/losses - that shows EBIT increasing from $28.7m in F21 to $391m in F22 - an increase of 36.1% and then they deduct CPI of 7.3% to get the 29%

Adjusting profits for CPI quite meaningful .....if other companies did it it might embarrass some

No wonder someone sees fair bit of value here and are in accumulation mode.

[winner69]

Hey Snoops - the Pension/Superannuation schemes seem to be in fairly healthy state these days. Contributions not as burdensome as a few years ago

Really cool the oldies and in some cases their spouses still get a monthly payment - even though some may have retired years ago - and some probably worked for parts of the businesses PGW have hocked off. Wonder if there's a few old dudes from Wrightson Bloodstock still alive and kicking and getting the pension

[Snoopy]

Hey Snoops - the Pension/Superannuation schemes seem to be in fairly healthy state these days. Contributions not as burdensome as a few years ago

Really cool the oldies and in some cases their spouses still get a monthly payment - even though some may have retired years ago - and some probably worked for parts of the businesses PGW have hocked off. Wonder if there's a few old dudes from Wrightson Bloodstock still alive and kicking and getting the pension


My Annual Report hasn't arrived yet Winner. My 'postie with the pack horse' is probably waiting for the river to go down. It is one report it 'doesn't seem right' to look up electronically. Last time I looked it was the 'discount rate' going up that saved the pension scheme balance. So with the rise in interest rates over the financial year, I imagine the pension scheme is looking sweet.

I imagine some of those thoroughbred horses bred through 'Wrightson Bloodstock', although long retired, may be still living out their post racing years on the farm too. The price of good horse feed over winter is not cheap. So that pension comes in handy for those cherished four legged scheme members as well.

We have to factor in all of those PGW Seeds staff who were let go to the Danes too. I mean, it is fun, but you can't really live on Lego. There are aging guys and gals, not at all seedy, who will no doubt be retiring with a significant nest egg that must be managed. On top of that you have the genetically hybridised trees that have bought that seeds division so much wealth over the years. They deserve a decent retirement too. Some of those retired genotype Rimus re-engineered for shelter belt breaks could live for hundreds of years. Go down to your local PGW and get a quote for 500 years worth of supplementary compost. You may be surprised by how fast those native tree feed bills add up.

So it is just as well that if what you say about PGW finally getting their pension scheme sorted is true. Cheers for the next few hundred years!

SNOOPY

[Sideshow Bob]

https://www.nzx.com/announcements/400697

Trading Update - operating EBITDA forecast to be around $62m ($67.2m last FY)

[winner69]

https://www.nzx.com/announcements/400697

Trading Update - operating EBITDA forecast to be around $62m ($67.2m last FY)

So all the waffle says profits down 9% on last year

Setting low expectations ….or the first in a series of downgrades?

[winner69]

PGW proudly touted a 'Inflation Adjusted Profit' number in full results

So this year ebita down about 16% in inflation adjusted terms ....ouch

[percy]

Details of the transactions or other events requiring disclosure: On 14 December 2022, Elders agreed to
acquire 8,526,245 ordinary shares in PGW from BCA New Continent Agri Hldg. Limited by way of an off
market trade for consideration of NZ$4.35 per share (being aggregate consideration of
NZ$37,089,165.75) with settlement to occur on 16 December 2022.

[Snow Leopard]

Details of the transactions or other events requiring disclosure: On 14 December 2022, Elders agreed to
acquire 8,526,245 ordinary shares in PGW from BCA New Continent Agri Hldg. Limited by way of an off
market trade for consideration of NZ$4.35 per share (being aggregate consideration of
NZ$37,089,165.75) with settlement to occur on 16 December 2022.

11.295% stake.
Will they want more or just blocking ?

[Snoopy]

Details of the transactions or other events requiring disclosure: On 14 December 2022, Elders agreed to
acquire 8,526,245 ordinary shares in PGW from BCA New Continent Agri Hldg. Limited by way of an off
market trade for consideration of NZ$4.35 per share (being aggregate consideration of
NZ$37,089,165.75) with settlement to occur on 16 December 2022.

"BCA New Continent Agri Hldg. Limited" is the Chinese government. The last declaration from these guys was on 25th July 2022, when their holding reduced from 9,758,714 shares (12.928%) to 9,000,915 shares (11.924%). The sale of 8,528,245 shares to Elders announced today means there are

9,000,915 - 8,528,245 = 472,670,

or just 0.626% of the shares in the company still in Chinese government hands. Or are they? I guess the imminent SSH declaration from "BCA New Continent Agri Hldg. Limited" will answer that question.

SNOOPY

[percy]

SHAREHOLDER NUMBER OF SHARES HELD % OF SHARES HELD as at 1st August 2022
1. Agria (Singapore) Pte Limited 33,463,399 44.33
2. BCA New Continent Agri Hldg. Limited (BCA) 8,993,305 11.91
3. HSBC Nominees (New Zealand) Limited 1,489,589 1.97
4. FNZ Custodians Limited 973,536 1.29
5. New Zealand Depository Nominee Limited 936,608 1.24
6. Forsyth Barr Custodians Limited 689,547 0.91
7. Accident Compensation Corporation 579,446 0.77
8. Custodial Services Limited 508,379 0.67
9. Nicolaas Johannes Kaptein 500,962 0.66
10. Citibank Nominees (New Zealand) Limited 493,956 0.65
11. JBWERE (NZ) Nominees Limited 470,443 0.62
12. Elizabeth Beatty Benjamin & Michael Murray Benjamin
(Michael Benjamin Family a/c)
300,000 0.40
13. H&G Limited 295,000 0.39
14. Totara Grove Investments Limited 280,000 0.37
15. Ian David McIlraith 230,000 0.30
16. David Mitchell Odlin 214,400 0.28
17. Leveraged Equities Finance Limited 204,217 0.27
18. Robert Vincent Cottrell & Lesley Maureen Cottrell 202,898 0.27
19. GMH 38 Investments Limited 200,000 0.26
20. Colin Hugh Notley & Jan Marie Notley 175,000 0.23

[percy]

11.295% stake.
Will they want more or just blocking ?
I would think they would want more.

[Snoopy]

SHAREHOLDER NUMBER OF SHARES HELD % OF SHARES HELD as at 1st August 2022
1. Agria (Singapore) Pte Limited 33,463,399 44.33
2. BCA New Continent Agri Hldg. Limited (BCA) 8,993,305 11.91


Ah thanks for that Percy. I hadn't realised that the time dated BCA shareholding disclosure in the Annual Report for FY2022 was ahead of the last disclosure to the NZX on 25th July 2022. This means that the number of PGW shares that BCA retains that are available for sale reduces to:

8,993,305 - 8,528,245 = 465,060, or 0.616%

It is quite likely they have already been sold, but the imminent substantial shareholding notice from BCA will confirm that.

The buyer, Elders of Australia, has been linked to takeover rumours swirling around PGW back in 2018.

https://www.afr.com/street-talk/elders-landmark-sowing-seeds-for-a-pgg-wrightson-takeover-20180509-h0ztt9

Subsequent to this the seed business part of PGW was sold. So Elders coming onto the share registry now makes more sense, because they were never interested in the seed part of the PGW business anyway. In relative terms, PGW would now be a smaller mouthful to swallow for Elders. They may not need a partner with which to structure such a deal.

Nevertheless a takeover of PGW would not be possible, without the agreement of defacto controlling shareholder Alan Lai, or Mr. Lai Guanglin, as he is more commonly known in Asia, and his now delisted company Agria holdings . So what has Mr Lai been up to of late?

It turns out that being the controlling shareholder of Hong Kong listed 'China Pipe Group Limited', he has just renewed a $US10m loan from that company.

https://www1.hkexnews.hk/listedco/listconews/sehk/2022/0422/2022042201592.pdf,

until 31st July 2025. This, plus the capital return on disposal of the seed business, should have strengthened the Lai/Agria finances to the point where he is under no pressure to sell that Agria PGW stake. But the 5.5% interest rate he has agreed to pay is above 'bank rates' in Hong Kong. Security for the loan is 20% of the shares in Agria Asia Investments Limited (AAIL) (p5 of above reference).

"AAIL is indirectly holding a share equity investment in an agricultural enterprise in New Zealand (which is PGW) through Agria (Singapore) Pte. Ltd. (“Agria Singapore”), the only and wholly-owned direct subsidiary of AAIL."

"According to (i) the latest consolidated management account of Agria Singapore for the nine months period ended 31 March 2022 and (ii) the latest unaudited consolidated financial statement of AAIL for the nine months period ended 31 March 2022 provided by AAIL:-

(a) the net assets value of Agria Singapore as at 31 March 2022 is NZD66.1 million (equivalent to approximately US$45.6 million);
(b) the net assets value of AAIL as at 31 March 2022 is approximately US$172.5 million."

The PGW share price closed at $4.43 on 31-03-2022. With Agria Singapore declaring a shareholding of 33,463,399 shares, this shareholding was worth:

$NZ4.43 x 33,463,399 = $NZ148,242,857.

Yet we are told the net asset value of Agria Singapore, which I believe holds PGW shares as their only substantial asset, is only $66.1m. If my maths is right, this indicates a substantial quantum of borrowed funds on the Agria Singapore balance sheet: $148.2m - $66.1m = $82.1m.

Of course over the last twelve months, PGW has paid a substantial dividend to Agria Singapore:

33,463,399x($0.14+$0.16) = $10.0m

That would be cashflow neutral or better to Agria Singapore, provided borrowing interest rates were less than: $10.0m/$82.1m = 12.2%. Since interest rates for borrowing by Mr. Lai Guanglin are well under that figure, it looks like dividends from PGW would have to halve before Mr. Lai Guanglin would come anywhere near any financial strain. Thus I see no need for Mr. Lai Guanglin to come under any pressure to accept a 'cheeky' offer for the PGW shares from Elders that he indirectly owns via Agria Singapore.

SNOOPY

[Snoopy]

The buyer, Elders of Australia, has been linked to takeover rumours swirling around PGW back in 2018.

https://www.afr.com/street-talk/elders-landmark-sowing-seeds-for-a-pgg-wrightson-takeover-20180509-h0ztt9

Subsequent to this the seed business part of PGW was sold. So Elders coming onto the share registry now makes more sense, because they were never interested in the seed part of the PGW business anyway. In relative terms, PGW would now be a smaller mouthful to swallow for Elders. They may not need a partner with which to structure such a deal.


There was a follow up to the announcement yesterday, at the Elders AGM today. From the Chairman's address:

"The business development pipeline for the coming year, is encouraging with numerous successful businesses expected to join Elders in the next 12 months and furthering our growth."

"As announced yesterday, to further our geographic diversification, we have also taken an 11.3% interest in PGG Wrightson Limited, the New Zealand based rural services business, which was acquired by private sale. Elders does not intend to initiate a proposal to acquire control of PGW, however it does support our diversification strategy as part of our pureplay agribusiness."

So 'no bid' is to be brought to the table for other PGW shareholders.

SNOOPY

[sb9]

There was a follow up to the announcement yesterday, at the Elders AGM today. From the Chairman's address:

"The business development pipeline for the coming year, is encouraging with numerous successful businesses expected to join Elders in the next 12 months and furthering our growth."

"As announced yesterday, to further our geographic diversification, we have also taken an 11.3% interest in PGG Wrightson Limited, the New Zealand based rural services business, which was acquired by private sale. Elders does not intend to initiate a proposal to acquire control of PGW, however it does support our diversification strategy as part of our pureplay agribusiness."

So 'no bid' is to be brought to the table for other PGW shareholders.

SNOOPY

Thanks for the update, while they may not immediately looking to acquire PGW, it takes away further selling pressure from their stake. We might see the sp get into $5 s range soon purely due to this transaction as it emphasizes long term potential of PGW.

[Snoopy]

"BCA New Continent Agri Hldg. Limited" is the Chinese government. The last declaration from these guys was on 25th July 2022, when their holding reduced from 9,758,714 shares (12.928%) to 9,000,915 shares (11.924%). The sale of 8,528,245 shares to Elders announced today means there are

9,000,915 - 8,528,245 = 472,670,

or just 0.626% of the shares in the company still in Chinese government hands. Or are they? I guess the imminent SSH declaration from "BCA New Continent Agri Hldg. Limited" will answer that question.


'Question answered' by the 16th December NZX announcement today. The 472,670 shares 'not acquired' by Elders were disposed of between 25 July 2022 and 24 August 2022 by selling on market at an average share price of:

NZ$2,090,424.15 / 472,670, = $4.42

So 'BCA New Continent Agri Hldg. Limited' have departed the share register completely. It is interesting to see that Elders paid a little less per share to acquire the remaining Chinese government shares ($4.35).

It was once said that western style investment managers like to shunt their shareholdings around on waves of greed and fear. Whereas the Chinese know how to recognise a good company, buy in, and stay as owners forever. So now we know how long 'forever' is. "BCA New Continent Agri Hldg. Limited" (actually their predecessor company) first appeared on the PGW share register as a 'substantial shareholder' on 17th April 2020. They exited the company on 16th December 2022. So "forever" = "two years and eight months".

SNOOPY

[Snoopy]

Memories of a misspent youth - spent many days at the Wrightsons Yearling Sales at Trentham. The days when Bart and Nelson would zillions on the beautiful young athletic horses. wrightsons were glamourous and prob made zillions themselves as well. In those days I didn't care about such things but Wrightsons meant something - oh no not a brand.

Well they stuffed that up and no longer run the premier sales in nz. Dabble in the harness horse bit though.

My grandad always raved on about how the man from Wrightsons helped him out with finance - all part of a good brand. But no more


The above post was from nine years ago, but you are still a horse man Winner? I noticed in the very fine print on AR2020 p39 that he PGG Wrightson standardbred division had been closed. The end of 100 years of history. No mention of this in the main text of the Annual Report. Not even an announcement to the NZX!

Now the 'Standardbred Division', part of Livestock, had the monopoly on selling harness horses in New Zealand. In fact, if you go to the half year report for the 2017 financial year, on page 7, there is a glowing write up on the business.

"While the organisation’s roots have been intertwined with the horse industry for over 100 years (back to the early days of the Canterbury Horse Bazaar and later through the Trentham Thoroughbred Sales) it wasn’t until 1987 that a Standardbred Division was established."

"The Standardbred Division specialises in the trading of harness horses. The team has a dedicated staff of five, collectively with over 125 years’ experience at PGW between them. They have provided a solid and consistent service delivery for 30 years and as a result they are well respected in the industry. Prior to 1987 there were seven organisations selling Standardbred horses throughout New Zealand, but since 1991 PGW have been the sole auctioneer to the industry."

Wow! That 'm' word I mentioned before. Monopoly means no competition. What a money spinner it must have been!

“The team experiences an unusual combination of excitement and angst on the three big days of the year. We need to get it right, or it impacts significantly on the annual performance of the division and so far we have. In the last 30 years, the team have catalogued and sold over 20,000 Standardbred horses."

"When our division started the pedigrees in the catalogue were handwritten, but over the last 30 years our team has developed an electronic database of Standardbred race records and pedigrees. This database is unequalled in the country, so we consider it one of our most valued assets.”

Two years down the track and this 'valuable asset' of race records and pedigrees became worthless!

I thought it must have been a Covid related thing. But the last sales under the PGG Wrightson yearly sales banner was on February 2018

https://www.aldebaranpark.com/pages/yearling-and-trotting-sales/2018-pgg-wrightson-yearling-sale-christchurch-new-zealand

And it looks like they only had one horse to sell - Aldabaran Tess! Looks like it was left to Mark 'the dude' Dewdney to shut the stable door after all his horses had bolted. Anyone have any idea what happened?

Those earthquakes we have been having in the North Island for the last few weeks Winner: Your old grandad, turning in his grave?

SNOOPY

[Snoopy]

No mention of this in the main text of the Annual Report. Not even an announcement to the NZX!

"The Standardbred Division specialises in the trading of harness horses. The team has a dedicated staff of five"

“The team experiences an unusual combination of excitement and angst on the three big days of the year. We need to get it right, or it impacts significantly on the annual performance of the division and so far we have. In the last 30 years, the team have catalogued and sold over 20,000 Standardbred horses."

"When our division started the pedigrees in the catalogue were handwritten, but over the last 30 years our team has developed an electronic database of Standardbred race records and pedigrees. This database is unequalled in the country, so we consider it one of our most valued assets.”

Two years down the track and this 'valuable asset' of race records and pedigrees became worthless!

The last sales under the PGG Wrightson yearly sales banner was on February 2018

https://www.aldebaranpark.com/pages/yearling-and-trotting-sales/2018-pgg-wrightson-yearling-sale-christchurch-new-zealand

And it looks like they only had one horse to sell - Aldabaran Tess!


Just in case anyone was wondering why I have become fascinated with, what is in the grand scheme of things, a small albeit (formerly) successful part of the Livestock business unit that no longer exists.....

PGW has changed a lot over the last five years, the most telling change being the selling off of the Seed business. Looking back over those years, I want to make an 'apples with apples' progress report. And that means, from a present day perspective, taking out historical cashflow streams that no longer exist under PGG Wrightson management today. This is why the 'secret' shutdown of horse trading back in FY2020 caught my attention.

Looking at the Consolidated Statement of Profit and Loss produces a slightly different picture to what I first thought (note that the 'discontinued operations' for the year in question relate entirely to Standardbred, even if you have to dive deep into other pages of the annual report to find this out):



Results from discontinued operations, net of income tax($0.371m)


plus gain on sale from discontinued operations, net of income tax$1.078m


equals Profit/(Loss) from discontinued operations, net of income tax$0.707m



So it does appear that in its last year of operation (admittedly encompassing the Covid-19 lock-downs) 'Standardbred' was losing money. It could be that the sale price of $1.078m for discontinued divisions was largely made up of money for that much trumpeted 'electronic database' as well as a gavel and an auctioneers stand. So maybe we shareholders did not lose out as badly as I thought.

The segmented result presentation, which separated out the 'Standardbred' division (AR2020 p41), was a bit strange: $0.707m of 'after tax net profit' on zero revenue. But then we learn on AR2020 p75 that:

"the comparatives have been restated to present the Standardbred business as a discontinued operation."

Does this mean the sales revenue for Standardbred as already been removed from the overall revenue presentation? I certainly hope so. Because I don't like my alternative explanation below.

It could be we had these five guys who only work for three days per year (that means 362 days off on this full time job every year, where do I sign up?) only had one horse to sell. And the horse didn't sell - hence no revenue was raised.

That means the operational loss for the year of $371,000 represented these five guys wages: $371,000/5 = $74,200 each after tax on average. Close enough to $100k each before tax I reckon. Those guys were on a good wicket, too good as it turned out. And that is why 'The Dewd' bolted the stable door on 'Standardbred'.

SNOOPY

[Snoopy]

FY2019 (iter. 1) (indicative forecast for FY2020)
FY2020 (as reported)


Cash On Hand
($1.160m)
($16.868m)


Short Term Bank Loans
$3.920m
$40.000m



add Long Term Bank Loans
$31.742m
$20.000m


add Net Defined Benefit Liability (Pension Plan deficit)
$5.883m
$9.838m


add Employee Entitlements
$16.821m
$13.960m


Total Bank and Worriesome Liabiliities {A}
$57.206m
$66.930m


NPAT + Impairment & Fair Value adj. {B}
$7.187m (i)$7.940m (i)


Minimum Debt Repayment Time {A}/{B} (in years)
7.968.43



Notes

Iteration i (Assuming Profits from Seed Sales paid through to Shareholders)

(i) Calculation of NPAT adjusting for 'Impairment & Fair Value' chnages (representing available cashflow for each year) is as follows:

FY2019: $4.000m+$3.187m = $7.187m
FY2020: $7.133m+$0.807m = $7.940m

------

My rule of thumb for the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

In terms of the ability to repay all debt, I would argue PGW is in its worst position since the GFC when it was bailed out by Alan Lai and Agria. Banks are being told to look upon their loans to business more kindly, so who knows how the bankers are reacting to PGW's position. But I can't see any adjective more suitable for describing PGW's debt position as 'high'.

To some extent this end of financial year debt position is artificially favourable, because it comes off a relatively buoyant first half, before the drought hammered the second half year into a loss. The long term weather outlook is more dry weather in the east of the country over the coming summer. That means up until December 2020, we might be looking with a calendar year with no net positive income for PGW.

In the 23rd July 2019 released document "Notice of Special Meeting and Explanatory Notes" outlining the proposed capital structure following the capital repayment, the forecast core debt level was to be between $25m and $50m (page 9). Taking the cash position in to account, that means we now have debt headroom of just:

$50m - ($40m + $20m - $16.868m) = $6.868m

This is not much. I would be fairly confident in predicting that as well as no final dividend for FY2020, there will be no interim dividend for FY2021 either. In my November 2019 review I said

"This is not a bond substitute."

No dividend for at least a year is a manifestation of that comment.


I made the above post in August 2020. My 'confident prediction' of 'no interim dividend' for FY2021 did not come to pass . It was 12.0cps. So a 'fail' for me on the predictive front, even though my bank account ended up taking an 'unexpected turn for the better' as a result of my 'failure'. So have I learned anything from this failed forecasting event?

The answer is yes. Whereas MDRT is a straightforward risk tool to use for trading companies, I feel it might be overstating the credit risk for financing companies. What is that you say? PGW is a rural services trading company is it not? Did they not sell off their finance arm to Heartland group a number of years ago? Well, yes they did, until they brought the finance business back by stealth under the new 'GoLivestock' (GoBeef and GoLamb) banner. Moving forward to FY2022, this new finance business is going from strength to strength with $66.109m of 'GoLivestock' loans on the books at the 30-06-2022 balance date.

$66.109m is an overstatement of the loan book on an annual basis. Livestock loans are seasonal. To get a representative loan balance over the year it is best to take an average of the three loan balance date points across FY2022 that we have: 30-06-2021 ($45.869m) , 31-12-2021 ($35.805m) and 30-06-2022 ($66.109m):

Averaged GoLivestock loan balance over FY2022: ($45.869m+$35.905m+$66.109m)/3 = $49.294m

We should note -in passing- that the interest earned on these 'GoLivestock' loans over FY2022 was $4.254m. Based on that averaged loan balance, this represents a gross return to PGW shareholders of:

$4.254m/$49.294m = 8.6%

That is a very nice little income stream for we shareholders. BUT -and here is my very important learning point- it is not the income on that loan that is taking the risk out of these loan transactions. It is the value of the livestock, that PGW still own, that is the security on this debt. This means that when we consider the debt risk we share holders face, we need to change the MDRT calculation from this:

MDRT = (Total Bank Debt) / (Declared NPAT)

to this

MDRT = (Total Bank Debt - Seasonally Adjusted 'GoLivestock' Debt) / (Declared NPAT - GoLivestock NPAT)

Effectively I am removing both the 'GoLivestock debt' and 'GoLivestock' income from the MDRT equation. Because the security of the 'GoLivestock' debt does not depend on the income earned from the livestock asset. The security of the debt is the livestock asset.

SNOOPY

[Snoopy]

BUT -and here is my very important learning point- it is not the income on that loan that is taking the risk out of these loan transactions. It is the value of the livestock, that PGW still own, that is the security on this debt. This means that when we consider the debt risk we share holders face, we need to change the MDRT calculation from this:

MDRT = (Total Bank Debt) / (Declared NPAT)

to this

MDRT = (Total Bank Debt - Seasonally Adjusted 'GoLivestock' Debt) / (Declared NPAT - GoLivestock NPAT)

Effectively I am removing both the 'GoLivestock debt' and 'GoLivestock' income from the MDRT equation. Because the security of the 'GoLivestock' debt does not depend on the income earned from the livestock asset. The security of the debt is the livestock asset.


Have a look at the 'Consolidated Statement of Financial Position' (AR2022 p50). There is a current asset there of 'Go livestock receivables'. $65.504m. This is not some bill that PGW needs to send their debt collectors around to hassle farmers over repaying. This book entry represents live animals 'down on the farm' that at some point will be rounded up and on-sold. The farmers that are looking after these animals are merely the guardians of these beasts that we shareholders own:

"the group retains legal title to the livestock until its sale" (from AR2022 p62)

These receivables are not loans taken out on cars that are depreciating by the day. They are not loans on holidays where the experience has been had and we are relying on the loan holder to keep sweating at their day job to repay it. These 'GoLivestock Receivables' are instead appreciating assets, carefully tended animals, entrusted to the care of farmers vetted by PGW itself. These are farmers that PGW know and have had successful business relationships with for several years.

There are some industry specific risks to consider. As an animal gains weight it generally becomes more valuable. But in a drought, where the animal sustaining capability of the land is reduced, there may be a sudden need to reduce the number of animals on farm. All of a sudden the freezing works are overwhelmed with stock and the price offered to the farmer 'per head' plummets (notwithstanding the animal weight). Add to that the 'storm risk' and the 'disease risk', which may account for some mortality among the stock being raised. But in general, even if a farmer is forced off their land (worst case), the farm itself still exists, bought by a new less leveraged farmer owner. So animals keep being bred, and keep needing to be fattened up. The 'fattening up' bit is what the 'GoLivestock' part of the PGW business supports. And the time frame for this aspect of farming is normally a few months, not years.




Debt Position PGW
EOFY2022


Cash On Hand
($4.676m)


add Short Term Bank Loans
$7.500m



add Long Term Bank Loans
$30.000m


add Net Defined Benefit Liability (Pension Plan deficit)
$2.126m


add Employee Entitlements
$24.643m



Total Bank and Worriesome Liabiliities
$59.413m



less Animal assets (annualised average)
($49.294m)


Total Net Debt
$10.119m



One tweak I might need to make on the above table is to put a 'fudge discount factor' on the value of PGW's animal assets. The above table is treating animals as 'cash in the bank' which might be a little optimistic. Then again that animal value is the value of the animal as bought at auction - not when it has been fed up six months down the track. So maybe I don't need any fudge factoring? I would welcome others comments on whether my overall picture of PGW debt is now more realistic. For me, accounting for the PGW animal assets in this way, puts the overall PGW debt picture in a new light. $10.119m of net debt sounds a lot better than $59.413m!

SNOOPY

[Snoopy]

Debt Position PGWEOFY2023


Total Bank and Worriesome Liabiliities$59.413m


less Animal assets (annualised average)($49.294m)


Total Net Debt$10.119m



For me, accounting for the PGW animal assets in this way, puts the overall PGW debt picture in a new light. $10.119m of net debt sounds a lot better than $59.413m!


The next task is to work out what the profit margin is on these GoLivestock loans. To work that out, we need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over FY2022 were $1.832m (AR2022 p55). Once again we will use our three time stamp data points to average the funds borrowed across the year.



Reference Date30/06/202131/12/202130/06/2022


Cash & Cash Equivalents($3.367m)($1.113m)($4.676m)


Short Term Debt$9.900m$18.000m$7.500m


Long Term Debt$0m$30.00m$30.000m


Total Net Debt$6.533m$46.867m$32.824m



=> Average Debt over Year = ($6.533m+$46.687m+$32.824m) / 3 = $28.681m

So the interest rate charged by the banks on the funds loaned was: $1.832m / $28.681m = 6.4%. We know from part 1 of this analysis that the return on funds loaned by PGW was 8.6%. The difference between the borrowed and lent loan rates, multiplied by the average GoLivestock loan balance is the NPBT earned by PGW from these GoLivestock loans:

(0.086-0.064)x $28.861m = $0.635m.

Of course it is likely that PGW earns a commission on the buying and selling of this animal stock via its own sale-yards as well. But such a commission would have been earned whether the animal stock was financed by PGW or not. It is the financing risk we are interested in here. It is only the $0.635m that is directly connected to that.

The $0.635m of profit earned on the funding aspect of the GoLivestock loans is taxable. The associated after tax profit figure was: 0.72 x $0.635m = $0.457m.

Now the declared profit for FY2022 was $24.286m. I would subtract from that the after tax effect of the impairment reversals on saleyards and the impairment reversal on the right of use assets related to the water business (AR2022 p54).

$24.286m - 0.72($0.414m+$0.695m) = $23.488m

We now have enough information to do our two alternative MDRT calculations

MDRT (old way) = (Total Worrisome Debt) / (Declared NPAT) = $59.413m/$23.488m = 2.53 years

MDRT (new way) = (Total Worrisome Debt - Seasonally Adjusted 'GoLivestock' Debt) / (Declared NPAT - GoLivestock NPAT)
= ($59.413m - $49.294m) / ($23.488m - $0.457m) = 0.44 years

------------------------------

My rule of thumb for the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

That means my revised modelling has seen PGW drop from what I had classed as a 'medium debt' company back to a 'low debt' company. And because PGW works in a turbulent sector like agriculture, this is good to see.

SNOOPY

[winner69]

Snoops …thanks for the memories re horse trading.

And there must still be few of those people still collecting their monthly pension payment courtesy of current shareholders

[Snoopy]

What’s the comparative for F19 after allowing for IFRS16




Have a look at AR2019 Note 29h Winner. Under IFRS16, operating expenses are expected to decrease by $21.4m. But interest charges are expected to rise by $6m and depreciation goes up by $16m. By my maths this equates to a change in 'Net Profit After Tax' if IFRS16 had been in force over FY2019 of:

0.72 x ( $21.4m - $16.0m -$6.0m ) = -$0.432m


I have made my Christmas season brain exercise puzzle, the task of taking IFRS16 out of the NPAT results at PGW. FY2019 was easy (see above). Unfortunately subsequent years are more opaque. The main problem is that unlike other companies I have looked at, lease expenses (the old rent) are not separately detailed in the cashflow statement. So we have to infer what these might be from other annual report entries.

Nevertheless the cashflow statement is useful in calculating post IFRS16 'rent'.




New Rent (added to finance expense)Old Rent (removed from operating expense)



Lease Amortisation & Impairment Post IFRS16 {A} (2)Financing Costs wrt Lease Payments Post IFRS16 {B} (2){A}+{B}IFRS16 adjustment to Operating Expenses



FY2019N/AN/AN/A$21.904m (1)


FY2020$17.586m$4.185m$21.771m$21.744m


5
FY2021$18.299m$4.036m$22.335m$21.722m


FY2022$18.873m$3.786m$22.659m$?m




Notes

1/ Figure for FY2019 is prior to IFRS16 being adopted and is explicitly stated to be 'Rental and operating lease costs' (AR2019 Note 3 'Other Operating Expenses'). Had IFRS16 been adopted for that year, I believe that same figure would have been declared as the 'IFRS16 adjustment to Operating Expenses'. (Note: Under IFRS16 operating expenses reduce, because the old 'rent' is re-stated in a slightly different form as a finance expense.)

2/ Figures from columns (A) and (B) are from the cashflow statements of the respective years.

3/ The 'Segment Report' 'Operating Segment Information' (right at the bottom of the FY2020 and FY2021 annual report's operating segment table) contains the IFRS16 EBITDA adjustment. That same number is labelled as 'other operating expenses', when presented under the "Impact of NZ IFRS16 Leases" explanatory note (AR2020 p37). If you then go to 'Note 3' where all the 'Other Operating Expenses' are optimised you will see a big drop in the 'Rental and operating lease costs' of approximately this amount ($21.744m) year to year. This is a strong hint that the $21.744m IFRS 16 adjustment to EBITDA for FY2020 is what accountants used to call 'rent'.

( Background IFRS16 replaced a single operating expense (rent) with two charges:
a/ The 'depreciation of a right of use asset'.
b/ An associated 'interest on lease liabilities' charge.

Over the length of each particular rent contract, this IFRS16 change is a net zero adjustment. However, on any particular year the 'preIFRS16' and post 'IFRS16' 'rent' are typically not the same number. )

The other net effect of IFRS16, reducing traditional operating expenses and creating new depreciation and interest charges, is that EBITDA increases (under IFRS16): The result reclassifying a traditional operating expense (rent) by financial instruments. (I believe it is reasonable to regard the EBITDA IFRS16 adjustment to 'other operating expenses' (AR2020 p37) as the old 'rent').

-----------

Inexplicably, PGW did not report and post a prior IFRS16 adjustment over FY2022. The way I see it, that means it is no longer possible to calculate what the PGW profit would have been prior to IFRS16 being introduced. And why does that matter? Because when considering banking covenants, the banks always remove the effect of IFRS16. And I think we shareholders should be allowed to evaluate our company the same way a bank does.

I would love it if I have misinterpreted the figures, regarding IFRS16, that PGW has produced (or not) for FY2022. Sadly, though, I feel I am correct :(

SNOOPY

[Snoopy]

New Rent
Old Rent





Post IFRS16 'rent' {A}
Pre IFRS16 rent {B}
NPBT adjustment to remove IFRS16 {A}-{B}
NPAT adjustment (assume 28% tax, use adjustment factor x0.72)



FY2019
N/A
$21.904mN/A$0.0m


FY2020
$21.771m$21.744m($0.027m)($0.019m)


FY2021
$22.335m$21.722m($0.613m)($0.441m)


FY2022
$22.659m$ ?m$ ?m$ ?m



Notes

1/ Rent has increased under IFRS16 reporting
=> NPBT has decreased under IFRS16 reporting
=> To restore NPBT back to where it was under the old accounting rules, you must 'add back' the difference in rent


SNOOPY

[Snoopy]

Time to reprise my 'snooping'. How does PGW go when subjected to Buffett's four investment selection tests?

1/ Top Three player in chosen market?

PGG Wrightson Limited (PGW) was formed in 2005, a result of a merger between two established agricultural supply service leaders: Wrightson Limited and Pyne Gould Guiness. However, the DNA of the operation goes back much further than this. Wright Stevenson & Company was established in Dunedin in 1868. Even they are a new boy on the block though, as Gould Beaumont & Co. had been founded in Christchurch as early as 1851.

Under the leadership of new CEO for FY2018 Ian Glasson, PGW has undergone a 'strategic review'. The review is to establish how much capital is required for PGW going forwards and how that capital might be supplied. This could include the divestment of certain business units. PGW is a diverse company. But the 'One PGW' motto of the previous CEO seems to have been dropped. The recognised business units are below:

1/ Merchandising (rural themed products) with 94 stores branded 'PGGW Rural Supplies' and 'Fruitfed Supplies'. Traditional competitors are 'NZ Farm Source', the rebranded RD1 (Fonterra owned) with 71 stores and Farmlands (a co-operative) with over 80 stores. There are others, but on a smaller scale to 'the big three'.

2/ Livestock Trading: PGW has NZs largest group of livestock representatives with 219 representatives across the country , handling 50%+ of transactions nationwide. The core market is sheep and beef cattle. But 'Livestock' will also sell dairy cows and deer velvet. The traditional saleyards are to be supplemented by a sophisticated on-line sales channel.

3/ Finance & Insurance: Commission agents for AON and Vero. Commission agents for Heartland Bank, under the 'PGW Finance' brand (owned by Heartland). PGW finance their own in house livestock transactions via their GO-beef and GO-lamb initiatives.

4/ Real Estate: Specialising in rural and small town properties. Together with Bayley's, PGW is one of the largest two players in what is a fragmented market.

5/ Water: PGW offer turf irrigation, for landscaping and sports use, along with their more traditional 'rural irrigation' and the bread and butter ongoing servicing work that tends to be higher margin. There is a wholesale side of the business too, supplying water and irrigation products. Turnover in FY2018 of $41m is substantial but well down on the FY2015 peak. This business is now loss making at EBITDA level. PGW stands out as a major national player in a fragmented irrigation market. (source: Kord Mentha Independent Appraisal Report section 3.4.2)

6/ Wool: PGW manages a substantial portion of the strong wool supply chain in New Zealand , from on farm procurement, freight and logistics through to sales (be they via auction, private sales, export (the Bloch & Behrens brand) and domestic). Higher value finer wool is marketed through the formerly associated NZ Merino Company. PGW sold their half stake to the growers co-operative in June 2011.

7/ Seeds: The largest seed producer in the Southern Hemisphere, with interests spread across New Zealand, Australia and South America. For seed and grain production PGGWs key competitor is Barenbrug. Barenbrug is a global seed business headquartered in the Netherlands that trades as 'Agriseeds' in NZ and 'Heritage' in Australia Seed and Grain Australian and South American businesses facing challenging climatic conditions over FY2018.

The bedrock of PGW seeds remains in New Zealand. The beachhead in Uruguay in particular is where PGW is building a strong presence. Building the business in neighbouring Argentina and Brazil looks to be the next step. Smaller acquisitions have been made in Australia in recent years.

Conclusion: Ticks the 'major player' (top three) criterion across all markets in which they operate. 'Pass Test'


Huge changes since the last time I looked at PGG Wrightson, The world class global seeds business has been sold to DLF Seeds A/S of Denmark. PGG Wrightson has retreated to a purely New Zealand based rural servicing organization. How does the 'new' PGW go when subjected to Buffett's four investment selection tests?

1/ Top Three player in chosen market?

PGG Wrightson Limited (PGW) was formed in 2005, a result of a merger between two established agricultural supply service leaders: Wrightson Limited and Pyne Gould Guiness. However, the DNA of the operation goes back much further than this. Wright Stevenson & Company was established in Dunedin in 1868. Even they are a new boy on the block though, as Gould Beaumont & Co. had been founded in Christchurch as early as 1851.

The sale of the seed business was a catalyst for a deeply self reflective review on what makes PGW a 'go to' supplier of choice. A key differentiating factor identified was the level of technical expertise that the PGW sales force possesses. PGW creates a 'synergistic circle' whereby sharing this technical expertise is a key to creating new sales opportunities.

The recognised business units are below:

1/ Merchandising (rural themed products) with 87 stores branded 'PGGW Rural Supplies' and 18 branded 'Fruitfed Supplies' (total Turnover $900m, after subtracting $50m for Water division turnover). Traditional competitors are 'Farm Source', the rebranded RD1 (Fonterra owned) with 68 stores (Turnover $23.423b-$22,955m= $498m) and Farmlands (like Fonterra, a co-operative) with 82 stores (Turnover $2,000m+). There are others, but on a smaller scale to 'the big three'.

2/ Livestock Trading: PGW has NZs largest group of livestock representatives with more than 180 representatives across the country, operating more than 50 sale-yard sites across New Zealand. The core market is sheep and beef cattle. But 'PGW Livestock' will also sell dairy cows and deer velvet. Saleyard business is conducted by farmers on site concurrently with PGW's in house on-line sales platform bidr®. Others in the NZ livestock trading game include "NZ Farmers Livestock" with more than 100 staff over 15 sale-yard sites, complete with their own web based trading tool: 'MyLiveStock'. Listed 'Allied Farmers' currently owns 67% of "NZ Farmers Livestock."

3/ Finance & Insurance: Commission agents for 'BrokerWeb Risk Services', a broker with access to multiple insurance companies.. PGW finance their own in house livestock transactions via their GO-beef, GO-lamb, GO-deer and GO-dairy-cow initiatives. PGW are nominally commission agents for Heartland Bank, under the 'PGW Finance' brand (owned by Heartland). However, with Heartland stating they want to reduce low margin rural relationship lending, and PGW itself making no mention of this arrangement in recent years, it could be that 'PGW Finance' is effectively being wound up.

4/ Real Estate: Specialising in rural and small town properties. Together with 'Bayley's Country' (82 listed on line, excluding development sites), a specialized sub-brand founded in 1999, PGW (439 properties listed on line) one of the largest two players in what is a fragmented market. "Property Brokers' is another provincially focussed real estate brand that currently has 177 rural properties for sale across New Zealand.

5/ Water: PGW through their 'Water Force' brand, have looked to diversify their business so as not to be dependent on dairy price cycles. 'Water Force', through the AIS (Advanced Irrigation Systems) sub brand, offer turf irrigation, for landscaping and sports use, to sit alongside the more traditional 'rural irrigation' and the bread and butter ongoing servicing work that tends to be higher margin. There is a wholesale side of the business too, supplying water and irrigation products. Turnover in FY2018 of $41m is substantial but well down on the FY2015 peak. No separate disclosure of turnover or profitability has been published since FY2018. What we do know is that the business has been restructured to lower its cost base, and Covid-19 supply chain issues are continuing. PGW stands out as a major national player in a fragmented irrigation market. (source: Kord Mentha Independent Appraisal Report section 3.4.2)

6/ Wool: PGW , manages a substantial portion of the strong wool supply chain in New Zealand, from on farm procurement, freight and logistics via four large warehouses, through to sales (be they via auction, private sales, export (the Bloch & Behrens brand) and domestic). Higher value finer wool is marketed through the formerly associated NZ Merino Company. PGW sold their half stake to the growers co-operative back in June 2011. But pricing for cross bred wool in an already depressed market - slowed further by Covid-19 - continues to be challenging. From AR2021 p23: "We anticipate an increasing shift from synthetics to natural fibres, which will ultimately result in stronger returns for our growers." I certainly hope so. But is hope a viable investment strategy?

Conclusion: Ticks the 'major player' (top three) criterion across all markets in which they operate. 'Pass Test'

SNOOPY

[Balance]

Thanks Snoopy.

Happy holder here and glad indeed that a takeover at $3.50 did not happen when PGW sp was $2.75!!!!

[mike2020]

I have always liked the company but I do feel the next results won't thrill, the last one's didn't. My reasoning is the RE division will be down and quite possibly the retail side as well with farmers under huge cost pressure. I would expect the company to have expenses rising as well.
I would rather be in than out but I am expecting a bit of a down cycle which was showing on the last results.

[Snoopy]

I have always liked the company but I do feel the next results won't thrill, the last one's didn't. My reasoning is the RE division will be down and quite possibly the retail side as well with farmers under huge cost pressure. I would expect the company to have expenses rising as well.
I would rather be in than out but I am expecting a bit of a down cycle which was showing on the last results.


I can't help but agree with you Mike2020. The rural real estate business is a bit feast or famine. The one saving grace is that rural land is valued by the income that can be earned from it. So as long as commodity prices hold up, the price of the land producing those commodities should hold up too.

Labour cost pressure is an issue for all companies in a inflationary environment, But as of two years ago, PGW had a policy of paying all employees the 'living wage'. I guess the living wage has gone up since that time. But it should mean the wage cost pressures are not as intense, in the short term at least, as those companies with many workers on the minimum wage.

I concur with your comments that FY2023 may be a the start of a 'down cycle'. But the thing I like about PGW is their exposure to a wide range of farming commodities: Dairy, beef, lamb, fruit - including the prized kiwifruit-, and other field crops like wheat and forage. In my experience it is very rare for all commodities to sink to a low price point at the same time. So PGW sales have a built in cross commodity 'averaging effect' across different commodity cycles. I never try to predict what the individual commodity cycles are. Instead I 'react' to expected low commodity prices, and use such situations as an opportunity to add to my PGW shares cheaply. I have been on the Wrightson (as it was then) share register since 1995 in a small way. However around 2014 was when I got serious about it. My average buy in price is $1.78, plus useful divvies in most years along the way. So I guess you could say my strategy is working ;)!

SNOOPY

[Snoopy]

EBITDAadd Associate Profitless D&Aless Net Interestless Income Taxequals NPAT
less Property salesequals Adjusted NPAT {A} No. Shares on Issue {B} eps {A}/{B}


FY2014$58.747m$2.521m$11.242m$6.262m$8.472m$35.312 m
$35.312m754.8m4.7c


FY2015$69.500m$0.181m$7.948m$7.921m$16.172m$37.640 m
$0.960m$36.680m754.8m4.9c


FY2016$70.181m$9.170m$9.016m$8.832m$43.163m
$4.990m$38.173m754.8m5.1c


FY2017$64.499m$10.733m$6.540m$10.428m$36.728m
$8.740m$28.058m754.8m3.7c


FY2018$70.174m$12.974m$9.986m$12.460m$34.754m
$1.700m$33.054m754.8m4.4c



Notes

1/ (New) I have looked at the 'Interest- Finance Income and Expense' note (7 in AR2018) and removed the foreign exchange effects when calculating the net interest bill.
2/ I have removed the contribution of property sales from the result as these are not indicative of operational performance.
3/ Associate profits are included in Operating EBITDA from FY2016 forwards.

After trending upwards for the first three years of our comparative periods, there was a sharp drop in normalized profit in FY2017, after which there has been just a partial recovery. Normalised profit is lower than five years ago.

Conclusion: Fail Test


There is only one 'crossover year' (FY2018) in the above referenced post with this one. However results for FY2018 in this post have been restated to include only those from the NZ based farm service business. The seed business, now sold, has been removed from the profit figures in this post.





Profit Normalisation table
FY2022FY2021FY2020FY2019FY2018
Reference


Declared Profit
$24.286m$22.720m$7.133m$4.510m$9.004m


less (add) Fair Value Gains (Losses) net of Impairments
0.72x$2.182m0.72x($1.832m)0.72x$0.807m0.72x$3.187m 0.72x$1.086m
AR Note 5


less (add) Foreign Exchange Gains (Losses)
0.72x($0.430m)0.72x$0.094m0.72x($0.178m)0.72x($0.8 12m)
0.72x$1.035m
AR Note 6


less (add) Standardbred Business Profit (closed business unit)
($0.707m)Post 5341


less (add) IFRS16 adjustment
0.72x($0.613m)0.72x($0.613m)0.72x($0.027m)
Post 5347


less (add) Non operating gains (losses)
0.72x($0.699m)0.72x($4.456m)0.72x($0.132m)0.72x$2. 170m0.72x$7.024m
AR Note 4


equals Normalised Profit
$24.603m$17.819m$7.471m$7.782m$14.881m





Notes

1/ I don't believe there is sufficient disclosure in AR2022 to allow us to calculate an IFRS16 profit adjustment for FY2022. In the absence of this, I have rolled forward the IFRS16 adjustment for FY2021 into FY2022, assuming it to be the same.
2/ Earnings per share calculations (below) have been adjusted to take into account the 9th August 2019 10:1 share consolidation, reducing the number of shares on issue to 75.484 million.


Earnings Per Share Calculations

FY2018: $14.881m / 75.484m = 19.7c
FY2019: $7.782m / 75.484m = 10.3c
FY2020: $7.471m / 75.484m = 9.9c
FY2021: $17.819m / 75.484m = 23.6c
FY2022: $24.603m / 75.484m = 32.6c

The extraordinary drop in profits between FY2018 and FY2019 had me diving back to my FY2019 annual report to see what went wrong.

From AR2019 p5.
"Reflecting on FY2019, we believe it was one of the most operationally challenging of recent years. Farmer confidence in parts of the agriculture sector remains subdued, constraining farm spending and therefore our revenue for the year. This has also been evident in recent months with a discernible tightening of the credit environment"

From AR2019 p6:
"The impact of mycoplasma bovis (present in NZ since mid-2017) was felt across the livestock and rural supplies business. Most particularly with reduced dairy herd settlements, a reduction in tallies, a softening in demand for dairy beef and and a more cautious approach to spending in the dairy sector across a range of farm inputs."
"Market conditions continued to challenge both our Real Estate and Wool businesses with results down on last year."

That all seems like a reasonable 'excuse'. But I guess it reflects the view that when the dairy industry catches a cold, it is hard for the rest of the farmers in NZ in other sectors to make up the lost income. Two down years in a row is enough to sink this test result.

Conclusion: Fail Test

SNOOPY

[Snoopy]

ROE here is defined as: (Adjusted NPAT) / (End of Year Shareholder Equity)

FY2014 : $35.312m/ $269.7m = 13.2%
FY2015 : $36.680m/ $267.4m = 13.7%
FY2016 : $38.173m/ $274.3m = 13.9%
FY2017 : $28.058m/ $289.7m = 9.7%
FY2018 : $33.054m/ $287.5m = 11.5%

Conclusion: Fail test


ROE here is defined as: (Adjusted or Normalised NPAT) / (End of Year Shareholder Equity)

FY2018: $14.881m / ($123.7m + ($292m-$234m)) = 8.19%
FY2019: $7.782m / ($398.264m-$234.000m) = 4.74%
FY2020: $7.471m / $156.702m = 4.77%
FY2021: $17.819m / $173.538m = 10.3%
FY2022: $24.603m / $172.684m = 14.2%

Notes

1/ A retrospective balance sheet for FY2018, assuming the Seed Business was already sold at the 30-06-2018 balance date, was prepared in the Korda Mentha October 2018 report (p36, p49). This provided a view of what a stand alone balance sheet for the PGW rural servicing business would look like. This was based on a projected capital return, following the purchase of the seed business by DLF Seeds A/S of Denmark, estimated at $292m. In fact the capital return would end up being only $234m. The difference between these two capital return numbers - equalling capital not paid out - I have added to shareholders equity as at 30-06-2018 for the purpose of calculating return on the total equity for FY2018.

2/ The $234m capital return eventually took place in FY2020, on 09/08/2019, following the settlement of the 'seed deal' on 01/05/2019. These two dates straddle the PGW end of year reporting date of 30-06-2019. A capital return was well signalled. So I believe it would be most representative to remove the capital return from the shareholder equity held on the books at the 30-06-2018 balance date for the purposes of making a 'Return on Equity' calculation.

An interesting observation to note is how far the return on equity figure has fallen in 2018, as the transition to the 'new PGW' was made in divesting the seeds business. The seeds business was where most of the intellectual property of PGW was held. And successfully exploiting intellectual property will generally yield a higher commercial return on assets than selling commodities. Given this, it is no surprise that the ROE over 2018 has dropped with the removal of the seed division. But it is quite sobering to see ROE almost cut in half!

None of the above makes a difference to the 'Buffett ROE picture', as ROE is consistently below the 15% goal for all years under consideration. But given the sharp improvement in the fortunes of the PGW rural servicing business over the last couple of years, I do wonder how high the ROE would have risen if the seeds business had not been sold.

Conclusion: Fail Test

SNOOPY

[Snoopy]

This test does not mean that PGW will always be able to raise margins above the rate of inflation. But it does mean that under certain market conditions it can, thus avoiding an eventual commodity price spiral to the bottom. The revenue associated with the now sold finance division has been removed from the appropriate years

Margin here is defined as: (Adjusted NPAT)/(Sales)

FY2014 : $35.312m/ $1,219m = 2.89%
FY2015 : $36.680m/ $1,203m = 3.05%
FY2016 : $38.173m/ $1,182m = 3.23%
FY2017 : $28.058m/ $1,133m = 2.48%
FY2018 : $33.054m/ $1,194m = 2.77%

Three years of improving margins from FY2014 to FY2016 inclusive shows that sustained margin improvement is possible.

Conclusion: Pass Test


This test does not mean that PGW will always be able to raise margins above the rate of inflation. But it does mean that under certain market conditions it can, thus avoiding an eventual commodity price spiral to the bottom. The revenue associated with the now closed down Standardbred division has been removed from the appropriate year (FY2018).

Margin here is defined as: (Adjusted NPAT)/(Sales)

FY2018: $14.881m / ($808.695m - $10.421m) = 1.86%
FY2019: $7.782m / $798.834m = 0.974%
FY2020: $7.471m / $788.036m = 0.948%
FY2021: $17.819m / $847.815m = 2.10%
FY2022: $24.603m / $953.700m = 2.58%

Notes

1/ AR2020 p35 states "The 2019 comparatives have been restated to represent the 'Standardbred' business as a discontinued operation. Now we know that in AR2019 overall revenue was listed as $809.965m. The restated comparative figure for FY2019 was $798.834m. So I am making the assumption that the comparative difference:

$809.965m - $798.834m = $10.431m

represents the turnover of the now closed 'Standardbed' operation over FY2019. The turnover for 'Standardbred' over FY2018 has not been revealed. But as a best guess I am assuming it was the same as over FY2019.

------------------------

Three years of improving margins from FY2020 to FY2022 inclusive shows that sustained margin improvement is possible.

Conclusion: Pass Test

SNOOPY

[Snoopy]

The table below reflects the dividends actually paid during the years in question.



Year
Dividends Paid 'per share'Sub TotalPGW Rural Servicing Normalised Earnings 'per share'


FY201820.0cps + 17.5cps37.5cps19.7cps


FY201912.5cps + 7.5cps20.0cps10.3cps


FY20207.5cps + 9.0cps16.5cps9.9cps


FY20210.0cps + 12.0cps12.0cps23.6cps


FY202216.0cps + 14.0cps30.0cps32.6cps



Total FY2018 to FY2022 inclusive116.0cps96.1cps



Notes

1/ For FY2018 and FY2019 I have adjusted the 'dividends per share' and 'earnings per share' to be consistent with the subsequent 10:1 share consolidation,

----------------



Discussion: What is a sustainable business cycle dividend range from 'the new PGW'?

The farming years from FY2018 to FY2022 certainly cover a business cycle. But that time period also spans perhaps the most significant restructuring ever of PGW itself. What insight into future farming cycles might we take from this historical earnings and dividend record? Because PGW is such a mature business, the past can reflect on the future. I think it is best to examine what has happened 'year by year'.

FY2018 (Ending 30th June 2018)
The acquisition of PGG Wrightson's seed division by DLF seeds of Denmark was announced on 5th August 2018. However, it is safe to assume that preliminary negotiations were going on for months before that. Nevertheless the dividends paid over FY2018 would have been from the old PGW 'combined business'. For this pre-split PGW business over FY2018 (see post 5352, referred post), I would consider 'eps' to be:

$33.054m / 75.483m = 43.8cps

Earnings of 43.8cps would see the actual dividend paid over FY2018 of 37.5cps well covered. But such earnings will not be coming PGWs way in the near future. So it would not be reasonable to expect the level of dividend paid over FY2018 to be indicative of any future dividend payments.

FY2019
Re-reading the Chairman's and CEOs commentary for FY2019 (AR2019 p5), much is made of the $138.1m NPAT (even though only 5.6% of that - $7.782m, or 10.3cps - was from continuing normal operations). There must have been considerable reserve in the imputation credit account to allow for the annual dividend paid over FY2019 to be nearly twice the continued operating earnings figure! How was this even possible? It may have just been prudent management using up any imputation credits previously accumulated by the seeds division and set to expire when its controlling shareholder changed. Furthermore, it may have been that some of the funds that were on the books for FY2020's 'capital repayment', (the capital repayment that eventually ended up being less than forecast), were instead directed towards a higher dividend over FY2019 than any reasonable shareholder might expect (A $7.32m cumulative higher dividend based on continuing operational profitability). My conclusion, given that actual dividends paid were nearly four times remaining operating earnings, is: "As a 'forward indicator', the actual dividends paid over FY2019 should be ignored."

FY2020
It is disappointing to see a small pull back on net profit margin over FY2019. But this could be explained by the higher holding costs associated with getting more stock in earlier to try and get around Covid-19 induced supply chain issues. This means I am not convinced a new downtrend in net profit margin has started.

This year saw a big improvement in operational cashflow. Included in that is a $15m (or 19.8cps) turnaround in the trade creditor balance (AR2020 p63). Perhaps this is what gave the company the confidence to pay yet another dividend well in excess (+67.7%) ahead underlying earnings? I am not sure where the imputation credits to cover the hyper dividends of FY2020 came from. The Agria friendly board has been very assiduous in extracting as much cashflow as they can from PGW over the years: fully imputed dividends matching profits. So it seems very unlikely that, since Agria became a controlling shareholder, a stash of unused imputation credits at PGW has been building up over an extended time frame - particularly so given the previous years apparent 'clear out of imputation credits'. How to explain it then? Perhaps there was some clever part of the seed division sale deal where new imputation credits were generated on the sale of seed stock to DLF seeds of Denmark's NZ Branch? That explanation sounds contrived. But when more likely explanations are eliminated, then the less plausible explanations are what remain. I am happy to be proved wrong, if someone can come up with a better explanation of where all of those excess imputation credits to fill out the hyper FY2020 dividends came from! Nevertheless, my conclusion is that FY2020 was also a financial outlier in terms of indicating where future dividends might go.

FY2021
In this 'new era of PGW' (i.e. after shedding the seeds division), there were only two years, FY2021 and FY2022, where earnings exceeded dividends. FY2021 ended in June 2021. So the first half of FY2021 covered the second half of CY2020. CY2020 was the year New Zealand went into 'Covid panic'. The pandemic arrived in New Zealand in early 2020, with Major Alert Level 4 restrictions imposed on 30th March. By that point PGW had already committed to their April 9th 2020 dividend, paid for by payments from farmer customers and already in PGW's bank. However, as 2020 progressed, logistical concerns of getting NZ farm product to international markets became a real concern. PGW became 'conservative' (rightly so IMO) and did not pay their customary October (2020) dividend. Dividend payments were back on stream by April 2021, as it became clear that even in a Covid-19 affected world, international buyers were prepared to 'pay the freight' for quality NZ farm produce. This explains why FY2021 was an 'outlier' in terms of the extra low 'dividend payment ratio'.

FY2022
The dividends paid during FY2022 represent the recent high water mark in operational earnings, and are certainly sustainable if profits hold up. The cyclical nature of farming though, would suggest that the FY2022 'good times' may not last forever. Nevertheless as a portent of future 'good times', I believe the FY2022 level of dividend is indicative.

Conclusion
Only the FY2022 dividend payments qualify as future dividend indicators. In the past, in exercises like this, I have used all of the previous five year dividend payments as 'future dividend indicators'. That was using the assumption that management generally know more than we shareholders, and could 'look through' any unusual single year events to provide a smoothed multi-year dividend stream. However, if you read through some of the individual dividend report years above, there are events that have happened that cannot be 'looked through'. In this special instance I propose to use historical earnings, rather than historical dividends, to forecast future dividend payments as part of a 'capitalised dividend valuation' model.

SNOOPY

[Snoopy]

Underlying NPAT for FY2019 was $10.987m (my post 4642) based on EBITDA of $28.725m. That is equivalent to eps of 14.6c. Dividend over the last year was the equivalent of 15cps. So dividends are already greater than underlying earnings, albeit 'in the ballpark'. If EBITDA rises to something above $30m that corresponds to an EBITDA increment of $1.175m. If all of that flows through to profit, then the incremental eps is:

($1.175m x 0.72) / 75.484m = 1.1cps

The forecast increase in interim dividend from 7.5cps to 8cps will be covered by this. As will an increase in final dividend to the same. So no real news in this mornings announcement, except that it looks like all earnings will be paid out as dividends into the future. The influence of Agria continuing?

It is a mathematically dodgy thing to do to extrapolate from a small number of data points. But if we take last years dividend of 15cps and link that in to a possible dividend of 16cps for FY2020, that makes for a 15.5cps average. If I use my pre-established gross required yield for this company of 8.5%, we can calculate a 'gross dividend capitalised valuation' of PGW as follows:

15.5c/ (0.72 x 0.085) = $2.53

That is fairly close to where the company is trading right now. The MDRT threat that I outlined in 4657 is real. But it will only become apparent if interest rates start to rise again. And as Stephen Guerin has announced a new lower more competitive interest rate he has negotiated with the banks, he has effectively kicked this 'debt threat' down the road.


The above quoted post is based on the FY2019 dividend viewpoint. As per the previous post (5355), I have now reverted to past earnings to give us the best forecast of a 'capitalised dividend valuation' from here going forwards.

The five year earnings per share average for FY2018 to FY2022 inclusive is: (19.7c+10.3c+9.9c+23.6c+32.6c) / 5 = 19.2c

The capitalised dividend required rate of return I have selected is 8.5%. I believe that this is appropriate for a retailer with a relatively weak moat that services a set of customers at the mercy of the weather gods. This means my 'fair value' centre of business cycle valuation is now:

19.2c / (0.72 x 0.085) = $3.14

At $3.14, PGW would be on a normalised historical PE of 314/32.6 = 9.5. That sounds about right for a no growth high yielding share. However PGW closed on the market today at $4.49. That implies of PE of: 449/32.6 = 13.8. Yes I know the share price has traded a whole dollar higher than this within the last twelve months. But $4.49 does seem a lot of money to pay for an agricultural share riding into the high of a business cycle wave.

My 'rule of thumb' is to both add and subtract 20% from the centre of business cycle valuation, to get an idea of where the share price should sit as the business cycle fluctuates.

Upper Cycle Value: $3.14 x 1.2 = $3.77
Lower Cycle Value: $3.14 x 0.8 = $2.51

I notice one area of agriculture where PGW do not have much of a presence is forestry and logging. But if one shareholder were to start chopping at that $4.49 share price and another shareholder cried 'timber', could that be the start of it?

SNOOPY

discl: Still holding, and thinking about what to do.

[Snoopy]

“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.

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.


Interesting speculation from me 2.5 years ago, questioning the reasons for Chinese Government interest in PGW. Elders have quite recently bought the Chinese government stake and are now on the PGW share register at $4.35 (although $4 was judged too high a price for Elders to pay back in 2018). The Chinese government are now out of PGW for quick profit of more than $1.50 per share in just 2.5 years. So which side was a winner on this deal? Reprising the international comparative valuation exercise drawn up by KordMentha in October 2018 - using 2022 values - might give us a clue.

I have redone the figures for PGW and its nearest Australian equivalents, Elders (Australia) and Ruralco (Australia). In the case of 'Ruralco', the comparison is not so straightforward because it was taken over by Canadian multinational Nutrien on 30th September 2019. Nutrien is the world's largest provider of crop inputs and services, and own their own production facilities. Nutrien produce 27 million tonnes of potash, nitrogen and phosphate products for distribution world-wide. But Nutrien's multi-nationally scattered ''rural serving distribution outlets" (the equivalent of the PGW business) made up only 16% of turnover in 2021. So Nutrien is not strictly comparable to PGG Wrightson, Elders, or indeed Ruralco before it was absorbed. More sales emphasis on undifferentiated commodities would suggest lesser earnings multiples at Nutrien might be expected. Readers should bear this in mind when looking at the comparative ratio multiple numbers.

To enable a more suitable comparison between 2018 and 2022, I have adjusted the 2022 EBITDA and EBIT figures for all three protagonists back to what they would have been had IFRS16 on property leases not been introduced.



Comparable Companies



Year
CompanyShare Price
Enterprise ValueEBITDAEBITDA multipleEBITEBIT multiple


2018Ruralco (Australia)$A2.82
$A425m$A67.5m6.3x$A54.5m7.8x


2022Nutrien (Canada)$C100.66
$C64.02b$C11.63b5.2x$C10.75b6.0x


.
2018Elders (Australia)$A6.34
$A780m$A75.7m10.3x$A71.6m10.9x.


2022Elders (Australia)$A9.91
$A1,712m$A268m6.4x$A229m7.5x


2018PGG Wrightson (NZ)
$NZ2.60
$NZ212.7m$NZ34.5m6.2x$NZ19.5m10.9x


2022PGG Wrightson (NZ)
$NZ4.49
$NZ371.7m
$NZ44.49m8.4x$NZ33.86m11.0x



Notes

1/ Enterprise Value = Market Value + Total Debt - Cash. The market value must be taken at a particular date. For the 2018 valuations, this date was 23rd August 2018. For the 2022 valuations the date was 13th January 2023. 'Total Debt' and 'Cash' are items from the respective balance sheets.

a/ For Elders this was 30th September,
b/ For PGG Wrightson this was 30th June
c/ For Nutrien I have used information from the third quarter report, 9 months ending 30th September. This includes a forecast EBITDA for the whole year of between $C12.2m - $C13.2m (I picked the middle $C12.7m before IFRS16 adjustments).
d/ For RuralCo (now delisted) this was 30th September.

2/ Earnings (EBITDA, EBIT) and payments (Interest on leases and capital repayments on leases) accumulated over a year used to construct the above table are from the respective annual reports. The exception being Nutrien where I have used the nine month figures and annualised those by taking the previous full year result and subtracting from that the previous year's nine month result and adding that difference.

3/ EBITDA multiple = Enterprise Value / EBITDA

4/ EBIT multiple = Enterprise Value / EBIT

5/ Figures for PGW for 2018 have been altered to remove the (subsequently sold) seed division from the capital and earnings figures.

---------------------



Discussion

With the exception of the Elders EBITDA multiple in 2018, PGW sits at the top of the multiple class. What happened at Elders over FY2018? 2017 was a drier than average year for much of inland Queensland, most of New South Wales, eastern and central Victoria, and all of Tasmania. So with gross underlying earnings looking to go lower, there can be a situation where present day market multiples become high as shareholders anticipate a recovery. This may explain the 10.3xEBITDA multiple that the market was prepared to pay for Elders shares in August 2018, approaching the 30-09-2018 balance date. By contrast, Ruralco (on only a 6.2x EBITDA multiple), and also Australia based, claimed in their annual report for 2018 that with diversification into Western Australia and more emphasis on 'water products', they were able to grow profits (+12%) in a drought year. When you are 'on a roll' in an ultimately cyclical market, it follows that Mr Market will not pay a high multiple for your shares.

There are a couple of reasons that I can think of to explain why Mr Market seems OK with paying a high multiple for PGW shares, both connected to the valuation reference dates. The first reference date of 20-08-2018 was only a couple of weeks after the announcement of the sale of the seed division on 06-09-2018. So the expectation of a significant capital payout would be at the front of share buyers minds. Likewise the second reference date of 13-01-2023 was only a month after Elders took over the Chinese Government stake on 14-12-2022. Such a chunky share transfer always brings with it rumour of perhaps more corporate activity, and speculative shareholder interest. Personally, I am not anticipating more corporate activity (see my posts 5336 and 5337 for an explanation). More generally PGW have been riding the farming 'headline trend' since Covid-19. Other global farmers struggle to replicate in efficiency, quality and 'greenness' of technique, of the produce from NZ farms. And PGW has become very good at servicing our farmers.

In summary, there are lots of reasons to like PGW, particularly when stacked up against other rural service providers. But is it 50% better than the others, as suggested by the FY2022 EBITDA multiples? NZ investors today who can take full advantage of the NZ dividend imputation system:

PGW historical gross yield = ($0.16+$0.14) / ($4.49 x 0.72) = 9.3%

would have no obvious reason to sell out of share with a gross yield like that. But is this kind of gross yield sustainable? Read my post 5355 again, looking at the commentary on dividend payments back beyond two years. I have a lot of respect for the way PGW as a company is run. But successful investing is all about buying into a good company at a good value price. When taking a broader multi-year view, I think PGW could be a value trap at $4.49. I think it is the Chinese government who came out looking smart on the sell side of this share sale deal to Elders.

SNOOPY

[Snoopy]

We cannot apply a Warren Buffett style growth model to valuing PGW because it has failed:

a/ test 2, the increasing 'eps' year on year test AND
b/ test 3, the 'Return on Equity' test.

These failures are not unexpected as these are tough hurdles for companies that must

ai/ weather the effects of the weather (sic) AND
bi/ carry a high level of stock and sell that stock a relatively low margins to pass. The risk here of having a large amount of stock on hand that spoils or must otherwise be heavily discounted below cost is very real in companies that sell commodities.

This doesn't necessarily mean that one should avoid PGW as an investment though. It means that you should probably use a more conservative evaluation method. The method I prefer in these circumstances is an (at least) five year average of dividend flows, with the underlying assumption of a steady rather than a growing market. This is otherwise known as the 'Capitalised Dividend Valuation Method'. Luckily for you readers I have already done this (my posts 4310 and 4311).


Multi-year trend results show a creditable rise in return on shareholder equity (test 3). This is particularly so over FY2022, when international logistics issues required higher than normal product stocking rates to ensure supply. Nevertheless the improvements fall short (albeit tantalizingly close) to the minimum Warren Buffett return on equity target. This means, in practice, that when farmers suddenly snap their cheque books shut, PGW will likely struggle to clear any 'surplus stock' at a profit. Hence the predictability of profit, so crucial for longer term Buffett style profitability forecasting, goes out the window. Normalised earnings per share was trendless, resulting in failure at Buffett test 2. None of this undermines the other business strengths which saw solid pass marks in Buffett tests 1 and 4. But it does mean alternative 'non-Buffett' ways to value this business will likely yield better results.

Capitalised dividend valuation is conservative (a zero growth assumption model) that makes the current share price look satisfactory, based on current dividend payout rates. Less so when you back track out the 'seed division sale hype' from earlier dividend payments made in the business cycle.

The PGW business is currently rated at the top of valuation metrics in relation to international peers, which is justified because NZ farmers never have down cycles - farm profitability always goes up every year. La Nina weather from here on in means more moisture in eastern NZ and no more drought. NZ has come out of climate change as the only global perpetual winner - a miracle country in fact. And my nose hasn't grown that much longer in telling you this. For those who 'believe this story', then at any price under $4.50 per share, PGW looks cheap. But for me PGW is a well managed company that Mr Market is currently pricing too highly.

Yes we are well down on our highs of over $5.50 from early in calendar year 2022. But I believe those were freak prices, based on an almost zero background interest rate outlook. The Chinese government 'smart money' has exited at a share price lower than today's. The new PGW chairman Joo Hai Lee has already lowered EBITDA expectations from $67.2m in FY2022 to $62m over FY2023, - a 10% fall. That 18th October 2022 announcement saw the PGW share price slip to under the $4 level, before rising again towards $4.50 - apparently based on 'corporate activity' expectations. For those of us who don't hold those corporate activity expectations, there is a good chance that PGW priced at $4.50 is currently a dividend trap. Consequently any share price strength that might happen into the expected late February first half year profit announcement might be an opportune time for overweight shareholders in PGW to reduce their holdings. I intend to do so, should that opportunity arise.

SNOOPY

[Snoopy]

Moving forward to FY2022, this new finance business is going from strength to strength with $66.109m of 'GoLivestock' loans on the books at the 30-06-2022 balance date.

$66.109m is an overstatement of the loan book on an annual basis. Livestock loans are seasonal. To get a representative loan balance over the year it is best to take an average of the three loan balance date points across FY2022 that we have: 30-06-2021 ($45.869m) , 31-12-2021 ($35.805m) and 30-06-2022 ($66.109m):

Averaged GoLivestock loan balance over FY2022: ($45.869m+$35.905m+$66.109m)/3 = $49.294m


One thing I am not sure I made clear when discussing 'GoLivestock' before is that on the balance sheet 'GoLivestock' is listed as an asset. That is because PGW retains ownership of the animals in the 'GoLivestock' scheme. So those 'GoLivestock' assets on the balance sheet really are live animals. However, this is where things get a little complicated. These animals are 'loaned' to farmers all around the country in the expectation that they can be fattened up, sold and the initial capital (dollar value of the animals delivered to the farmer) will be recovered, plus a 'financial loan fee'. You can think of the 'financial loan fee' as 'interest paid' on the (animal) capital borrowed.

Now go one step further back. Where did PGW get the money to buy the animals in the first place? I would argue that they borrowed it. Or at least borrowed some of it. Why do I say that?



We need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over FY2022 were $1.832m (AR2022 p55). Once again we will use our three time stamp data points to average the funds borrowed across the year.



Reference Date30/06/202131/12/202130/06/2022


Cash & Cash Equivalents($3.367m)($1.113m)($4.676m)


Short Term Debt$9.900m$18.000m$7.500m


Long Term Debt$0m$30.00m$30.000m


Total Net Debt$6.533m$46.867m$32.824m



=> Average Debt over Year = ($6.533m+$46.687m+$32.824m) / 3 = $28.681m

So the interest rate charged by the banks on the funds loaned was: $1.832m / $28.681m = 6.4%.


One thing I have noticed is that the average GoLivestock balance over the year is greater than the average funds borrowed by PGW over the year ($49.294m>$28.681m). So one way of looking at this is to say that all of the funds borrowed by PGW from the banks are on lent as livestock loans to farmers (but from a PGW viewpoint their 'livestock placements' are seen as assets to the company, so appear as assets on the PGW company balance sheet).

PGW have a right to charge a 'competitive interest rate' (which includes a margin on the money PGW themselves borrow form the bank) to their animal guardians (the farmers). Since the company loan balance is less than the value of animals on the balance sheet 'loaned out', one way of looking at this situation is to consider that all bank money borrowed by PGW is on loan to farmer animal guardians. Thus my analysis tells me that PGW is immune from market interest rate rises, because any costs of higher interest rates are passed directly through to those farmer 'animal guardians'.

Am I right here, or is this another example one of my late night thinking screw ups?

SNOOPY

[nztx]

All the Superannuation Fund financing issues goneburger, done and dusted - Snoopy ? ;)

[Snoopy]

All the Superannuation Fund financing issues goneburger, done and dusted - Snoopy ? ;)


Errrrrr, I was hoping no-one would bring that up. After being 'solved' it would seem the pension scheme deficit is back! So what are PGW doing to solve it?



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).





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


FY2017$7.551m$5.920m$1.631m21.6%


FY2018$2.842m$3.011m-$0.169m-5.9%


FY2019$10.274m$8.455m$1.819m17.7%


FY2020$0.0m$0.692m-$0.692mNM


FY2021$0.563m$0.960m-$0.397m-70.5%


FY2022$0.0m$0.567m-$0.567mNM


Total$21.230m$19.605m



We have an interesting situation in FY2020 and FY2022 where PGW contributed to the pension scheme without dolling out any cash. That is a very strange thing. One explanation could be that the managed pension scheme(s) into which PGW invests pay a dividend and that dividend is simply reinvested back into the said fund(s). Thus while no cash comes out of PGW coffers, they have forgone cash coming in by reinvesting that 'fund dividend' back into the fund that created it.

The above explanation shows how more money can be put into a pension scheme than by merely moving cash. It does not explain how in FY2017 and FY2019 a significant percentage of the funds contributed disappeared. There may be a clue in the cashflow statement where for FY2019 it says 'ESCT included'. ESCT stands for 'Employer Superannuation Contribution Tax'.

The ESCT rate paid per employee is set in advance of the tax year and does not change over that year. The rate of ESCT payable for each employee determines each employee's 'ESCT rate threshold'. This is calculated is by combining their annual salary or wages and the employers gross annual KiwiSaver employer contributions and is designed to mirror the tax rates paid under the PAYE income tax system. Taking FY2019 as an example, the 17.7% of contributed funds 'lost' is close to the 17.5% ESCT rate that applies to employees earning between $16.8k and $57.6k per year back in 2019

https://www.accounted4.co.nz/blog/post/77306/ESCT-Threshold-Annual-Review-at-1st-April/

That sounds low until you remember that many of the people in that PGW superannuation scheme are already retired, and so may not be earning high incomes. People in that situation would drag the 'average' ESCT rate down. Thus this seems to be the most likely answer to my original question posed in the quoted text in bold. The 'missing' money disappeared as tax.

If this is the explanation, why was the percentage of tax taken off higher in FY2017? That is the opposite of what you might expect if wages increase with time. It could just be that the the average 'wage' decreases in retirement, and more people took retirement between 2017 and 2019, than took wage increases, thus causing the average 'wage' as seen by the pension scheme to fall. (We have to keep in mind that the pension scheme has been closed to new members for many years, so it will have an increasingly 'greying' profile.)

With the disappearing pension money over FY2017 and FY2018 finally 'explained', a new question arises in the 'in between' year FY2018. How did the pension scheme end up getting **more** money added to it by the company than was shown in the cashflow statement? There is a puzzle for the punters at home to ponder, and no I don't know the answer!

Back to nztx's question. The total defined benefit liability was $2.126m at the last balances date (30-06-2022) (See AR2022 p69). This is a marked deterioration over the EOFY2021 position where the figure was a surplus of $311k. I don't understand why more money ($960k) was being poured into a scheme over FY2022, when that scheme was in surplus at EOFY2021. Nevertheless it is just as well this did happen, because they scheme suffered a $2.437m 'value blowout' over the year. Without PGW's $0.537m contribution, the shortfall would have been close to $3m!

Interest rates have risen during the year and the value of share investments has generally fallen. Those two effects should be having opposite effects on the 'blowout deficit', and which effect is stronger is unknown. But who would bet against PGW continuing to bail out their pension fund, even if that bail out does tend to be more hidden in the accounts (using the trick of not taking income due, rather than stumping up cash) these days.

SNOOPY

[Snoopy]

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($5.301m)($3.777m)


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.


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 18 in AR2022).

PGW Pension Plan(s) External Cashflows



Financial Year
Pension Plan Deficit EOFY
PGW Contribution {A}
Tax Adjustment (1)
Members Contribution {B}
Total Contribution {A}+{B}
Benefit Paid {C}
Net Cash Movement {A}+{B}-{C}


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
-$2.389m
]$1.199m$7.119m($6.010m)$1.109m


2018-$7.722m$3.011m
-$0.961m
$1.170m$4.181m($8.914m)($4.773m)


2019-$5.883m$8.455m
$0.703m
$1.268m$9.723m($14.044m)($4.321m)


2020-$9.838m$0.692m
$1,104m
$0.832m$1.524m($5.301m)($3.777m)


2021+$0.311m$0.960m
-$2.694m
$0.782m$1.742m($3.907m)($2.165m)


2022-$2.126m
$0.567m
$0.706m
$0.816m$1.383m($3.265m)($1.882m)



Bold Total
$19.605m
-$3.551m




Notes

1/ The 'tax adjustment' referred to here may be found in the 'Consolidated Statement of Comprehensive Income' of the respective annual reports from FY2017. More fully, the tax figure is the 'tax on re-measurement of the defined benefit plan' relating to the PGW superannuation scheme. Prior to FY2017 this tax adjustment was amalgamated within the income tax calculation in the "Statement of Profit or Loss'. A negative number indicates a tax payment due to be made, whereas a positive number indicates a tax refund.


--------------------------------------

Question/ Why have I highlighted the contributions of PGW to the pension plan over the last 6 years only?

Answer/ In AR2017 report p64, 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 had been taken out of the headline profits. As an example of what has happened in the past, and how the accounting treatment has now changed, 'Basic Earnings Per Share (Continuing Operations)' was listed as 5.3cps (AR2016 p35 'Statement of Profit & Loss'). Yet the equivalent comparative figure, also relating to FY2016 in AR2017 was 5.8cps (AR2017 p35). This difference was solely due to:

i/ The removal of a $5.835m 'Remeasurement of Profit and Loss' OFFSET BY
ii/ a $1.634m 'Deferred tax on re-measurements of defined benefit liability'

making a net -($5.835m-$1.634m) = -$4.201m 'item that will never be classified to profit and loss'. [see my post 4135 on this thread for more detail]

Yet this net $4.201m pension plan propping was 'real cash' that could have had alternative possible uses such as:

a/ To pay shareholders higher dividends, OR
b/ To shore up the capital position of the company.

-------------------------------

Now, I have added up that effect for all subsequent years and I get the 'bold total' of $19.605m and I have to subtract from that any deferred tax liability on re-measurements of defined benefit pension scheme.

$19.605m - $3.531m = $16.074m

In todays terms, given that the number of shares on issue have been adjusted, to 75.484m at the latest balance date:

$16.074m / 75.474m = 21.3cps

This in my view is the 'cumulative since FY2017' net 'lost capital' per share of PGW shareholders as a result of maintaining the PGW 'in house' 'defined pension scheme'. 21.3cps, so far, has effectively been 'swept under the table' to an obscure area of the accounts where questions are not commonly asked. Please note I am not suggesting that PGW has done anything wrong by doing this. They are just following the accounting rule book that allows them to present their headline profit figures exactly as they have done. Nevertheless in presenting the performance figures quoted, I think it is fair to point out to shareholders what has legally gone on 'under the hood'. The other point to remember is that all of this is now historical.

SNOOPY

[Snow Leopard]

I wrote on 27-10-2017. Like nearly four & half years ago:

I am just going to keep quiet, occasionally look in on how this is 'progressing' and possibly allow myself a few smug moments...

I despair: Possibly I should say something.
14457

[Snoopy]

I wrote on 27-10-2017. Like nearly four & half years ago:
"I am just going to keep quiet, occasionally look in on how this is 'progressing' and possibly allow myself a few smug moments..."
I despair: Possibly I should say something.


The above taken from your post 4149 dated 26-10-2017 on this very thread.

As a fellow shareholder it might be useful if you said something. After four and one half years, all of your slothful suntanning on those alpine rock outcrops is forgiven. I hereby grant you permission to reply.

SNOOPY

[Snow Leopard]

And thus the Snow Leopard pontificated:

Trying to square the circle of the accounts for any company or indeed any one aspect of any company over any length of time longer than the issuing of 2 annual reports (that being 1 year and 1 day) is fraught with perils because:
> The company changes;
> The accounting standards change;
> The reporting of accounts change.

The PGW Pension Scheme, here we go :scared:...

[Snow Leopard]

Cash Flows:

Inwards:

1/ Employer Contributions:
Regular yearly payments made every year - tends to be hidden in employee costs in the main part of the accounts.
Lump sum payments made as necessary - tned to have their own line in the main accounts.

Shown in the Defined Benefit Tables net of taxes.
Gross payments include ESCT where appropiate. As an operating expense they are offset by the reduced companies tax.
becomes an asset of the fund and increases the fund value

2/ Employee Contributions:
Shown in the Defined Benefit Tables net of personal taxes.
This cash asset received gives rise to a equal liability

3/ Interest Earned:
This cash asset gives rise to a similar sized liability :mellow:.

Outwards:

1/ Benefits Paid:
Reduces both assets and liabilities equally :)

2/ Current Service Costs:
Surely this is must be a cash outflow ?

[Snoopy]

I am going to preface my reply by saying that I am not and have never been an employee of PGG Wrightson, or any of its ancestral companies. Thus I am not privy to the exact details of the PGW 'defined benefit scheme', or indeed schemes as implied by the AR2022 text (p69).

"....provides a range of superannuation and insurance benefits for employees and former employees."
"Former employees are entitled to receive an annual pension payable for their remaining life and in some instances the remaining life of a surviving spouse."

My reading of the above quotes is that, for current employees, they will likely receive some kind of life insurance benefit should they not survive their employment term with the company. At retirement age, the surviving scheme members will receive an annuity, or pension for life, which must be on favourable terms. I say that because if the terms were not favourable, the working members of the scheme would stop all contributions and put that money into Kiwisaver instead (and that hasn't happened).

This 'defined benefit scheme' then is quite a different arrangement to Kiwisaver, where no ultimate return is guaranteed and instead the final payout, which some may nevertheless consider converting to an annuity at retirement, is left to the ebb and flow of the markets with no guarantee.

Straight away then, we can see that PGW is in an onerous position. PGW is investing in the markets to meet their contracted 'defined benefit' cashflow obligations. But should any of their investment decisions prove sub-optimal, PGW is required to make up any defined benefit plan shortfall in cash from their own coffers.

SNOOPY

[Snoopy]

Cash Flows:

Inwards:

1/ Employer Contributions:
Regular yearly payments made every year - tends to be hidden in employee costs in the main part of the accounts.


I put it to you that statement is an assumption. Before Kiwisaver, there was no expectation that employers would contribute to your retirement scheme. Instead you would 'do it yourself' by joining AMP or some other such provider. If we go to AR2022 p69, we see in table A that the 'Defined benefit obligation' shows a zero input from the employer. If there was such a 'regular employer contribution', as you suggest, that was hidden as part of the wage bill in the rest of the accounts, would you not expect to find it there separated out in that table?

The employer contribution of $567k is under a different header 'fair value of plan assets'. Could that be a 'lump sum' correction? I don't think so because under the lump sum correction header in the cashflow statement there is a nil entry for FY2022. So by a process of elimination I believe this 'non cash' fair value contribution of $567k represents the increase in value of the underlying investments that are used to fund the defined scheme.



Lump sum payments made as necessary - tend to have their own line in the main accounts.


Yes but over FY2022, there weren't any (refer to cashflow statement)



Shown in the Defined Benefit Tables net of taxes.
Gross payments include ESCT where appropriate. As an operating expense they are offset by the reduced companies tax.
becomes an asset of the fund and increases the fund value


I am not so sure about that. While the company pays the ESCT tax, they also pay PAYE income tax on behalf of the employee, If you look at the ESCT tax table, the tax deducted closely mirrors PAYE deduction rates. It looks to me as though ESCT is structured as though ESCT payments and any associated defined plan contributions are equivalent a 'salary sacrifice' for the employee. IOW, although ESCT is paid by the company, it is in fact an individual tax obligation, and not a company one. And if that is true, it means there is no increase in value of the fund due to ESCT.



2/ Employee Contributions:
Shown in the Defined Benefit Tables net of personal taxes.
This cash asset received gives rise to a equal liability

3/ Interest Earned:
This cash asset gives rise to a similar sized liability :mellow:.


Agreed



Outwards:

1/ Benefits Paid:
Reduces both assets and liabilities equally :)


Yes



2/ Current Service Costs:
Surely this is must be a cash outflow ?


Current Service Cost / Fund Balance = $489k / 0.5x($56.483m + $53.725m) = 1%

Sounds like it could be a fund managers fee? If that is the case it will have been taken off the funds invested, so it would not be a cash outflow.

SNOOPY

[Snow Leopard]

Argh!

Now I remember why I don't try and help.

I am out of the apartment while the world's noisiest workmen rip the spouting off the roof and doing the editing to break this mess down into the different bits tin order to answer them is just to hard to do on a handphone.

I may go through it later or then again I might just keep quiet for another four and a half years.


I put it to you that statement is an assumption. Before Kiwisaver, there was no expectation that employers would contribute to your retirement scheme. Instead you would 'do it yourself' by joining AMP or some other such provider. If we go to AR2022 p69, we see in table A that the 'Defined benefit obligation' shows a zero input from the employer. If there was such a 'regular employer contribution', as you suggest, that was hidden as part of the wage bill in the rest of the accounts, would you not expect to find it there separated out in that table?

The employer contribution of $567k is under a different header 'fair value of plan assets'. Could that be a 'lump sum' correction? I don't think so because under the lump sum correction header in the cashflow statement there is a nil entry for FY2022. So by a process of elimination I believe this 'non cash' fair value contribution of $567k represents the increase in value of the underlying investments that are used to fund the defined scheme.



Yes but over FY2022, there weren't any (refer to cashflow statement)



I am not so sure about that. While the company pays the ESCT tax, they also pay PAYE income tax on behalf of the employee, If you look at the ESCT tax table, the tax deducted closely mirrors PAYE deduction rates. It looks to me as though ESCT is structured as though ESCT payments and any associated defined plan contributions are equivalent a 'salary sacrifice' for the employee. IOW, although ESCT is paid by the company, it is in fact an individual tax obligation, and not a company one. And if that is true, it means there is no increase in value of the fund due to ESCT.



Agreed



Yes



Current Service Cost / Fund Balance = $489k / 0.5x($56.483m + $53.725m) = 1%

Sounds like it could be a fund managers fee? If that is the case it will have been taken off the funds invested, so it would not be a cash outflow.

SNOOPY

[Snoopy]

Argh!


The correct spelling for that is 'Arrrrrrgh!' (according to Charlie Brown)



Now I remember why I don't try and help.

I am out of the apartment while the world's noisiest workmen rip the spouting off the roof and doing the editing to break this mess down into the different bits tin order to answer them is just to hard to do on a handphone.

I may go through it later or then again I might just keep quiet for another four and a half years.


Classic! Now I know why you seek the peace and solace of the mountain tops!

SNOOPY

[Snoopy]

All the Superannuation Fund financing issues goneburger, done and dusted - Snoopy ? ;)



And thus the Snow Leopard pontificated:

Trying to square the circle of the accounts for any company or indeed any one aspect of any company over any length of time longer than the issuing of 2 annual reports (that being 1 year and 1 day) is fraught with perils because:
> The company changes;
> The accounting standards change;
> The reporting of accounts change.

The PGW Pension Scheme, here we go :scared:...


Some years ago, 'defined benefit schemes' became an issue overseas. I recall some local reporter doing an article on whether any NZ shareholders should be concerned about the existence of such schemes in NZ companies, and one name stood out: Wrightson. I cannot remember whether it was still Wrightson then, or whether it was the merged 'PGG Wrightson'. But I am not as worried as I was. If we go back to FY2016, the year before the Seeds Division de-merger you can see why:




FY2016
FY2022


Defined Benefit Plan Deficit
($25.729m)
($2.126m)


Net Profit Declared
$39.678m
$24.286m



Back in 2016 the pension scheme deficit was about half the net profit for the year, whereas by 2022 it was only one tenth. So while it is annoying for shareholders that PGW seems to have to keep topping up the defined benefit scheme with one off payments, they appear to be in a much stronger financial position today to be able to do so today. Furthermore those payments are getting smaller in absolute terms too (see my post 5362).

I also know that the actuarial models used to forecast future deficits in the 'defined benefit pension scheme' are not aligned to IFRS reporting rules. This explains why despite the scheme being apparently in surplus at EOFY2021, PGW nevertheless put a $567k payment into the fund over the subsequent year. The IFRS reporting where discount rates were linked to NZ ten year bond rates magnified any future liabilities in 'present day terms', as the ten year bond rate dropped below 1%. However, as ten year bond rates rise again, that 'shadow' should recede. Working against that 'bank rate effect' is the value of the underlying investments used to fund the defined benefit scheme going down as sharemarkets fell. In this circumstance I find myself agreeing with the Snow Leopard. Knowing the position of your 'pension plan market investments' as at 30-06-2022, may not be all that helpful in figuring out the composition of the funding engine now. However, the guys and gals at PGW running the scheme know all about this. So rather than try and 'second guess' what those fund managers should be doing (based on our out of date historical information), I think it is more useful to look at what they did do, while knowing more information than shareholders are privy to.

Again, if we refer back to post 5362, the PGW contributions are well down in the latest three years, compared to the previous three before that. It looks to me that PGW staff do not have an issue with their defined benefit plan as it sits today. And if they are not worried about it, then neither am I!

SNOOPY

[winner69]

Snoopy …..that Pension Plan getting smaller by the year probably because pensioners and their wives are dying off. No new members força while.

Many such defined benefit schemes were essentially wound up by offering a lump sum payment and hoping enough would accept and bugger off

I suppose PGG considered that ….bit surprised they didn’t proceed.

[Snow Leopard]

....I find myself agreeing with the Snow Leopard....

Sounds like a good idea:
https://snowleopardconservancy.org/wp-content/uploads/2023/02/Suzi-Eszterhas-feature-photo.jpg

The Snow Leopard Conservancy (https://snowleopardconservancy.org/)

[Snoopy]

All the Superannuation Fund financing issues goneburger, done and dusted - Snoopy ? ;)



Snoopy …..that Pension Plan getting smaller by the year probably because pensioners and their wives are dying off. No new members for a while.

Many such defined benefit schemes were essentially wound up by offering a lump sum payment and hoping enough would accept and bugger off

I suppose PGG considered that ….bit surprised they didn’t proceed.


There has been some rationalisation of the PGW defined benefit plan(s) Winner.

From AR2017 p62
"During the period the assets and liabilities of the Wrightson Retirement Plan were transferred to the PGG Wrightson Employee Benefits Plan. This resulted in the Wrightson Retirement Plan having no liability as at 31st December 2016. The remaining defined benefit plan is not open to new members"

In fact neither plan has been open to new members for some time.

From AR2013 p75
"The two defined benefit plans are open by invitation, however the group has not invited new members to the schemes since June 1995 and November 2000 respectively."

Details of the defined benefit plan(s) were first reported in detail in AR2008. Page 59 of that report shows a total defined benefit obligation of $68.705m when discounted back to a present value. At that point the value of the plan assets was $69.528m - so the plan(s) were in surplus. Go forward one year and the plans' assets had collapsed in value by more than 30% to just $48.183m. No doubt the GFC had something to do with that.

Fast forward thirteen years all the way forwards to FY2022 and the Defined Benefit obligation is still $49.165m. Those oldies are doing a good job of 'hanging on'. The $2.126m unfunded portion of that is 4.3% of the total. So it is significant but in total dollar terms in relation to group profit, a capturable obligation, should further capital injection by PGW be required.

Of course we have to remember that if some up and coming your manager was offered to join the scheme at age 30 in November 2000, they would only be aged 52 now. That PGW defined benefit scheme still has a few decades to run I think.

SNOOPY

[Sideshow Bob]

https://www.nzx.com/announcements/407033

PGG Wrightson Limited1 (PGW) today announced its results for the first half of FY23.
Key highlights of the first six months to 31 December 2022 included:
❖ Operating EBITDA2 of $47.8 million (up $0.4 million or 0.9%)
❖ Revenue of $585.8 million (up $33.4 million or 6.0%)
❖ Net profit after tax of $21.2 million (down $1.3 million or 6.0%)
❖ Interim dividend of 12 cents per share
❖ Total Shareholder Return3 (TSR) of +3.4%
 Updated Operating EBITDA guidance of around $57 million for financial year to 30 June 2023

[winner69]

Loooks good Bob but includes a profit downgrade

Last year operating profit $67m and then a few months ago they said F23 will be about $62m

And now they say it’s going to be about $57m

[winner69]

Hey Snoops … FCF looks a bit sad eh and the trend over the last year or so not too healthy (my view)

Love companies thar borrow to keep the divies coming

[percy]

It is the same every year.
Nature of the beast.
Negative cash flow first half as they stock up on farmers' requirements.
Second half cash flow positive as farmers' pay for purchases.
What is known as "seasonal demand".

[winner69]

It is the same every year.
Nature of the beast.
Negative cash flow first half as they stock up on farmers' requirements.
Second half cash flow positive as farmers' pay for purchases.
What is known as "seasonal demand".

But the outflows are getting larger and second half inflows aren’t always offsetting the first half outflows

Betcha you always made sure you got heaps more cash in over the year than the initial outlay on books

[percy]

But the outflows are getting larger and second half inflows aren’t always offsetting the first half outflows

Betcha you always made sure you got heaps more cash in over the year than the initial outlay on books

The word "SUBSTANTIAL" comes immediately to mind..lol

[Snoopy]

Hey Snoops … FCF looks a bit sad eh and the trend over the last year or so not too healthy (my view)

Love companies thar borrow to keep the divies coming


With PGW, you have to remember that much of the borrowing will be going to support the 'GOlivestock 'let's not call it a finance company' business. So those increasing borrowed funds are being lent out at higher rates, and earning more profit for PGW.

"During the period GO-STOCK celebrated two significant milestones with two million lambs purchased. on GO-LAMB contracts, and three hundred thousand cattle procured through GO-BEEF since launch."

Note 3 in HYR2023 shows GOlivestock receivables up to $43.0m, up from $35.8m the previous corresponding period. So this 'livestock rental business', (which is not a finance business as Heartland bought 'PGW Finance' a few years back, so don't call it that) looks to be growing very well.

What heartens me is that all of the business elements that PGW can control (retail and water) seem to be doing well. We knew that real estate would be dire in a rising interest rate environment. So no surprise it has probably tipped into a loss making situation - for now. And wool is doing what wool has done for a while now unfortunately. Interim dividend is down a couple of cents, but the share is still trading at a healthy yield.

So I am actually quite heartened by this result, as I think the underlying result is better than the headline figures would have you believe.

SNOOPY

[winner69]

So FY23 ebitda likely to be $57m

Heck that's about the same as they achieved in FY21

What's going on down on the farm .... profits not increasing

Not good enough

[Snoopy]

So FY23 ebitda likely to be $57m

Heck that's about the same as they achieved in FY21

What's going on down on the farm .... profits not increasing

Not good enough

Blame all those Wellingtonians bidding up their own house prices. They are the ones pushing interest rates ever higher.

SNOOPY

[winner69]

Blame all those Wellingtonians bidding up their own house prices. They are the ones pushing interest rates ever higher.

SNOOPY

But Wellington house prices falling faster than sheep prices ……..have to blame something else for declining profits

I see they didn’t come out with and ‘inflation Adjusted EBIT’ number this time …….wouldn’t been a good story.

[nztx]

But Wellington house prices falling faster than sheep prices ……..have to blame something else for declining profits

I see they didn’t come out with and ‘inflation Adjusted EBIT’ number this time …….wouldn’t been a good story.


why inflate the rate of real decline after inflation is taken into account ? ;)

The Wellington sheep might be moving towards looking for new day jobs soon :)

especially after Orr-Some has had a fiddle all of his own among the castles in the sandpit

[winner69]

Still trying to keep on liking PGW but finding it harder and harder to do so.

So this year ebitda going to be 57m ……H1 reported 47.8m and H2 forecast 9.2m

Last year H1 was 47.4m and H2 was 19.8m (FY 67.2m)

So next 6 months ebitda going to be down the 50% on pcp ….that’s huge …and trend may continue into F24

Ah, seasonality you say …just like the horrific first half FCF. Methinks you stretch the seasonality excuse so far

Looking for some good bits

[winner69]

Done some suns …PGW worth $2.90 to $3.20 at moment

[mike2020]

I prefer cyclical to seasonal. I also like my pgg earnings at least 10% plus before I add any. Prefer 12% just for the "seasonality"


Still trying to keep on liking PGW but finding it harder and harder to do so.

So this year ebitda going to be 57m ……H1 reported 47.8m and H2 forecast 9.2m

Last year H1 was 47.4m and H2 was 19.8m (FY 67.2m)

So next 6 months ebitda going to be down the 50% on pcp ….that’s huge …and trend may continue into F24

Ah, seasonality you say …just like the horrific first half FCF. Methinks you stretch the seasonality excuse so far

Looking for some good bits

[BlackPeter]

Still trying to keep on liking PGW but finding it harder and harder to do so.

So this year ebitda going to be 57m ……H1 reported 47.8m and H2 forecast 9.2m

Last year H1 was 47.4m and H2 was 19.8m (FY 67.2m)

So next 6 months ebitda going to be down the 50% on pcp ….that’s huge …and trend may continue into F24

Ah, seasonality you say …just like the horrific first half FCF. Methinks you stretch the seasonality excuse so far

Looking for some good bits

You might find it getting harder these days to like any company - if their growth rates are the only thing which determine how much you like them.

The days of cheap money seem to be over - its getting harder to make it ... and maybe at some stage we need to learn liking companies which just have a sustainable income - without trying to achieve endless and unsustainable growthrates.

[winner69]

SNOOPY

discl: Still holding, and thinking about what to do.

A few days ago

You still thinking about what to do

[Snoopy]

The above quoted post is based on the FY2019 dividend viewpoint. As per the previous post (5355), I have now reverted to past earnings to give us the best forecast of a 'capitalised dividend valuation' from here going forwards.

The five year earnings per share average for FY2018 to FY2022 inclusive is: (19.7c+10.3c+9.9c+23.6c+32.6c) / 5 = 19.2c

The capitalised dividend required rate of return I have selected is 8.5%. I believe that this is appropriate for a retailer with a relatively weak moat that services a set of customers at the mercy of the weather gods. This means my 'fair value' centre of business cycle valuation is now:

19.2c / (0.72 x 0.085) = $3.14

At $3.14, PGW would be on a normalised historical PE of 314/32.6 = 9.5. That sounds about right for a no growth high yielding share. However PGW closed on the market today at $4.49. That implies of PE of: 449/32.6 = 13.8. Yes I know the share price has traded a whole dollar higher than this within the last twelve months. But $4.49 does seem a lot of money to pay for an agricultural share riding into the high of a business cycle wave.

My 'rule of thumb' is to both add and subtract 20% from the centre of business cycle valuation, to get an idea of where the share price should sit as the business cycle fluctuates.

Upper Cycle Value: $3.14 x 1.2 = [$3.77
Lower Cycle Value: $3.14 x 0.8 = $2.51

discl: Still holding, and thinking about what to do.





Done some suns …PGW worth $2.90 to $3.20 at moment

I have a wider 'valuation band' than you Winner. But it looks like we are pretty much in agreement on where the value of PGW should sit. Of course where it 'should sit' and where the market sees it sitting are not always the same thing. I admit I put a 'sell down' order in advance of the profit announcement though to my broker at, given where PGW trades today, was an embarrassingly high price. At this stage I will hold and enjoy the dividend and think about enjoying some of those reconstruction order profits. Not sure about forward orders for irrigation systems in the Hawkes Bay though......

SNOOPY

[winner69]

Fonterra has cut its forecast farmgate milk price will cut farmers income by $900m they say

Will that hurt PGW prospects this year

[Snoopy]

Huge changes since the last time I looked at PGG Wrightson, The world class global seeds business has been sold to DLF Seeds A/S of Denmark.


PGG Wrightson Seeds are no longer owned by PGG Wrightson, the business unit being sold on 1st May 2019. But having opposed the demerger, I can't help asking myself the 'what if' question.

Buyer DLF Seeds A/S of Denmark are a privately owned co-operative and so there is no public annual reporting. They do issue regular newsletters though, and here are some of the comments about New Zealand since the takeover.

-----------------------

https://www.dlf.com/about-dlf/news-and-press-releases/article/strong-half-year-result-in-dlf?M=News&PID=1905

Strong half-year result in DLF 25-02-2022

"The Danish seed harvest was above normal in 2021, whereas other seed producing countries in Europe did not reach their normal yields. The New Zealand seed harvest is impacted by rain and looks to be lower than standard. This is also the case in South America where the crop has suffered greatly from dry conditions"

------------------------

https://www.dlf.com/customer-support/newsletter/prograss/202205market-update

Global pressures keep grass and clover prices high 10-05-2022

"Global issues are affecting production costs for grass and clover seeds."
"More recently, the New Zealand harvest experienced a huge failure, especially in perennial ryegrass and white clover.

-----------------------------

https://www.dlf.com/customer-support/newsletter/prograss/202210inflation-and-production-costs-are-in-the-driving-seat

Inflation and production costs are in the driving seat 18-10-2022

"A tough economic situation coupled with increased costs for energy, wages, fertilisers, packaging and logistics are pushing up prices for grass and clover seed. In addition, good production prices for other ag-commodities, such as wheat and rapeseed, are making it harder to contract the planned multiplication acreage for grass and clover seed at a competitive price."

"In the southern hemisphere, the January to March harvest was below average, especially in New Zealand where perennial ryegrass and white clover yields were low."

"We’re finding it difficult and expensive to contract new seed production fields for this species. For similar reasons, the usual third-party production from New Zealand also appears to be quite challenging."

"Clovers are short in general. White clover harvested well in Denmark, but increased demand for European mixtures coupled with a continuing shortage in supplies from New Zealand have lifted prices to an all-time high."

"In this era of economic pressures – increasing cost prices and inflation driven by energy and food prices – it’s vital to work with secure and reliable production partners. Since agricultural commodity prices are competing at farm level with grass and clover production, it’s becoming harder to maintain the balance between farmer production prices and an acreage that will cover future demand. Climate change doesn’t help. Dry springs, summer droughts and periods of heavy rainfall make future demand more unpredictable."

"Contracting of new production for the 2024 harvest remains difficult. We expect to see a drop in European acreage for the harvest years 2023 and 2024 caused by production costs and the lure of alternative crops. That means we see firm or further firming prices ahead of us."

---------------------------------

https://www.dlf.com/about-dlf/news-and-press-releases/article/new-forage-grass-raises-the-bar-in-oceania

New forage grass raises the bar in Oceania 27-02-2023

"Our latest tetraploid perennial ryegrass, Vast, distinguished itself with a high yield in the last part of the season. This variety is ready for launch in spring 2023 and is the first extremely late-heading perennial ryegrass on the market in Oceania. Vast has genetics from the Southwest and Northern Europe as well as New Zealand and stands out due to its fine and dense plant density, strong winter production, good disease tolerance and extremely low aftermath seed head production. These characteristics mean that it continues to produce quality forage even when the quality of most other ryegrasses is declining. This adds significant value for farmers, as late grass production helps to slow the decline in post-peak milk production in dairy systems, and the timing of Vast’s forage production is also ideal for flushing and mating ewes and for beef and lamb finishing."

-------------------------------


It looks like after a tough year in 2022 (ryegrass and clover prices are good, but if you don't have the production you can't get those prices) all that R&D that we PGG Wrightson shareholders paid for in the past might be rising to fruition? A "Vast" improvement coming through?

SNOOPY

[winner69]

Snoops - DLF Seeds file Anual Accounts with NZ Companies Office if interested

Go back many years so if you keen you might be able to work out how sales have grown since they acquired PGW Seeds

https://app.companiesoffice.govt.nz/companies/app/service/services/documents/1FCD8DC962240A8FABF80BA56D212AB5

June 21 accounts - June 22 to be filed soon?

[winner69]

DLF NZ sales were about $15m in June 15 year - June 21 year they were $427m

What was PGW seeds doing?

[Snoopy]

DLF NZ sales were about $15m in June 15 year - June 21 year they were $427m

What was PGW seeds doing?


Prior to the takeover, DLF NZ had their own much smaller seeds operation, which is what the $15m in sales will be related to. As to what PGW seeds were doing, it gets a little complicated.....

If we look at AR2019, the last year that PGW seeds was under PGW control, then the seeds business, listed as a 'discontinued operation' turned over $434m. But that was for the period 1st July 2018 to 30th April 2019, not for a full twelve months (the seed business changed hands on 1st May 2019).

If we instead go back to the 'independent appraisal report' issued by Korda Mentha in October 2018, then p39 of that document shows projected seed division revenue of $536m for the full FY2019 year. Annualising the actual figure for FY2019 over 12 months not 10, gives a projected annual revenue of $434m x 12/10 = $521m. But annualizing is probably not the best method to use when you know that seed division revenues over the year are not uniform but lumpy.

The next complicating factor comes when you look at DLF's Australian website: https://www.dlfseeds.com.au/

"DLF Seeds represents the coming together of PGG Wrightson Seeds, AusWest and Stephen Pasture Seeds."
"These three respected Australian forage seed brands joined forces to ......."

So after pinching Crowded House and Russell Crowe, those Aussies have pinched PGG Wrightson as their own as well! The significance of this, in the context of this discussion, is that it looks like DLF have carved out the Australian arm of PGW Seeds and reinstalled that under their own Australian division management. Australia was always a 'poor cousin' in the PGW seed portfolio. The Korda Mentha report on p30 forecasts, over FY2019, the geographical split between EBITDA in the three markets the seed division operated in to be:



PGW Seed Division
Forecast EBITDA 2019
Percentage
Apportioned Revenue (1)


New Zealand$33.1m
77.5%
$415m


Australia$4.8m
11.2%
$60m


Uruguay$4.8m
11.2%
$60m


Total
$42.7m
100%
$536m



Notes

1/ This column is my own apportioning, where I have allocated the revenue between each geographic region relative to EBITDA earned in that market. This revenue splitting exercise assumes equal profitability, in EBITDA terms, across each geographic region. In practice that assumption is likely inaccurate.

-----------------------

I believe that NZ was a lot more profitable than those other two markets. That would in turn mean that NZ would have required less revenue to earn their proportion of EBITDA earnings. So that $415m revenue figure that I put down for NZ seed turnover in FY2019 is probably an 'upper bound' estimate of what the NZ seed revenue really was.

Just an an exercise in face value though, adding the already existing 'beachhead' DLF seeds operation to my $415m PGW NZ seed revenue estimate I get total revenue for DLF Seeds New Zealand over 2019 to be:

$415m + $15m = $430m

If two years later, combined revenue was $427m, it doesn't like too many growth synergies with the global DLF seeds business have been exploited.

SNOOPY

[winner69]

Brad Olsen says ‘ New Zealand's exports weren't performing as well they were at the end of 2022, with meat and dairy exports falling "quite heavily" from the previous quarter. “

Does less exports and farmers claiming poverty impact Wrightsons performance

https://www.newshub.co.nz/home/money/2023/03/brad-olsen-warns-new-zealand-s-trade-could-be-hit-by-global-economy-facing-weakest-growth-since-pandemic-started.html?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Tuesday+28+ March+2023

[Snoopy]

Brad Olsen says ‘ New Zealand's exports weren't performing as well they were at the end of 2022, with meat and dairy exports falling "quite heavily" from the previous quarter. “

Does less exports and farmers claiming poverty impact Wrightsons performance

https://www.newshub.co.nz/home/money/2023/03/brad-olsen-warns-new-zealand-s-trade-could-be-hit-by-global-economy-facing-weakest-growth-since-pandemic-started.html?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Tuesday+28+ March+2023

Animals tend to cost the same to keep no matter what the price you receive for the end product. Since PGW are a supplier of animal inputs, I guess it doesn't matter too much what price the farmer receives for their milk or meat. You still have to fence the paddock, buy the milking equipment and buy the supplementary feed.

There would be a downstream growth effects no doubt. Less sales in the rural real estate arm. Less money at the price sold end, means less money to develop the business. But in the end, farmers have to spend as a cost of staying in business. You can't kill your herd off while you wait for prices to improve. As far as PGW is concerned maybe a bit down but definitely not out. I would say the amount of rain we get would be a bigger mover of profit than falling prices for commodities overseas. That's how I see things anyway.

SNOOPY

[mike2020]

Snoopy, I feel you are being optimistic. Rural real estate is well down. Any drop in income always goes back to your expenditure budget so farmers will spend less. Any drop in the price of sheep and beef will be reflected in commissions earned. The companies own expenses will rise, those agents do like their santa fe's up to date for the weekends towing, wage rises etc. The last result was a little underwhelming, I expect more of the same. That said at some point it will be a buying op and there is always the chance of a TO out of the "left field". Looking at the buy side I think I'm not alone in my thinking.

[Snoopy]

Snoopy, I feel you are being optimistic. Rural real estate is well down. Any drop in income always goes back to your expenditure budget so farmers will spend less. Any drop in the price of sheep and beef will be reflected in commissions earned. The companies own expenses will rise, those agents do like their santa fe's up to date for the weekends towing, wage rises etc. The last result was a little underwhelming, I expect more of the same. That said at some point it will be a buying op and there is always the chance of a TO out of the "left field". Looking at the buy side I think I'm not alone in my thinking.


Hi mike2020,

I am not saying you are wrong. I guess what I am saying is that there is a certain amount of essential farm spending that never goes away. Farmer's might postpone upgrading their ute. But they still need to look after their animals, fruit trees and crop fields. It will be interesting to see how the GoLivestock animal financing goes in any downturn. This is the scheme where PGW owns the livestock and rents it out to farmers to do what they do best - raise animals - but at no capital cost to the farmer. So a farmer can still use his/her skill and knowledge to bring an animal product to market, without putting up the capital to do so. That is a formula that sounds like it might work in a 'down' market.

Contrast that to the fortunes of other human based customer retailers and the consumer, who might well be able to get through the coming winter using last years coat.

As for your other comment on market depth, how the market perceives a business and the underlying mechanics of running a business on a day to day basis are entirely different things. In terms of a value perspective I agree with you. Now is not the time to be buying PGW shares.

SNOOPY

[mike2020]

I used to use a bull scheme for my dairy cows, very similar GoLivestock only over a shorter timeframe. It saved me short term OD when I needed cashflow elsewhere. It kept the business with the company I bought through and usually I made a profit verses leasing which was and is expensive. It will work for PGW.

[Sideshow Bob]

https://www.nzx.com/announcements/410761

PGW reaffirms FY guidance, and announces emission targets......

[Balance]

https://www.nzx.com/announcements/410761

PGW reaffirms FY guidance, and announces emission targets......

Have a feeling Elders may be ready to make a move.

[winner69]

Have a feeling Elders may be ready to make a move.

Still likely mate?

Decent takeover ‘premium’ in the current share price so market possibly still hoping Elders are the ones.

[Southern Lad]

Still likely mate?

Decent takeover ‘premium’ in the current share price so market possibly still hoping Elders are the ones.

I suggest that anyone holding out for a near term cash offer from Elders should review Elders recent announcements and share price downward trajectory on the ASX and you will soon realise that Elders has a long way to go to get its own nest in order first. Any debt fuelled purchase of PGW would IMO be absolutely slammed by the market. Even a scrip based takeover doesn’t make sense given the current Elders depressed share price. Elders selling their existing PGW shares is arguably a greater possibility than them purchasing more.

[Balance]

I suggest that anyone holding out for a near term cash offer from Elders should review Elders recent announcements and share price downward trajectory on the ASX and you will soon realise that Elders has a long way to go to get its own nest in order first. Any debt fuelled purchase of PGW would IMO be absolutely slammed by the market. Even a scrip based takeover doesn’t make sense given the current Elders depressed share price. Elders selling their existing PGW shares is arguably a greater possibility than them purchasing more.

Fair comments except that Elders bought its stake to have a big seat at the table when Agria finally decides to sell out - not if but when imo.

[Ricky-bobby]

Having a look at these guys… in terms of market share these guys are doing really well. Farmlands are a shambles and Fruitfed are dominating. Farmers are tightening their belts, so this will have an impact more on the Ag side of the business. What are people thinking?

[Snoopy]

Having a look at these guys… in terms of market share these guys are doing really well. Farmlands are a shambles and Fruitfed are dominating. Farmers are tightening their belts, so this will have an impact more on the Ag side of the business. What are people thinking?


PGW is a well run company, which as you say, has been gaining market share from the co-operative Farmlands group. But like any agricultural group they are subject to the 'vicissitudes', the ebb and flow of rural markets. PGW supply operational necessities rather than 'nice to haves' (like a new tractor). So I think they are well positioned to weather any farming downturn. Unfortunately the coming year doesn't look great for many of our farmers. Dairy in particular looks like it will be under pressure. Horticulture still looks good IMV, unless your Hawkes Bay orchard was wiped out. Yet even if you are recovering from a disaster like that, a company like PGW will be the first port of call to 'get you back on your gumboots'.

I invest in PGW, because I don't like second guessing which rural sub-sector is the best home for my money. An investment in PGW gives you a foot in all camps. The question remains though, at what price is PGW fair value?



Details of the transactions or other events requiring disclosure: On 14 December 2022, Elders agreed to acquire 8,526,245 ordinary shares in PGW from BCA New Continent Agri Hldg. Limited by way of an off market trade for consideration of NZ$4.35 per share (being aggregate consideration of NZ$37,089,165.75) with settlement to occur on 16 December 2022.


When the Chinese government disposed of their stake in December 2022, you can guarantee they sold at a price they considered 'full value'. The Chinese government are long term investors and they are smart. Sure I know the PGW share price was bid up higher than that towards $4.70 after that sale was announced. But IMV this was just momentum NZ investors speculating. Despite what Balance has opined on this thread more than once, Mr. Lai Guanglin has no reason to sell down his Agria stake. Mr. Lai Guanglin is in fact using cashflow from Agria and assets within Agria as security to fund his Hong Kong listed 'China Pipe Group Limited' investment. Lai is well within debt covenants on his transactional borrowings.

https://www.sharetrader.co.nz/showthread.php?2923-PGW-PGG-Wrightson&p=986018&viewfull=1#post986018

No reason to 'rock the boat' of the status quo.

Outside of 'irrational exuberance', I would say $4.35 is the 'top of the market'. Elders overpaid to get a strategic stake at 'above market value' is my view of the other side of the transaction of the Chinese government stake sell down. So is PGW a buy at $4.05 today? Probably not in my view. The interim dividend was cut from 14cps to 12cps. Last year the final dividend was 16cps. I wouldn't be surprised to see that cut as well, and by more than 2cps. Once the wider rural outlook becomes more widely known, I am expecting the PGW share price to slip back under $4. Nevertheless, I don't see a market rout in PGW shares coming.

SNOOPY

discl: holding

[Snoopy]

https://www.sec.gov/news/press-release/2018-276

This is so serious that I believe Agria & he were only fined US$3m.

His reputation (& Agria's) is gone as a 'fit' & 'proper' person I would have thought - be fascinating to read the full terms and conditions of the deal made with OIO.


Friday afternoon announcement. It looks like another PGW chair could have a wonky leg?

------------

Governance Announcement Regarding Chair, Mr. Lee Joo Hai


1 (PGW) notes that the PGW Board of Directors have been informed that its Chair, Mr. Lee Joo Hai has been charged in Singapore under certain Singaporean securities regulation in respect to potential lapses in relevant disclosures related to a Singaporean listed company, Hyflux Limited in respect of which Mr. Lee was a director.
The PGW Board notes that these matters are completely unrelated to PGW and the business and operations of PGW.
The PGW Board has considered matters and understands that Mr. Lee is defending these charges. The PGW Board has agreed with Mr. Lee that it is currently considered that the charges and related investigations do not compromise the performance of Mr. Lee’s duties in relation to PGW. The PGW Board (with Mr. Lee abstaining) are of the view that it remains appropriate for Mr. Lee to continue as a Director and Chair of PGW.
The PGW Board has requested Mr. Lee keep the PGW Board updated on the conduct of these investigations and charges laid in Singapore. The PGW Board will accordingly continue to monitor matters and evaluate Mr. Lee’s continued suitability as a Director and Chair of PGW.

--------------

I will be watching to see what comes out of the 'woodwork'. Just as well when all this is resolved there will be nothing to see.....

SNOOPY

[Balance]

Soonest Agria sells out of PGW, the better.

And trigger a takeover which we may or may not decide to accept. :t_up:

[Snow Leopard]

Quick off the mark!

https://www.businesstimes.com.sg/companies-markets/energy-commodities/hyflux-independent-director-charged-over-neglect-failure


...The Business Times learnt on Thursday (May 4) that Lee Joo Hai, 67, was charged in March this year with one count of neglect as an independent director under the Securities and Futures Act...

[Snoopy]

Friday afternoon announcement. It looks like another PGW chair could have a wonky leg?

------------

Governance Announcement Regarding Chair, Mr. Lee Joo Hai

------------


The background take:

https://www.channelnewsasia.com/commentary/fall-of-once-great-hyflux-unicorn-in-singapore-story-891886

"Commentary: The fall of once-great Hyflux, a unicorn in the Singapore story"

SNOOPY

[Balance]

Then there’s Meng Foon as well on the Board.

Starting to look like the board could use a bit of a shakeup?

[Snoopy]

Then there’s Meng Foon as well on the Board.

Starting to look like the board could use a bit of a shakeup?

The shakeup has started, as announced to the stock exchange today:

"The PGG Wrightson Limited1 (PGW) Board today announced that it was appointing current director, Mr. U Kean Seng as Acting Chair effective from 4 July 2023. Mr. Lee Joo Hai would remain on the Board while relinquishing the Chair and independent director, Mrs. Sarah Brown would assume the role of Deputy Chair."

"While the PGW Board has not altered its preliminary view as expressed on 30 June, it has determined that it would be in the best interests of PGW for Mr. U to assume the role of Acting Chair while the investigations and charges relating to Mr. Lee remain ongoing. Further, the Chair’s role could also be well supported by current resident independent Director Mrs Brown as Deputy Chair."

SNOOPY

[Snoopy]

The shakeup has started, as announced to the stock exchange today:

"The PGG Wrightson Limited1 (PGW) Board today announced that it was appointing current director, Mr. U Kean Seng as Acting Chair effective from 4 July 2023. Mr. Lee Joo Hai would remain on the Board while relinquishing the Chair and independent director, Mrs. Sarah Brown would assume the role of Deputy Chair."

"While the PGW Board has not altered its preliminary view as expressed on 30 June, it has determined that it would be in the best interests of PGW for Mr. U to assume the role of Acting Chair while the investigations and charges relating to Mr. Lee remain ongoing. Further, the Chair’s role could also be well supported by current resident independent Director Mrs Brown as Deputy Chair."


Shake shake shake.......It only took 12 days in the end.

-----------------------

Resignation – Mr. Lee Joo Hai

Mr. Lee Joo Hai has informed the PGG Wrightson Limited1 (PGW) Board that he would not be standing for re-election as a director at the upcoming PGW Annual Shareholders Meeting. Mr. Lee noted that he was resigning in order to eliminate the ongoing distraction caused due to media and market attention regarding the securities regulation matters that he is defending in Singapore. While Mr. Lee noted that he did not consider that those matters effected his capacity to remain a PGW director he nevertheless felt that it was in the best interests of PGW that he step down in order to remove the speculation that these matters were fuelling. Mr. Lee was also stepping down from the PGW Audit Committee effective immediately and Acting Chair, Mr. U Kean Seng would join the Audit Committee.

Mr. U acknowledged and thanked Mr Lee for his contributions as a director since 2017 and for his principled decision to support the best interests of PGW. Mr. U wished Mr. Lee well for the future.

----------------------------

I always had a quiet 'smile of approval' when I saw Russel (single l) Creedy's name at the bottom of the Restaurants Brands CEO spiel in the Restaurant Brands annual report. I thought not only of of all the printers ink saved over the years in Annual Reports, but also the ink saved in correspondence by Russel not having two letter 'ls' at the end of this name. But this new Chairman of PGW, Mr U, takes ink saving to a new level. In the future I would like to see even more ink saved. Who was James Bond's sidekick? Q wasn't it? I would like to see him on the board. And who knows? 'Q' might even help us get to the bottom of what is going on.

SNOOPY

[Snow Leopard]

For S

https://www.mychinaroots.com/surnames/detail?word=U

SL

[winner69]

PGW doing a good job managing market expectations …like under promise over deliver trick even though profits are declining. Upgraded guidance today

FY23 ebitda to be 60m - down 10% on FY22

First half of year flat and second half down 40% on same period last year …..suggests first half of FY24 might be down as well

Be interesting what the starting point for F24 guidance is

Whatever at least they still making money even if times not the best down on the farm. (So they say)

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/415297/399153.pdf

[winner69]

If this 13 nations ‘commitment’ cum agreement to vastly limit livestock farming in order to save the planet gets a foothold in NZ PGW might need to reinvent themselves away from being a rural outfit.

Good the farmers in Netherlands are putting up a big fight

Mind you we seem to be already heading that way ..pretty fast

Biden’s ‘Climate Czar’ John Kerry seems to be leading the charge on this globally ….. suppose it will be better to starve before we burn.

[na2m1]

If this 13 nations ‘commitment’ cum agreement to vastly limit livestock farming in order to save the planet gets a foothold in NZ PGW might need to reinvent themselves away from being a rural outfit.

Good the farmers in Netherlands are putting up a big fight

Mind you we seem to be already heading that way ..pretty fast

Biden’s ‘Climate Czar’ John Kerry seems to be leading the charge on this globally ….. suppose it will be better to starve before we burn.

I think you might be a bit misleading on this one Winner. They are wanting to reduce methane emissions. This can be achieved by slightly changing the feed for livestock etc. Good thing is a lot of the methods doesn't even reduce livestock!

[Snoopy]

I think you might be a bit misleading on this one Winner. They are wanting to reduce methane emissions. This can be achieved by slightly changing the feed for livestock etc. Good thing is a lot of the methods doesn't even reduce livestock!


The other factor with PGW is that they cover all genres of farming. So if cows are removed from the Canterbury plains and fruit trees put in instead, PGW can supply those plants and whatever fertilizer regime is required to optimize fruit production.

SNOOPY

[percy]

Conversion of sheep and beef farms into carbon farms continues at alarming rate



New research shows the scale and pace of sheep and beef land purchased for forestry is even higher than first thought.



An updated Orme & Associates report on land-use change from pastoral farming to large-scale forestry shows the amount of land sold in 2021 soared 66 percent compared to the previous year.



Beef + Lamb New Zealand (B+LNZ) CEO Sam McIvor says the report will be alarming for farmers, rural communities, and wider New Zealanders, who are already concerned about the conversion of food producing sheep and beef land into carbon farming.



“The Orme & Associates report was commissioned by B+LNZ two years ago to track the amount of land purchased for afforestation and taken out of pastoral production. It initially showed more than 52,000ha of land was purchased for forestry interests in 2021,” he says.



“However, the latest revised data shows that figure to be more than 63,000ha, a 66 percent increase on 2020 and up from 7,000ha in 2017.”



Uncertainty over policy changes led to a decrease to 36,000ha in 2022, but McIvor says this figure is likely to increase because there is a backlog of applications sitting with the Overseas Investment Office (OIO).



“This takes the total to more than 200,000ha of sheep and beef farms bought over the last five years, which is a significant concern for the sheep and beef sector and rural communities,” he says.



McIvor says the scale of change is far more than what is recommended by the Climate Change Commission and will have a negative impact on rural communities, food production and export income, which affects all New Zealanders.



“New Zealand is one of the only countries in the world that allows fossil fuel emitters to offset 100 percent of their emissions,” he says.



“The Government is currently consulting on changes to the Emissions Trading Scheme, and it needs to act.



“B+LNZ is not anti-forestry, there is absolutely a place for it and for some offsetting. We know many farmers are interested in integrating trees into their farms, but there is a need for some balance.



“Though less than the sheep and beef industry, forestry does create jobs and export revenue. In contrast, carbon farming doesn’t create jobs or add export returns.



“Production forestry, in combination with carbon forestry, can often be integrated into sheep and beef farms without loss of food production.



“We also recognise the unique circumstances of some Māori landowners who can never sell their land. This is a legitimate instance where carbon credits from offsetting should be available.”



McIvor says the impact of land use change is now being reflected in livestock numbers with Statistics New Zealand’s 2022 Ag Census data showing the national sheep flock to be 25.3 million as of June 2022, a drop of 400,000 from the previous year with numbers likely to fall further due to new plantings.



MPI’s Afforestation and Deforestation report, which focuses on larger scale planting, supports B+LNZ’s findings.



“While whole farm sales seemed to have slowed last year, new plantings continued at pace with another 64,000ha of new forestry planted in 2022,” says McIvor.



“MPI have also surveyed foresters’ intentions for 2023 and estimate a further 88,000ha of new planting in 2023. This data reinforces how quickly farms are being converted.



“The Government must urgently work with the sector to implement limits before it’s too late.”



Land-use change from pastoral farming to large-scale forestry update (Orme & Associates Limited): https://beeflambnz.com/sites/default/files/news-docs/Afforestation-Review-2023.pdf

[Sideshow Bob]

https://www.nzx.com/announcements/416337

PGW Delivers Positive Trading Performance in Volatile Market

GROUP PERFORMANCE

PGG Wrightson Limited1 (PGW) today announced its results for the financial year ended 30 June 2023.

Financial highlights for the year to 30 June 2023 included:

 Operating EBITDA2 of $61.2 million (down $6.0 million or 9% on prior financial year)
 Net profit after tax (NPAT) of $17.5 million (down $6.8 million or 28% on prior financial year)
 Revenue of $975.7 million (up $23.0 million or 2% on prior financial year)
 Fully imputed final dividend of 10 cents per share (22 cents per share for full year)
 Second-strongest trading performance for the business since the PGW Seeds divestment (bettered only by last year’s record result)

PGW Acting Chair, Mr U Kean Seng said “Against a challenging backdrop, PGW delivered strong financial results for the financial year. Although Operating EBITDA of $61.2 million was down $6.0 million (9 per cent) and NPAT of $17.5 million was down $6.8 million (28 per cent), revenue grew to $975.7 million and was up $23.0 million (2 per cent) compared to the prior year. These results were realised with margins broadly in line with the comparative period. This is the second-strongest trading performance for the business in recent years and bettered only by last year’s record result.

The resilient performance of PGW in volatile market conditions is perhaps the most pleasing aspect of the result. Strong operating performance was generated by most business units with Livestock, Wool, and Water all experiencing solid demand. Rural Supplies and Fruitfed Supplies again experienced a standout performance. The exception was our Real Estate business which continues to operate in difficult market conditions.
 
Macro trading conditions for the year have been volatile with increasing input costs, inflationary pressures, and falling commodity returns for our clients., A wet and cold spring delivered frosts which affected a number of crops. Two cyclones through late summer also resulted in significant crop and rural infrastructure damage in the North Island.

In the context of these market conditions, we are heartened by the performance of the business and what has been achieved this financial year. We are proud of the way our team responded to the demands experienced in their regions and the extraordinary efforts of many in the way they supported each other, our clients, and their communities in need.

The Board has declared a fully imputed final dividend of 10 cents per share. The dividend will be paid on 3 October 2023 to shareholders on PGW’s share register as at 5pm on 15 September 2023. This will effectively bring the total fully imputed dividends for the year up to 22 cents per share.”

Retail & Water Group

PGW CEO, Stephen Guerin said, “The Retail & Water business incorporates Rural Supplies, Fruitfed Supplies, Water, and Agritrade. Retail & Water’s Operating EBITDA was an impressive $54.1 million and up $1.6 million on the prior year (or 3 per cent). Revenue of $785.3 million, was up $24.0 million or 3 per cent.

This financial year has been another record year for our Retail & Water businesses. Increased sales were recorded in the animal health, fencing, general merchandise, and horticultural categories.

We transacted increased business volumes with the same level of staff, which is something we are very proud of and testament to the commitment of our team members.

Our clients appreciate the superior technical ability of our people who are backed by our dedicated Research and Development team. We will continue to build on this point of difference to ensure we maintain and increase our market share.

Global supply chain disruptions following COVID-19 caused us to carry higher levels of inventory to ensure we could provide our clients with the right products at the right time. Elevated inventory levels caused some challenges with storage and working capital management. As international shipping delays are easing there is more certainty regarding deliveries. We have adjusted inventory levels given that we do not need to carry the same quantities of buffer stock as was considered necessary in the prior year.

Rural Supplies recorded its best performance ever exceeding last year’s record result, with strong sales across a range of categories. We continued to grow market share and delivered an outstanding result in a shrinking market. To achieve growth on last year is an exceptional result given the climatic challenges and demonstrates the strength of our Rural Supplies business.

Our people are passionate and motivated to go the extra mile for our hardworking clients. We are winning new business and seeking opportunities with key accounts, in animal health, forestry, and the ever-changing landscape of our traditional business.

The wet spring contributed to additional Ag chem sales in our Fruitfed Supplies winery and horticultural merchandise business. Our market share also increased in the vegetable sector which is an important area we have targeted for growth.

The damage caused by spring frosts and floods across parts of the North Island and the impacts from Cyclone Gabrielle in the Tairāwhiti and Hawke’s Bay regions will impact the Fruitfed Supplies business over the next few seasons. However, the long-term outlook for horticulture remains positive.
Our Fruitfed Supplies strategic plan focuses on adapting to changes in the industry, capitalising on category growth, and how we can proactively and strategically adapt to land use change.

The Water business’ strategic focus is to add value to our clients’ businesses by growing service delivery and the best technical advice. We are the market leader with the most technically skilled workforce as verified by Valley and the only current Valley Certified Field Technicians and Certified Valley Designers in the country.
Our Sales and Design crew are actively targeting irrigator upgrade options and enquiries for infill irrigation are increasing, specifically where clients see the benefit of fixed grid solutions.

Agritrade, our wholesale business division, celebrated its 10-year anniversary in September 2022 and showed good growth over this period. This past financial year has seen another lift in sales revenue with growth across horticultural inputs and animal health products. Our range continues to expand as suppliers look to us to supply product given our large logistics function and growing reach to merchants and vets across the country.

Agency Group

Our Agency group incorporates the Livestock, Wool, and Real Estate businesses. Operating EBITDA was $16.1 million and was down $5.8 million on the prior year’s strong result (26 per cent). Revenue was $188.8 million, which was broadly in line with the prior year’s result, down just $0.6 million.

Our Livestock business achieved a solid performance in a difficult market. Whilst there were challenges through softer sheep pricing, significant wet weather events in the North Island and declining tallies in some stock lines, there were also positive outcomes for the year. The wet conditions contributed to greater pasture growth than normal which created unseasonal trading during the summer and autumn seasons.

Revenues received for cattle were robust, with higher prices received compared to the prior year. This was driven by healthy pricing achieved throughout the year which was assisted by abundant feed and increases in export volumes. Sheep pricing was below expectations throughout much of the year as demand was slow to recover in our key export markets.

GO-STOCK, our grazing programme which frees up capital in order that farmers can invest in other areas of their businesses, achieved another record year with the highest balances recorded in terms of values and tallies. GO-BEEF, including the new GO-BEEF PRIME offering, and GO-STOCK DAIRY performed well. During FY23, two significant milestones were reached with over 350,000 cattle and 2.3 million lambs purchased through GO-STOCK since its launch during the 2016 financial year.

The PGW Velvet business delivered a strong performance, achieving its best result ever. This was achieved through increases in volumes traded with South Korean health food customers. China’s extended shutdown caused slower sales which reduced prices on the prior year. With all velvet stock sold and exported, it remains a profitable income stream for deer clients and continues to grow in both production and quality.

The Genetics business achieved some outstanding results with its bull sales. The team is investigating the value add of a “beef over dairy” strategy which will benefit dairy farmers seeking genetics that shorten gestation, maximise ease of birth, and increase profitability of cattle.

Overall, the Wool business had a solid year with total bales procured into stores in line with last year. Wool growers continue to be negatively impacted by cross-bred wool prices. PGW Wool had another steady fine wool season, growing market share supported by high value long-term merino contracts with growers.

The real estate market has experienced one of the toughest years in some time with high interest rates, stricter regulatory requirements, softening commodity prices, and uncertainty regarding the outcome of the general election in October 2023 all contributing to negative sentiment.

This was reflected in operating results for PGW’s Real Estate with the decline in market activity leading to significantly fewer sales being made than in the prior financial year. On the positive side, we maintained our market share and increased share in some regions.”

Cashflow and Debt

Mr U reported that “PGW recorded operating cash flows during the year of $25.5 million, which was $1.8 million higher than the prior year, impacted by higher income tax payments on last year’s exceptional result together with higher funding costs.

PGW invested in working capital during the year, including implementation of our strategy to grow our GO-STOCK receivables book to $74.0 million at 30 June 2023, an increase of $7.9 million or 12.0 per cent from 30 June 2022.

Capital expenditure of $17.1 million was $8.4 million higher than 30 June 2022. This increase was driven by the significant investment in our IT Systems Business Improvement Programme (which includes both operating expenditure and capital expenditure components) and is due to go-live in the 2024 financial year.
Our net interest-bearing debt was $65.3 million as at 30 June 2023, an increase of $32.5 million from the prior comparative period.”

Outlook

Mr U noted, “There is a significant degree of volatility in the global economy and international markets currently. New Zealand, like many of our key trading partner nations are committed to taming inflation with Central banks lifting interest rates. The effect of this monetary policy is being felt with inflation levels beginning to trend lower but with elevated interest rates raising borrowing costs.

Growth in emerging economies is forecast to increase faster than developed countries. The longer-term outlook is positive with the government projecting steady growth for New Zealand primary exports and revenue projected to reach $62 billion by 2027. As a market leader in the sector, PGW is in a strong position to assist our clients grow their businesses as they respond to export demand.

Our country’s farmers and growers are renowned for their resourcefulness and their pioneering spirit continues with creating new solutions to adapt to climate change and become more efficient. Regardless of the regulatory framework that is ultimately adopted, the primary sector will adapt and continue to enhance its social licence to operate. PGW is on a journey to reduce its emissions and has committed to a 30% reduction target by FY30 from our FY21 baseline. This emissions target is part of the broader Sustainability Strategy to embed sustainability within our operations and ensure PGW remains future focused.

It is too soon to forecast trading performance for the year, but we hope to be better placed to provide guidance for FY24 following the start of the important spring trading period at our Annual Shareholders’ Meeting in October 2023. In the meantime, we do note the following positive signals:

 PGW continues to pick up market share and we see this in key categories and in new client enquiry and business.
 Maize orders for the coming spring are strong and tracking ahead of the same time last year.
 The viticulture sector had a good harvest and New Zealand wines are in demand internationally with new plantings planned and Fruitfed Supplies well placed to support the growers.

While we are well positioned operationally as we move into the current financial year, we see continuing volatility and softening commodity prices for our clients and even more challenging macro market conditions out over the short to medium term than experienced in recent years.”

[winner69]

NPAT down 18% on last year but amazingly this year so many records broken and positivity exudes

“Record” used 9 times (a few related last years record) / “positive” 6 times with the odd ‘exceptional”

All in all a positive result …..and looking good for the future

[Sideshow Bob]

Say it enough times, it becomes true.

[winner69]

Operating Cash Flow reported as $25.5m

But when you take off the $19.5m of lease/rent payments it’s really on $6.0m …but ‘positive’ so no worries

After capex Free Cash Flow was negative $10.8m ( cash burn)

Paid dividends of $21.8m so not funded by cash flows

Could say they increased debt by $33m to pay for the Dividend and throw a bit more into GO-STOCK

No doubt me ol mate Snoops will see things differently.

[BlackPeter]

If this 13 nations ‘commitment’ cum agreement to vastly limit livestock farming in order to save the planet gets a foothold in NZ PGW might need to reinvent themselves away from being a rural outfit.

Good the farmers in Netherlands are putting up a big fight

Mind you we seem to be already heading that way ..pretty fast

Biden’s ‘Climate Czar’ John Kerry seems to be leading the charge on this globally ….. suppose it will be better to starve before we burn.

Somewhat outside the scope of this thread ... but I assume you realise that the world could easily produce sufficient food for everybody and at the same time reduce its carbon footprint. If we all just reduce our intake of meat and eat more local produced veges and fruits, if we all stop to wage stupid wars and replace greed and selfishness with consideration for the well being of the globe, it would be a piece of cake to go to carbon neutral and feed everybody.

I don't think the alternative is "starve or burn" ... and NZ certainly could stay a premium producer of agricultural products in a carbon neutral environment. Not sure why anybody would think that we really need to keep intensifying the production of meat and other animal products to prevent the globe from starving?

[Balance]

Somewhat outside the scope of this thread ... but I assume you realise that the world could easily produce sufficient food for everybody and at the same time reduce its carbon footprint. If we all just reduce our intake of meat and eat more local produced veges and fruits, if we all stop to wage stupid wars and replace greed and selfishness with consideration for the well being of the globe, it would be a piece of cake to go to carbon neutral and feed everybody.

I don't think the alternative is "starve or burn" ... and NZ certainly could stay a premium producer of agricultural products in a carbon neutral environment. Not sure why anybody would think that we really need to keep intensifying the production of meat and other animal products to prevent the globe from starving?

Imagine there’s no heaven …

It’s easy if you try.

No hell below us, above us only sky ….

Imagine all the people, living life in peace ..

Etc

Etc

[Sideshow Bob]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/416647/400786.pdf

Elders buying a few more.....from 11.3 to 12.3%

[Snow Leopard]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/PGW/416647/400786.pdf

Elders buying a few more.....from 11.3 to 12.3%

At this rate Elders will have to do the formal takeover thing in Oct 2028. :sleep:

[winner69]

Last year PGW were very proud that they had “ Achieved CPI normalised EBIT growth of 29%”

Just as well they didn’t stay with this CPI normalised stuff this year ….the EBIT decline of 11% would have been 18%

And revenues didn’t keep with inflation either so no doubt they’ve given up on clever reporting

[winner69]

What’s up Snoopy ….PGW share price in free fall ….down nearly 20% last week or so.

At $3.41 almost back to the good old days when everybody got excited if it hit 3 bucks ……and long way off recent high when it got close to 6 bucks

[mike2020]

I can tell you now, look at the div trajectory and think seriously about the current rural situation. Most dairy farmers will make a loss this year and have bought the cost of production down already, how?

[winner69]

I can tell you now, look at the div trajectory and think seriously about the current rural situation. Most dairy farmers will make a loss this year and have bought the cost of production down already, how?

Share price really started tumbling soon after weather guys talked El Niño on way

[Snoopy]

What’s up Snoopy ….PGW share price in free fall ….down nearly 20% last week or so.

At $3.41 almost back to the good old days when everybody got excited if it hit 3 bucks ……and long way off recent high when it got close to 6 bucks

Don't worry Winner. The good thing about PGW is that they cover all aspects and categories of rural supplies. And they specialise on 'the essentials'. Not the nice to haves. I heard on the news this morning we are looking good for a "bumper* season of summerfruit. That is like a bumper year with plenty of cherries on top. Fruitfed is the jewel in the PGW crown. The don't call those growers 'haughtyculturalists' for nothing!

I also think the hesitancy of the banks towards their rural customers will provide a further tailwind for PGW's popular 'Go Livestock' line of finance offerings.

SNOOPY

[mike2020]

Lets all be honest with ourselves, we will all still get excited when it hits $3

[Rawz]

Just had a look at the PnL and wow didn’t realize PGW operates in such a low margin space.

[winner69]

Don't worry Winner. The good thing about PGW is that they cover all aspects and categories of rural supplies. And they specialise on 'the essentials'. Not the nice to haves. I heard on the news this morning we are looking good for a "bumper* season of summerfruit. That is like a bumper year with plenty of cherries on top. Fruitfed is the jewel in the PGW crown. The don't call those growers 'haughytculturalists' for nothing!

I also think the hesitancy of the banks towards their rural customers will provide a further tailwind for PGW's popular 'Go Livestock' line of finance offerings.

SNOOPY

What are the sales and profit of this fruitfed division …numbers seem lost in the Retail and Water segment

[winner69]

Just had a look at the PnL and wow didn’t realize PGW operates in such a low margin space.

Margins always been like that rawz …..the way they operate …..so I suppose you wont be too interested at a p/b of 1.5 …esp if growth aspirations under pressure

[Snoopy]

I feel it might be overstating the credit risk for financing companies. What is that you say? PGW is a rural services trading company is it not? Did they not sell off their finance arm to Heartland group a number of years ago? Well, yes they did, until they brought the finance business back by stealth under the new 'GoLivestock' (GoBeef and GoLamb) banner. Moving forward to FY2022, this new finance business is going from strength to strength with $66.109m of 'GoLivestock' loans on the books at the 30-06-2022 balance date.

$66.109m is an overstatement of the loan book on an annual basis. Livestock loans are seasonal. To get a representative loan balance over the year it is best to take an average of the three loan balance date points across FY2022 that we have: 30-06-2021 ($45.869m) , 31-12-2021 ($35.805m) and 30-06-2022 ($66.109m):

Averaged GoLivestock loan balance over FY2022: ($45.869m+$35.905m+$66.109m)/3 = $49.294m

We should note -in passing- that the interest earned on these 'GoLivestock' loans over FY2022 was $4.254m. Based on that averaged loan balance, this represents a gross return to PGW shareholders of:

$4.254m/$49.294m = 8.6%

That is a very nice little income stream for we shareholders. BUT -and here is my very important learning point- it is not the income on that loan that is taking the risk out of these loan transactions. It is the value of the livestock, that PGW still own, that is the security on this debt.


I always get a little tetchy about companies that have had a 'golden run' and seemingly load themselves up with debt. What happens when the market conditions turn?
I feel it is worth having a closer look at PGW as weather events and commodity prices create a bit of 'on the ground' havoc. My first task is to look at how the GoLivestock 'don't call it a finance division Trev' loans, err I mean 'advances' are going.

Looking at AR2023, this 'GoLivestock' unit has 'advances' on the books of $71.829m+$2.570m = $74.399m (not accounting for the provision of $376k, ref AR2023 p81) as at the 30-06-2023 balance date.

Yet $74.399m is an overstatement of the loan, ahem advance book on an annual basis. Livestock advances are essentially seasonal (although I am curious to know where that $2,570m of non-seasonal GoLivestock balance has come from) . To get a representative 'advances' balance over the year, it is best to take an average of the three 'advances' balance data points across FY2023 that we have: 30-06-2022 ($66.019m) , 31-12-2022 ($43.011m) and 30-06-2023 ($74.023m):

The triangulated averaged GoLivestock balance over FY2023: ($66.109m+$43.011m+$74.023m)/3 = $61.048m

We should note -in passing- that the interest earned on these 'GoLivestock' 'advances' over FY2023 was $6.573m. Based on that averaged 'advances' balance, this represents a gross return to PGW shareholders of:

$6.573m/$61.048m = 10.8%

That is a very nice little income stream for we shareholders. BUT -and here is my very important learning point- it is not the income on that loan (darn it there is that word I wasn't allowed to use) that is taking the risk out of these loan transactions. It is the value of the livestock, that PGW still own, that is the security on this debt. And according to the auditors (AR2023 p104), the security on that livestock loan portfolio looks A.O.K.. (albeit with $375k of provisions taken out).

So a fairly strong asset position and strong income position may be found under PGW's GoLivestock umbrella over FY2023. Just don't call it a finance division Trev!

SNOOPY

[Snoopy]

Have a look at the 'Consolidated Statement of Financial Position' (AR2022 p50). There is a current asset there of 'Go livestock receivables'. $65.504m. This is not some bill that PGW needs to send their debt collectors around to hassle farmers over repaying. This book entry represents live animals 'down on the farm' that at some point will be rounded up and on-sold. The farmers that are looking after these animals are merely the guardians of these beasts that we shareholders own:

"the group retains legal title to the livestock until its sale" (from AR2022 p62)

These receivables are not loans taken out on cars that are depreciating by the day. They are not loans on holidays where the experience has been had and we are relying on the loan holder to keep sweating at their day job to repay it. These 'GoLivestock Receivables' are instead appreciating assets, carefully tended animals, entrusted to the care of farmers vetted by PGW itself. These are farmers that PGW know and have had successful business relationships with for several years.

There are some industry specific risks to consider. As an animal gains weight it generally becomes more valuable. But in a drought, where the animal sustaining capability of the land is reduced, there may be a sudden need to reduce the number of animals on farm. All of a sudden the freezing works are overwhelmed with stock and the price offered to the farmer 'per head' plummets (notwithstanding the animal weight). Add to that the 'storm risk' and the 'disease risk', which may account for some mortality among the stock being raised. But in general, even if a farmer is forced off their land (worst case), the farm itself still exists, bought by a new less leveraged farmer owner. So animals keep being bred, and keep needing to be fattened up. The 'fattening up' bit is what the 'GoLivestock' part of the PGW business supports. And the time frame for this aspect of farming is normally a few months, not years.




Debt Position PGW
EOFY2022


Cash On Hand
($4.676m)


add Short Term Bank Loans
$7.500m



add Long Term Bank Loans
$30.000m


add Net Defined Benefit Liability (Pension Plan deficit)
$2.126m


add Employee Entitlements
$24.643m



Total Bank and Worriesome Liabiliities
$59.413m



less Animal assets (annualised average)
($49.294m)


Total Net Debt
$10.119m



One tweak I might need to make on the above table is to put a 'fudge discount factor' on the value of PGW's animal assets. The above table is treating animals as 'cash in the bank' which might be a little optimistic. Then again that animal value is the value of the animal as bought at auction - not when it has been fed up six months down the track. So maybe I don't need any fudge factoring? I would welcome others comments on whether my overall picture of PGW debt is now more realistic. For me, accounting for the PGW animal assets in this way, puts the overall PGW debt picture in a new light. $10.119m of net debt sounds a lot better than $59.413m!


We have established that the 'Go Livestock' receivables should not be considered as part of PGW company debt. So how does the underlying debt position of PGW stack up to scrutiny?



Debt Position PGW
EOFY2023


Cash On Hand
($4.643m)


add Short Term Bank Loans
$19.960m



add Long Term Bank Loans
$50.000m


add Net Defined Benefit Liability (Pension Plan deficit)
$1.076m


add Employee Entitlements
$19.944m



Total Bank and Worriesome Liabiliities
$86.327m



less Animal assets (annualised average)
($61.048m)


Total Net Debt
$25.279m



One tweak I might need to make on the above table is to put a 'fudge discount factor' on the value of PGW's animal assets. The above table is treating animals as 'cash in the bank' which might be a little optimistic. Then again that animal value is the value of the animal as bought at auction - not when it has been fed up six months down the track. So maybe I don't need any fudge factoring? I would welcome others comments on whether my overall picture of PGW debt is now more realistic. For me, accounting for the PGW animal assets in this way, puts the overall PGW debt picture in a more realistic light. $25.279m of net debt sounds a lot better than $86.327m! Nevertheless that $25.279m is a lot more net debt than the $10.119m that was on the books only a year ago, when the outlook for PGW was brighter.

SNOOPY

[Snoopy]

The next task is to work out what the profit margin is on these GoLivestock loans. To work that out, we need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over FY2022 were $1.832m (AR2022 p55). Once again we will use our three time stamp data points to average the funds borrowed across the year.



Reference Date30/06/202131/12/202130/06/2022


Cash & Cash Equivalents($3.367m)($1.113m)($4.676m)


Short Term Debt$9.900m$18.000m$7.500m


Long Term Debt$0m$30.00m$30.000m


Total Net Debt$6.533m$46.867m$32.824m



=> Average Debt over Year = ($6.533m+$46.687m+$32.824m) / 3 = $28.681m

So the interest rate charged by the banks on the funds loaned was: $1.832m / $28.681m = 6.4%. We know from part 1 of this analysis that the return on funds loaned by PGW was 8.6%. The difference between the borrowed and lent loan rates, multiplied by the average GoLivestock loan balance is the NPBT earned by PGW from these GoLivestock loans:

(0.086-0.064)x $28.861m = $0.635m.

Of course it is likely that PGW earns a commission on the buying and selling of this animal stock via its own sale-yards as well. But such a commission would have been earned whether the animal stock was financed by PGW or not. It is the financing risk we are interested in here. It is only the $0.635m that is directly connected to that.

The $0.635m of profit earned on the funding aspect of the GoLivestock loans is taxable. The associated after tax profit figure was: 0.72 x $0.635m = $0.457m.

Now the declared profit for FY2022 was $24.286m. I would subtract from that the after tax effect of the impairment reversals on saleyards and the impairment reversal on the right of use assets related to the water business (AR2022 p54).

$24.286m - 0.72($0.414m+$0.695m) = $23.488m


The next task is to work out what the profit margin is on these GoLivestock loans. To work that out, we need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over FY2023 were $5.521m (AR2023 p74). Once again we will use our three time stamp data points to average the funds borrowed across the year.



Reference Date30/06/202231/12/202230/06/2023


Cash & Cash Equivalents($4.676m)($2.484m)($4.643m)


Short Term Debt$7.500m$48.000m$19.960m


Long Term Debt$30.000m$50.000m$50.000m


Total Net Debt$32.824m$95.516m$65.317m



=> Average Debt over Year = ($32.824m+$95.516m+$65.317m) / 3 = $64.552m

So the interest rate charged by the banks on the funds loaned was: $5.521m / $64.552m = 8.6%. We know from part 1 of this analysis that the return on funds loaned by PGW was 10.8%. The difference between the borrowed and lent loan rates, multiplied by the average GoLivestock loan balance, is the NPBT earned by PGW from these GoLivestock loans:

(0.108-0.086)x $64.552m = $1.420m.

Of course it is likely that PGW earns a commission on the buying and selling of this animal stock via its own sale-yards as well. But such a commission would likely have been earned whether the animal stock was financed by PGW or not. It is the financing risk we are interested in here. It is only the $1.420m that is directly connected to that.

The $1.420m of profit earned on the funding aspect of the GoLivestock loans is taxable. The associated after tax profit figure was: 0.72 x $1.420m = $1.023m.

Now from the 'Consolidated Statement of Profit and Loss'', the declared profit for FY2023 was $17.518m. We can think of this $17.518m as money available to pay down debt, if the banks demanded that debt be fully repaid (in general this is a hypothetical situation).

SNOOPY

[Snoopy]

We now have enough information to do our two alternative MDRT calculations

MDRT (old way) = (Total Worrisome Debt) / (Declared NPAT) = $59.413m/$23.488m = 2.53 years

MDRT (new way) = (Total Worrisome Debt - Seasonally Adjusted 'GoLivestock' Debt) / (Declared NPAT - GoLivestock NPAT)
= ($59.413m - $49.294m) / ($23.488m - $0.457m) = 0.44 years

------------------------------

My rule of thumb for the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

That means my revised modelling has seen PGW drop from what I had classed as a 'medium debt' company back to a 'low debt' company. And because PGW works in a turbulent sector like agriculture, this is good to see.


We now have enough information to do our two alternative MDRT (Minimum Debt Repayment Time) calculations. Note the 'old way' assumes all of that livestock loan debt is just company debt (not realistic IMV).

MDRT (old way) = (Total Worrisome Debt) / (Declared NPAT) = $86.327m/$17.518m = 4.93 years

MDRT (new way) = (Total Worrisome Debt - Seasonally Adjusted 'GoLivestock' Debt) / (Declared NPAT - GoLivestock NPAT)
= ($86.327m - $61.048m) / ($17.518m - $1.023m) = 1.53 years

------------------------------

My rule of thumb for the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

That means my revised modelling has seen PGW drop from what I had classed as a 'medium debt' company back to a 'low debt' company. And because PGW works in a turbulent sector like agriculture, this is good to see.

Looking out into FY2024, I can see that MDRT figure deteriorating. But at this point I would not be concerned about that. It is something that I would expect as more rural commodities head toward their cyclical market lows.

SNOOPY

[Snoopy]

The table below reflects the dividends actually paid during the years in question.



Year
Dividends Paid 'per share'Sub TotalPGW Rural Servicing Normalised Earnings 'per share'


FY201820.0cps + 17.5cps37.5cps19.7cps


FY201912.5cps + 7.5cps20.0cps10.3cps


FY20207.5cps + 9.0cps16.5cps9.9cps


FY20210.0cps + 12.0cps12.0cps23.6cps


FY202216.0cps + 14.0cps30.0cps32.6cps



Total FY2018 to FY2022 inclusive116.0cps96.1cps



Notes

1/ For FY2018 and FY2019 I have adjusted the 'dividends per share' and 'earnings per share' to be consistent with the subsequent 10:1 share consolidation,

----------------



Discussion: What is a sustainable business cycle dividend range from 'the new PGW'?

The farming years from FY2018 to FY2022 certainly cover a business cycle. But that time period also spans perhaps the most significant restructuring ever of PGW itself. What insight into future farming cycles might we take from this historical earnings and dividend record? Because PGW is such a mature business, the past can reflect on the future. I think it is best to examine what has happened 'year by year'.

FY2022
The dividends paid during FY2022 represent the recent high water mark in operational earnings, and are certainly sustainable if profits hold up. The cyclical nature of farming though, would suggest that the FY2022 'good times' may not last forever. Nevertheless as a portent of future 'good times', I believe the FY2022 level of dividend is indicative.

Conclusion
Only the FY2022 dividend payments qualify as future dividend indicators. In the past, in exercises like this, I have used all of the previous five year dividend payments as 'future dividend indicators'. That was using the assumption that management generally know more than we shareholders, and could 'look through' any unusual single year events to provide a smoothed multi-year dividend stream. However, if you read through some of the individual dividend report years above, there are events that have happened that cannot be 'looked through'. In this special instance I propose to use historical earnings, rather than historical dividends, to forecast future dividend payments as part of a 'capitalised dividend valuation' model.





The above quoted post is based on the FY2019 dividend viewpoint. As per the previous post (5355), I have now reverted to past earnings to give us the best forecast of a 'capitalised dividend valuation' from here going forwards.

The five year earnings per share average for FY2018 to FY2022 inclusive is: (19.7c+10.3c+9.9c+23.6c+32.6c) / 5 = 19.2c

The capitalised dividend required rate of return I have selected is 8.5%. I believe that this is appropriate for a retailer with a relatively weak moat that services a set of customers at the mercy of the weather gods. This means my 'fair value' centre of business cycle valuation is now:

19.2c / (0.72 x 0.085) = $3.14

At $3.14, PGW would be on a normalised historical PE of 314/32.6 = 9.5. That sounds about right for a no growth high yielding share. However PGW closed on the market today at $4.49. That implies of PE of: 449/32.6 = 13.8. Yes I know the share price has traded a whole dollar higher than this within the last twelve months. But $4.49 does seem a lot of money to pay for an agricultural share riding into the high of a business cycle wave.


I have decided the best capitalised valuation technique to use for PGW from a FY2023.5 perspective is a hybrid technique using normalised earnings (2HY2019.5, FY2020 and FY2021) and actual dividends paid (FY2022, FY2023 and HY2023.5). I am effectively using normalised (post restructuring) earnings as a proxy for dividends, because recent history has shown that PGW pay out all of their operational earnings as dividends.



Year
Dividends Paid 'per share'Sub TotalPGW Rural Servicing Normalised Earnings 'per share'


FY201912.5cps + 7.5cps20.0cps9.2cps+1.1cps (1)


FY20207.5cps + 9.0cps16.5cps9.9cps


FY20210.0cps + 12.0cps12.0cps23.6cps


FY202216.0cps + 14.0cps30.0cps32.6cps


FY202316.0cps + 12.0cps28.0cps23.0cps


FY202410.0cps + ?cps10.0cps?cps


Total FY2022 to FY2023.5 inclusive68.0cps


Total FY2019.5 to FY2021 inclusive34.6cps



Notes

1/ Total FY2019 earnings of 5.8cps were not distributed equally throughout the year. I have apportioned the 5.8cps of earnings over FY2019 by considering the NPAT for the 'Agency' and 'Retail & Water' for FY2019 and HY2019 (see Segmented Profit Section of each report) as follows.



Agency {A}Retail & Water {B}{A}+{B}


FY2019$9.600m$11.645m$21.245m


less HY2019$2.249m$16.728m$18.977m


equals 2HY2019$7.351m($5.083m)$2.268m



This means the total portion of 'Agency' and 'Retail & Water' profits earned in 2HY2019 was: $2.268m/$21.245m= 10.68%
0.1068 x 10.3c = 1.1cps

---------------------------

The total return I am capitalising over a period of five years is: 68.0c+34.6c= 102.6c. This works out to be 105.5c/5=20.5cps on average every year. Due to interest rates rising and forecast to be higher for longer, I am raising my required capitalised rate of return to 9.0% gross. I had considered raising that rate even further to 9.5%. However, due to the strong operational performance over the last couple of years reflected in PGW gaining market share and having a relatively stable and well thought of workforce, I thought the company had earned half a percentage point 'required return credit' when I set the required yield rate. Now what does a 9.0% required gross yield on 21.1c of annual payments imply for the share price?

20.5c/ (0.72x0.09) = $3.16

PGW closed at Friday 20th October at $3.42. Given the market share gains made by PGW over the last couple of years, perhaps such a growth premium of $3.42-$3.16= 26cps is justified (remember capitalised dividend valuation assumes zero growth) ? Yet despite the heady price falls from the $5.50+ share price peaks of a couple of years ago, I do not believe this share is 'cheap' at $3.42. I calculate the current year normalised historical PE ratio to be 342/24.1= 14.2. However, if the share price were to continue down toward, and maybe just under, that $3 mark? Then I think PGW would hit that share price point of 'good business cycle buying'.

SNOOPY

discl: holding

[Snoopy]

Inexplicably, PGW did not report and post a prior IFRS16 adjustment over FY2022. The way I see it, that means it is no longer possible to calculate what the PGW profit would have been prior to IFRS16 being introduced. And why does that matter? Because when considering banking covenants, the banks always remove the effect of IFRS16. And I think we shareholders should be allowed to evaluate our company the same way a bank does.


No progress made on this IFRS 16 puzzle as yet. So let's reprise the puzzle in the form of a scenario

-------------------------

Imagine you are the finance director based in PGW's ivory tower (actually now PGW's head office is based at Christchurch International Airport so it might be more correct to call it the 'control tower' - but I digress). The bill comes in from your farthest flung landlord asking for their monthly payment. You open the envelope and out drops two bills, not one. The first bill is titled "Partial Repayment of Lease Liability Principal" and the second bill is titled "Interest due on Lease Liabilities." You scratch your head and wonder what happened to the old days of when you simply got a demand for "rent". However, 'that was then' and 'now is now'. Under the now current IFRS16 reporting standard all rent bills have to be separated into two parts, as described in the two separate pieces of paper that fell out of the single demand envelope.

How realistic a scenario is this? I would say unlikely as in the real world, bills for rent still get sent out. IFRS 16 is merely an accounting reporting construct, which does change the way in which the rent is reported, but not the way the bill is received. It is accepted practice to report "Partial Repayment of Lease Liability Principal" and "Interest due on Lease Liabilities." in the income statement, while the actual rent paid is reported in the cashflow statement.

EXCEPT in the case of PGW both "Interest due on Lease Liabilities." and "Partial Repayment of Lease Liability Principal" are reported in the CASHFLOW statement. And that in turn would suggest the rent bill did indeed arrive in two parts as I suggested in my scenario, with two separate bills falling out of the demand envelope. Could this be true? What the heck is going on inside the control tower for reporting to happen like this? Ideas?

SNOOPY

[Snoopy]

A reality check update for my November 2019 forecast projections for FY2020:

Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
=( -$16.868m + $30.000m + $20.000m ) / $23.446m = 1.41 < 3.00 (good)

That is the balance date figure.


Three years on and with the trading position of PGW going into more difficult times, a reassessment of the Senior Debt Coverage Ratio (SDCR) is in order. We will look at the 30th June balance date first. The cash balance (offsetting debt) together with the long term company debt and short term company debt come straight from the balance sheet. The operating EBITDA figure is from the Consolidated Statement of Profit and Loss.

Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
=( -$4.643m + $19.960m + $50.000m ) / $61.194m = 1.07 < 3.00 (very good)

So all looking very good then, EXCEPT, these figures are not what they seem. The "Senior Debt"/EBITDA hurdle was set up in pre IFRS 16 days. IFRS 16 mandates the transfer of rent from what was an operating expense to a finance expense, an operation that inflates the EBITDA figure accordingly. That means if we make the adjustment to a comparable pre IFRS 16 figure, by removing the 'interest paid on lease liabilities' and 'repayment of principal portion of of lease liabilities' (both figures may be found in the cashflow statement), then the comparable EBITDA figure reduces to this:

$61.194m - ( $3.800m + $19.532m ) = $37.862m

This is not the end of the adjustment exercise, unfortunately. This is because the the EBITDA figure quoted includes income from the 'GoLivestock' financing operation, the liabilities of which I have not included in the debt picture. It follows then that if I am not including 'GoLivestock' debt in this exercise, I must also exclude any income associated with that debt. So what is the interest revenue associated with 'GoLivestock'? $6.573m (AR2023 p71). That has to come off the EBITDA figure as well.

$37.862m - $6.573m = $31.289m

That means the adjusted Senior Debt Coverage Ratio calculation becomes:

=( -$4.643m + $19.960m + $50.000m ) / $31.289m = 2.09 < 3.00 (good, but no longer very good)

Looking out into FY2024, investors might want to consider what might happen if EBITDA reduces further in FY2024, while debt remains at today's levels. But that couldn't happen, could it?

SNOOPY

[winner69]

Farmer said going into a Farmlands or a Wrightsons store is like going into a supermarket …..’all the prices have doubled’

Isn’t that higher $ margin for PGW?

[BlackPeter]

Farmer said going into a Farmlands or a Wrightsons store is like going into a supermarket …..’all the prices have doubled’

Isn’t that higher $ margin for PGW?

I guess it depends on whether PGW's cost doubled as well :) ;

[Snoopy]

Farmer said going into a Farmlands or a Wrightsons store is like going into a supermarket …..’all the prices have doubled’

Isn’t that higher $ margin for PGW?


I am having a little trouble with my net profit figures Winner, because I am having to guess on removing the IFRS 16 adjustments that are distorting the cashflow of the reported figures. FWIW here is where I have got to so far:



FY2023FY2022Reference


Net Profit (declared)
$17.518m
$24.286m
AR2023 'Consolidated Statement of Profit and Loss'


add back/ subtract Impairment / Fair Value Gains
0.72x ($0.051m)
0.72x $2.182m
AR2023 Note 5


add back/ subtract Forex Losses / Forex Gains
0.72x $0.737m
0.72x ($0.430m)
AR2023 Note 6


subtract IFRS 16 rent cost correction
0.72x ($0.613m)
0.72x ($0.613m)
See table Note 1/


subtract Non Operational Gains
0.72x ($0.327m)
0.72x ($0.699m)
AR2023 Note 4


equals Normalised NPAT
$17.335m
$24.603m


divided by Operating Revenue
$975.692m
$952.700m


equals Normalised Net Profit Margin
1.78%
2.58%



Notes

1/ This figure is a guess. I have simply repeated the figure from FY2021 when we were able to calculate what it was. I don't believe there was sufficient disclosure in the FY2022 and FY2023 annual result releases to calculate this unfortunately.

-----------------------------

If these results are not exactly right, I can still claim they are comparable because I have made the same IFRS16 'adjustment error' in both years. So yeah all good for PGW with their 'doubled prices', provided their input costs have not doubled in sympathy. Which is I think what this table is telling us is it not ;-P ?

SNOOPY

[mike2020]

Im astounded at the cost of processing home kills since I left the farm mid 2020. If that is the type of cost being incurred across the sector farmers are going to struggle.

[Snoopy]

That means the adjusted Senior Debt Coverage Ratio calculation becomes:

=( -$4.643m + $19.960m + $50.000m ) / $31.289m = 2.09 < 3.00 (good, but no longer very good)

Looking out into FY2024, investors might want to consider what might happen if EBITDA reduces further in FY2024. But that couldn't happen, could it?


When debt and earnings are lumpy, as they are at PGW, sometimes it is useful to look at covenants over more than one period. I have used my annual report and half year report collection to compile semi-annual earning periods over the last two years, as below:



2HY20231HY20232HY20221HY2022


EBITDA (quoted)$13.350m$47.844m$19.725m$47.428m


less Lease liability Interest payment$1.892m$1.908m$1.878m$1.908m


less Lease liability principal payment$9.966m$9.566m$8.952m$9.291m


less GoLivestock Income$3.199m$3.374m$2.359m$1.895m


equals EBITDA (Covenant calculation adjusted)-$1.507m$32.996m$6.356m$34.334m



I can use the above table to look at how the SDCR stacks up over the 12month period made up of 2HY2022 and 1HY2023 as an example.
Note that the 'Senior Debt' as at HY2023 was: -$4.676m (cash) + $48,000m (current bank debt) + $50,000m (non-current bank debt) = $93.324m. (Reference HYR2023 'Interim Consolidated Statement of Financial Position').

Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
= $93.324m / ($32,996+$6.356m) = 2.37 < 3.00

That SDCR is still OK, although closer to 'the standard' edge than the same calculation made six months later at EOFY2023.

SNOOPY

[Snoopy]

Another ten years on update

FCCR= [EBITDA+Lease Expenses] / [Total Interest(less interest income in cash)+Lease Expenses]

= [$30m + $21.904m] / [$3.826m + $21.904m] = 2.0 > 2.0

The fixed cost coverage ratio just passes but with nothing to spare. More evidence that PGW is 'mortgaged to the max'


The above quote is a 'forecasted value' for FY2020. This was before the implementation of IFRS16, which changed the definition of EBITDA (lease expenses are now included in EBITDA). Nevertheless it will be necessary to take off the income resulting from the GoLivestock loans ($6.573m, ref AR2023 p71). I shall now attempt an up to date version of this covenant calculation.

FCCR= [(EBITDA+Lease Expenses)(1)] / [Total Interest(less interest income in cash)+Lease Expenses]

(1) Under IFRS16, the definition of EBITDA has been rewritten to include lease expenses. So there is no need to add them back as a 'supplementary entry' as before.

= [$61.194m - $6.573m] / [$5.521m + ($3.800m+$19.532m]] = 1.89 < 2.0 (! Oh oh)

It looks like PGW has failed this covenant test. But did I do it right?

SNOOPY

[Sideshow Bob]

https://www.nzx.com/announcements/420425

Operating EBITDA forecast for year to 30 June 2024 to be around $52 million

PGG Wrightson Limited (PGW) Acting Chair, U Kean Seng, commented today that “There is a significant degree of volatility in the global economy and international markets currently. The effects of New Zealand’s monetary policy are also being felt with inflation levels beginning to trend lower but with elevated interest rates raising borrowing costs.

While some parts of the rural sector are recovering from last summer’s cyclones there is also concern about the potential for drought conditions in the coming months due to El Niño weather patterns. Demand in key export markets has declined and China’s economic recovery remains subdued. These factors combine to hamper confidence and reinforce cautiousness as farmers and growers anticipate the impacts on the profitability of their business operations.

Although the sector faces a challenging year, this is nevertheless balanced by strong medium to longer-term fundamentals. We expect to see improvement as the economies of our key export markets recover. The global population and demand for protein is projected to show continued growth and the fundamentals for the agri-sector remain sound.

The Ministry for Primary Industries is projecting steady growth for New Zealand’s primary exports with annual revenue expected to reach $62 billion by 2027. As a market leader in the agricultural sector, PGW is in a strong position operationally to support our clients grow their businesses as they respond to this uptick in demand.
On balance, we remain cautious about the financial year ahead given the mixed signals in the macroeconomic environment. Trading for the first quarter was back on last year and was influenced by these factors and a subdued real estate market.

PGW is forecasting an Operating EBITDA2 result for the year to 30 June 2024 of around $52 million. As noted earlier, while the medium to long-term sector fundamentals remain strong, our short-term Operating EBITDA is expected to be back from last year’s strong Operating EBITDA result of $61.2 million based upon our current assessment of a more challenging operating environment. However, it is early in our financial year, and we will be in a better position to assess the full year forecast again after the spring trading period.”

[winner69]

Operating EBITDA in F22 was $67m ….in F23 $61 ….and down further to $52m in F24

Is a volatile world eh ….times are tough but a 15% decline in profit isn’t that good

Look forward to Snoops comments

[Snoopy]

I have to admit HY2021 is looking better than I expected. However that 'at least' 8c forecast interim dividend will not be finally confirmed until after the half year results are in next year. So let's hope everything holds up and wool comes back into the black. Storm clouds on the horizon for the livestock division in 2HY2020 though. The drought this year saw much slaughtering of stock was brought forward. So fewer beasts to go under the hammer this financial year.

The Chairman admitted to giving a visiting delegation from the Chinese BAIC Limited a whistle stop tour of PGW's business in N.Z. earlier this year. But he was quite adamant that the investment was purely strategic when he asked BAIC representatives their plans. No evidence that BAIC have been buying above $2.75 yet. Until proven otherwise, I am assuming any post AGM share price flurry is due to NZ based yield chasers (now the dividend is forecast to return), not BAIC.

I won't be buying any more shares myself above $2.75. I don't think the business picture painted going forwards at the AGM justifies a further re-rating in the share price going forwards.


Above comments are from the 2020 AGM, the last one subject to 'beagle snout scrutiny'. BAIC is now gone from the share registry, at a good profit of course, replaced by Elders.



Operating EBITDA in F22 was $67m ….in F23 $61 ….and down further to $52m in F24

Is a volatile world eh ….times are tough but a 15% decline in profit isn’t that good

Look forward to Snoops comments.


I sent the pup with the biggest snout out to the AGM at the Sudima Airport Hotel this morning. Apart from the EBITDA downgrade for FY2024 (actually not really a downgrade as I don't think there has been a hint of a forecast for FY2024 before, but it will be less than FY2023 - that much is clear) the report back was that this was one of the 'tightest lipped' AGMs of any company ever.

I am not saying the presentations were not thorough, quite the reverse. CEO Steve Guerin gave a particularly comprehensive run down of the trials and tribulations of each division. But having just read the annual report again prior to the meeting, Steve's verbal report sounded like a Dictaphone repeat of what was just read. No up to the minute insights added. It was left to Deputy Chair Sarah Brown to deliver the less than glowing quarterly update, against a background of the worst farmer confidence surveys since the 1980s. Yikes, I think that was when Roger Douglas was in the beehive carving out a new financial direction, including the end of farm subsidies, with big David. It must surely be tough times indeed on our farms today if our farmers confidence has regressed to those levels. Rather than one of those AGMs where incisive illuminations were made, this AGM was notable instead for events that did not happen, not being spoken about. My snout on the ground reports:

A/ There have not been any high level talks with Elders about any further plans they might have for their 11.96%b PGW stake at reporting date (now a 12.3% stake as at 18th August). Of course being in the same industry, albeit on opposite sides of the ditch, PGW folk cannot help but run into Elders folk at supplier gatherings. But no more should be read into it than that.
B/ Largest shareholder Guanglin Lai was enjoying his first AGM for a while and enjoying his time in sunny Christchurch, while looking forward to coming back next year (IOW he is not planning to sell out).
C/ Shareholder question on banking covenant compliance danced around by CFO Peter Scott, but no numerical answers given. Follow up question at the after match function suggested that PGW was on good terms with their banking syndicate, and they did not want to give their competitors an edge by publishing too much information that could lead to reverse engineering of interest margins and overall profit margins.
D/ Other questions answered along the lines of 'We follow company protocols, blah blah blah.' IOW an object lesson on how to answer a question without giving any specifics.

In summary, this was an AGM where investors looking for answers did not get them. Although looking at things another way, the non-answers were answers, for those prepared to look through the facade of excuses for the answers not given. The outlook is best summarised as 'nothing new to get excited about', apart from 'we will battle through the current rural malaise'. However, the sausage rolls at the after match function were excellent (eat your heart out Chris Hipkins).

SNOOPY

[Snoopy]

Operating EBITDA in F22 was $67m ….in F23 $61 ….and down further to $52m in F24

Is a volatile world eh ….times are tough but a 15% decline in profit isn’t that good

Look forward to Snoops comments


Interesting to plug this new EBITDA guidance into the 'Consolidated Statement of Profit and Loss for FY2023' and the associated cost structures.

Consolidated Statement of Profit and Loss





FY2024 ForecastFY2023 Actual



Operating EBITDA
$52.000m$61.194m



less Depreciation and Amortisation Expense
$28.063m$28.063m


equals EBIT
$23.937m$33.509m


less Net Interest and Finance Costs
$9.573m$9.573m


equals Profit Before Income tax
$14.364m$23.936m


less Income Tax Expense$4.022m$6.418m


equals Profit Net of Income Tax$10.342m$17.518m



Now: $10.342m/75.484m= 13.7cps

As it happens 10.0cps has already been paid out during FY2023 as the final dividend for FY2022. So to keep that balance sheet intact, the final dividend paid during FY2024 (actually the interim dividend for FY2024) should be no more that 4cps. And 4cps is only a little down on the interim dividend paid in that same time space but a year earlier of 12cps. Hey, just a minute........

SNOOPY

[Sideshow Bob]

You'd also have to expect that the 'Net Interest & Finance Costs' are more likely to be higher this year.

Pleased to hear that the sausage rolls were excellent Snoopy. That may be your feed from PGW this year.....??

[winner69]

Jeez Snoops …a 15% decline in ebitda leads to a 40% decline in npat

That’s a disaster ..we’ll almost

If you are close with your $10.3m npat that’s an eps of 14 cents

So PGW on a PE of about 24 at the moment

Just as well the market doesn’t work on PE ratios eh

[winner69]

Maybe punters waiting for the ‘reassessed’ guidance they will give in a few months …….but you wouldn’t want it to be more dismal eh

[winner69]

Snoops …thanks for your meeting report and the sums you’ve done since

Well done

[Snoopy]

You'd also have to expect that the 'Net Interest & Finance Costs' are more likely to be higher this year.


I thought about that, then considered that PGW could probably downsize their inventory a bit to go towards debt reduction. So hopefully no increase in that interest rate bill. Remember PGW have had the foresight to appoint a 'Scott' as CFO. Scott by name equals Scottish by nature?



Jeez Snoops …a 15% decline in ebitda leads to a 40% decline in npat

That’s a disaster ..we’ll almost


I suggest you plot the projected profit fall on a log scale graph Winner. It looks much less dramatic if you do that.

SNOOPY

[winner69]

That possible npat if $10m for F24 is pretty dreadful

Not much more than when they were in the depths of despair in 2020

Just as well share price doesn’t follow profits in PGW’s case

[Snoopy]

SHAREHOLDER, NUMBER OF SHARES HELD



Holderas at 1st August 2022as at 1st August 2023


1/
Agria (Singapore) Pte Limited
33,463,399
33,463,399



2/
BCA New Continent Agri Hldg. Limited (BCA)8,993,305



2/
Elders Limited9,026,128


3/
HSBC Nominees (New Zealand) Limited
1,489,589 1,345.634


4/
New Zealand Depository Nominee Limited936,6081,111,351


5/
FNZ Custodians Limited973,536952,601


6/
Custodial Services Limited508,379662,491


[TR]
7/
Forsyth Barr Custodians Limited689,547662,437


7/
Accident Compensation Corporation579,446


8/ Nicolaas Johannes Kaptein500,962500,962


9/ JBWERE (NZ) Nominees Limited470,443442,909


10/ Citibank Nominees (New Zealand) Limited493,956407,550


11/ Elizabeth Beatty Benjamin & Michael Murray Benjamin (Michael Benjamin Family a/c)
300,000300,000


12/ H&G Limited 295,000 295,000


13/ Ian David McIlraith230,000230,000


14/ GMH 38 Investments Limited 200,000 229,217


15/ Robert Vincent Cottrell & Lesley Maureen Cottrell 202,898 202,898


16/ Leveraged Equities Finance Limited 204,217 192,417


17/ Totara Grove Investments Limited 280,000 180,000


18/ David Mitchell Odlin 214,400 178,700


19/ Colin Hugh Notley & Jan Marie Notley 175,000 175,000



Bullet Points

a/ The exit of the Chinese government from the share registry and the arrival of Elders has been well documented during the year. The ACC departure somewhat less so.
b/ Former substantial shareholders H&G, a vehicle controlled by the Cushing family, maintain their interest in a small way (well small for them, 295,000 shares is still quite a lot!)
c/ GMH 38 Investments looks like a private investment vehicle based in Auckland with one 'Graeme John Hitch' being the 75% shareholder.
d/ Totara Grove is a private investment vehicle of Colin Robert Beaven, who owns 100% of the shares.
e/ Leveraged Equities is a fully owned subsidiary of the Forsyth Barr Group.

My final observation is that the 'top twenty' shareholder list in AR2023 is really only a 'top 19', because the shareholder numbering system jumped from 5 straight to 7' But apart from the 20th largest shareholder missing out on their moment of fame, I don't think the omission will do much damage. It may look like the same happened in AR2022 as well if you look at my table. But if you look carefully you will see that the list from AR2022 contains two number 7s, which is a quirk of the way I decided to present the table.

SNOOPY

[Snoopy]

I remain a bit concerned about ability of PGW to generate cash in tough times. So I have raided my collection of past reports to conduct my own figurative 'searching down the back of the sofa' exercise. My rationale for creating the table below is as follows:

a/ There will always be bills to pay and accounts to collect. My view is that it is useful to look at the difference between those two totals . That way we can discern that if 'refusing to pay bills' is being used as a tool to artificially reduce debt. If the 'net receivables' is positive at any balance date (first part of the table), then it is possible that this is going on. Adding on any 'net receivables' provides a truer company debt picture.
b/ I think of inventory as an asset, which is, subject to the desires of management - to convert it into cash. As a 'PGW store owner', this would ideally happen in the oncoming season after balance date. In this sense, I think of inventory as 'always on the cusp of being converted to cash'.
c/ I am valuing this inventory 'at cost' in the table, because in tough times, it may be necessary to sell it at cost (when you have to make an assumption on profit margins, make it conservative).
d/ I am not considering cash generation from 'services' where there is no company owned inventory to sell. As an example, in tough times real estate may be difficult to sell, so we cannot guarantee profits from this division.

I am not exactly sure what CFO Peter Scott, following questioning at the AGM meant where he mentioned that the banks were looking at "Clean down of our working capital (short term debt) on an annual basis." as an area to report on. But I think the general idea of keeping tabs on the lending from year to year and how the profits ebb and flow around that loan balance are similar to the kind of picture I was attempting to illustrate in the table below.



Reference Date
31/12/2021
30/06/2022
31/12/2022
30/06/2023


Reference Period Named
HY2022
FY2022
HY2023
FY2023


Trade and Other receivables
($296.772m)
($170.336m)
($321.851m)
($154.656m)


less Accounts payable & accruals
$269.311m
$189.290m
$273.959m
$164.107m






Cash balance generating position



equals Net Receivables................!
($27.461m)
$18.884m
($47.892m)
$9.451m


add Inventory
($111.939m)
($102,048m)
($129.717m)
($107.533m)


add Cash & Cash Equivalents
($1.113m)
($4.676m)
($2.484m)
($4.643m)


add Short Term Debt
$18.000m
$7.500m
$48.000m
$19.960m


add Long Term Debt
$30,000m
$30.000m
$50.000m
$50.000m


equals Total Net Debt
($92.513m)
($50.340m)
($82.093m)
($32.765m)



Discussion

The table above is four snapshots in time of an edited down version the PGW balance sheet. That means the table doesn't say anything about earnings directly. But it is earnings that have indirectly resulted in those balance sheet movements over time. When you have a service business that is facing macro-environment headwinds, preparing for a severe downturn is relatively easy - sack a few staff. However, such a strategy would likely backfire in an specialised inventory heavy retail business, because products don't select themselves, order themselves and walk themselves out to the customer's ute. I regard another way of looking at 'tabulated inventory' as an 'emergency cash fund'.

At any time inventory can be converted to cash. After the passage of enough time, hopefully all of it will be converted to cash. Furthermore, as long as the inventory is sold at a profit, the company will pick up some incremental shareholder funds as well. But of particular interest today is what happens in tough times. A useful thing about customers of rural suppliers is that in order to keep their animals and/or crops in top, saleable, condition -no matter what is going on in the wider economy-, some money will have to be spent. And if - worst case - the farmer is so poor they cannot even do that, then PGW clips the ticket anyway as the 'must be sold' stock go through their sale-yards. Then the new animal owner becomes the PGW retail customer! This table could be interpreted as working on a 'worst case' scenario, showing what would happen where the inventory must be quit at cost. Of course such a scenario - quitting all your inventory stock at cost, because the banks demand you instantly must pay off all of your debt - is very unlikely to occur in practice. So the real value in such a table is to examine the relative size of the 'liquidity rescue lifeboat (the inventory) to see how well prepared the PGW company is for, if not a full sinking, a repairable gash in the side of the hull.

The last line for all four of the timestamp periods, which can be thought of as the size of the emergency lifeboat, is negative for all periods examined. But a negative debt is an asset, which is a good thing. Yet looked at in the light of the previous paragraph, and based around the normal trading conditions of 2HY2023 our 'lifeboat' has halved in size (by $50.340m - $32.765m = $17.575m). The next question is, how significant is that $17.575m?

SNOOPY

[percy]

I remain a bit concerned about ability of PGW to generate cash in tough times. So I have raided my collection of past reports to conduct my own figurative 'searching down the back of the sofa' exercise.



Reference Date
31/12/2021
30/06/2022
31/12/2022
30/06/2023


Trade and Other receivables
($296.772m)
($170.336m)
($321.851m)
($154.656m)


less Accounts payable & accruals
$269.311m
$189.290m
$273.959m
$164.107m


equals Net Receivables
($27,461m)
$18.884m
($47.892m)
$9.451m



Inventory
($111.939m)
($102,048m)
($129.717m)
($107,533m)




Cash & Cash Equivalents
($1.113m)
($4.676m)
($2.484m)
($4.643m)



Short Term Debt
$18.000m
$7.500m
$48.000m
$19.960m


Long Term Debt
$30,000m
$30.000m
$50.000m
$50.000m


Total Net Debt
$m
$32.824m
$95.516m
$65.317m


Inventory and debt builds up for their peak selling period,Spring.
Reduces for end of year 30th June,and as at 30/6/23 it was under 25% of their market cap.

[winner69]

Hey snoops …all OK as most of extra debt incurred in F23 went to pay the divie

No harm in borrowing to keep shareholders happy eh

[winner69]

Snoopy has a point when he says ‘I remain a bit concerned about ability of PGW to generate cash in tough times. ‘

Like 12 months to June 23 PGW had negative cash flows ….and it looks like F24 is likely to be tougher.

F23 Cash Flow -

Reported cash from operations $25.5m
Less rents paid $19.5m
Gives real cash from operations of $6.0m

Spend on capex $16.8m

Gives Free Cash Flow negative $10.8m ….the old cash burn trick

But they still paid divies of $21.7 …….funded by borrowing more

The F23 cash burn was more than previous year ……so last 2 years PGW haven’t generated any cash after selling the best part of a billion of stuff.

No wonder Snoopy a bit worried …..esp as head honcho raved on things a bit tough …and volatile

[Snoopy]

Inventory and debt builds up for their peak selling period,Spring.
Reduces for end of year 30th June,and as at 30/6/23 it was under 25% of their market cap.

Yes I hear you Percy. You spend up big for the coming season building up inventory to sell, and as a result your debt goes up. It doesn't matter if your debt goes up as long as you have enough offsetting glossy inventory on the shelves and lots of eager beaver farmers ready to 'spring into action' (see what I did there) to buy it. That is how rural supplies traders are meant to operate.

We are using 30th June (the company balance date) as a proxy for when the spring stock is ready to fly out the doors and the the 31st December half year date as a proxy for when most of those big sales are done.

You could express this same idea in the form of an equation. Something like:
(Inventory) + (Profit Margin) - (Dividends Paid Out) = (Dosh Available to buy Inventory for next season)

But I am looking at that really bad year where no money is made by the retailer and no dividend is paid out. So our equation reduces to:
(Inventory) = (Dosh Available to buy Inventory for next season)

Outside of this equation, I want you to think of PGW as a 'black box' with debt going up and down for whatever reason. The question I am thinking about is what is the underlying ability of those relatively liquid assets (the inventory) to wipe out that total debt balance, however it came to be?

Rather than thinking about that specific gloomy prospect, lets go back to the normal year. You sell the goods, your inventory goes down and now you can repay the bank, so your debt goes down too. So you would expect your net debt position to be more favourable at the end of the selling season, (at our 31st December sold down by proxy date) - right? That is what the table (post 5063, not the work in progress thing you repled to) is showing. Higher 'negative net debt' (sorry about the double negative) or more net assets (probably a better way to think of it) at the 31st December reporting date. But the table is also showing us that the 'net income generating asset position' is deteriorating, by $10m at the half year date and nearly $20m at the full year date (year on year). I don't think that can be good.

SNOOPY

P.S. Not sure what point you were making by referring to 'market cap' in the context of the 'money flow', (or 'potential money flow'), I was talking about.

[Snoopy]

Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA < 3.00

The "Senior Debt"/EBITDA hurdle was set up in pre IFRS 16 days. IFRS 16 mandates the transfer of rent from what was an operating expense to a finance expense, an operation that inflates the EBITDA figure accordingly. That means if we make the adjustment to a comparable pre IFRS 16 figure, by removing the 'interest paid on lease liabilities' and 'repayment of principal portion of of lease liabilities' (both figures may be found in the cashflow statement), then the comparable EBITDA figure reduces to this:

$61.194m - ( $3.800m + $19.532m ) = $37.862m

This is not the end of the adjustment exercise, unfortunately. This is because the the EBITDA figure quoted includes income from the 'GoLivestock' financing operation, the liabilities of which I have not included in the debt picture. It follows then that if I am not including 'GoLivestock' debt in this exercise, I must also exclude any income associated with that debt. So what is the interest revenue associated with 'GoLivestock'? $6.573m (AR2023 p71). That has to come off the EBITDA figure as well.

$37.862m - $6.573m = $31.289m

That means the adjusted Senior Debt Coverage Ratio calculation becomes:

=( -$4.643m + $19.960m + $50.000m ) / $31.289m = 2.09 < 3.00 (good, but no longer very good)

Looking out into FY2024, investors might want to consider what might happen if EBITDA reduces further in FY2024, while debt remains at today's levels. But that couldn't happen, could it?




The last line for all four of the timestamp periods, which can be thought of as the size of the emergency lifeboat, is negative for all periods examined. But a negative debt is an asset, which is a good thing. Yet looked at in the light of the previous paragraph, and based around the normal trading conditions of 2HY2023 our 'lifeboat' has halved in size (by $50.340m - $32.765m = $17.575m). The next question is, how significant is that $17.575m?


Let's do a forecasting exercise based on the projected EBITDA for FY2024, superimposed over the debt structure of FY2023.

EBITDA for bank covenant purposes = $52.000m - ( $3.800m + $19.532m ) -$6.573m = $22.095m

Now senior debt cannot exceed 3x this value or: 3 x $22.095m = $66.285m
But balance date debt @30th June 2023 was: -$4.683m + $19.960m + $50.000m = $69.955m (too much to be set off against the new downsized EBITDA forecast)

We still have a good sized inventory lifeboat on board at balance date, with a capacity of $32.765m dollars. Cutting inventory by one tenth of that value, which equates to a $3.2765m/$107.533m = 3.05% of the total inventory value looks do-able. But it is now clear that satisfying these banking covenants, in particular relating to the Senior Debt Ratio, will not be the same 'walk in the park' in FY2024, as it was in FY2023.

SNOOPY

[Snoopy]

The above quote is a 'forecasted value' for FY2020. This was before the implementation of IFRS16, which changed the definition of EBITDA (lease expenses are now included in EBITDA). Nevertheless it will be necessary to take off the income resulting from the GoLivestock loans. I shall now attempt an up to date version of this covenant calculation.

FCCR= [(EBITDA+Lease Expenses)(1)] / [Total Interest(less interest income in cash)+Lease Expenses]

(1) Under IFRS16, the definition of EBITDA has been rewritten to include lease expenses. So there is no need to add them back as a 'supplementary entry' as before.

= [$61.194m - $6.573m] / [$5.521m + ($3.800m+$19.532m]] = 1.89 < 2.0 (! Oh oh)

It looks like PGW has failed this covenant test. But did I do it right?


To get a better idea what we are talking about with FCCR, from 'Investopedia':
What Is the Fixed-Charge Coverage Ratio?

"The fixed-charge coverage ratio (FCCR) measures a firm's ability to cover its fixed charges, such as debt payments, interest expense, and equipment lease expense. It shows how well a company's earnings can cover its fixed expenses. Banks will often look at this ratio when evaluating whether to lend money to a business."

Investopedia then goes on to show us a slightly different formula for calculating FCCR than the one used to evaluate the FCCR number for PGW in the past. That is annoying, so I will revert back to the PGW definition of FCCR used in the past, and use the 'guiding principle' expressed in the Investopedia opening paragraph (as quoted above) to keep myself straight on why we are doing this calculation in the first place.

Since PGW were not censured by their banking syndicate for their FY2023 result (publicly anyway), this is an indication that my calculation, as quoted above, may not be right.

The total interest figure of $5.521m (Note 6 AR2023) is made up of 'bank interest on loans and overdrafts' of $4.565m and a 'bank facility fee' of $0.956m. Now the bank facility fee is a fixed charge imposed by the banking syndicate. It is not part of the normal monthly operating free flow of cash in and out of the business. So it would be a little bizarre if the bank asked for an FCCR covenant test to be done, but then imposed a hefty one off charge to ensure that their customer, PGW, failed the bank's own 'FCCR test'! I don't see the benefit in a banking syndicate firing 'foot shots' into their own client base.

If I leave the bank facility fee out of the FCCR covenant equation, (while still subtracting GoIncome Interest Revenue of $6.573m from the top line, AR2023 p71) it changes to to this:

FCCR= [(EBITDA - 'GoLivestock Interest Income'] / [Total Interest(less interest income in cash)+Lease Expenses]
= [$61.194m - $6.573m] / [$4.465m + ($3.800m+$19.532m)] = 2.0 (That just scrapes in over our 'target margin of 2 or more'). Phew!

SNOOPY

[Snoopy]

There is something about the 'GoLivestock' funding model that makes me feel uncomfortable. It all made perfect sense until I zoomed right out and took the big picture view. 'GoLivestock' is sold on the basis that farmers can free up capital for other uses. But if it was such a good idea, why wouldn't the banks be queuing up to put their own capital into funding livestock? Part of the answer could be that with the closing down of much of the banking network, especially in rural towns, banks simply do not know their customers any more. If a farmer is reduced to a number on a wider spreadsheet, how can a bank judge a risk of a rural loan? OTOH PGW do have a rural network that stretches out into the heartland in a way no other kind of organisation can. PGW understand their customers, know their ability at fattening stock from their sale-yard records, and consequently have a very good idea of who they should 'rent' those PGW owned animals out to, to fatten them up for market under a 'GoLivestock' plan.

Then I got to thinking. What if 'GoLivestock', and schemes of their ilk, did not exist? That would mean there would be far fewer farmers able to afford to pay the prices that animals sell for in the sale-yards today. Pre-fattening animal prices would be much lower. But that wouldn't bother the farmer, because the farmer's ability to rear that animal would not change. In fact the percentage gain in price from purchase would likely increase once that animal was fattened up, if the initial capital buy in price was lower. That is because the ultimate sale price is set by end line market demand. And market demand cares not a hoot about how these animals were financed in the early stages of their growth. Looked at this way 'GoLivestock' resembles a ponzi scheme where farmers are bidding against each other, spending capital they don't have (but which certain lenders are happy to clip the ticket to advance to them) to raise the base pre-fattening price of all animals. If there is a sudden 'farmer awakening' that the 'opening capital' invested into animals does not have to be so high, then the owner of those animals might take a significant capital hit. And the owner of those animals, under the 'GoLivestock' scheme, is PGW itself!

I am sure that no-one thinks much about this stuff when farming is ticking along nicely, and price rises and falls are small perturbations about a mean. But what about the case of a more substantial market shock? What would happen if a whole series of farmers went broke, and PGW was left $70m of livestock on the balance sheet (their animal stock level at EOFY2023) that they could only sell for half that amount? Have the more than able finance team at PGW really thought about the 'shock downside' of their financial strategy? Or is this all just alarmist nonsense by me, fuelled by market malaise trickling down into my computer?

SNOOPY

[mike2020]

I would not want you to tell this to a stock agent Snoopy, they would take it badly. I knew a lot of PGW agents and counted them as friends, that is how good they are at client relationships, they do know every farmer well. Busy guys who communicate well both with clients and each other. They intend to keep you happy both in buying and selling because they make money each time and retain loyalty, there is competition out there and they fight hard to keep clients.
That said they all get a decent income and company car to tow the boat...I'd say they have incentive.

[kiora]

PGW is a funny business.

My understanding is

Delayed charge for seasonal items: A lot of their "inventory" doesn't have to be paid for until sold

Their markups is S*^t as far as I know

(other retailers wouldn't get out of bed for 20%GP or even less would they?)

[winner69]

NBR says Oliver and NZSA have gone soft :)

Has the Shareholders’ Association gone soft? At the annual meeting for PGG Wrightson in Christchurch on Wednesday, the NZSA’s personable CEO Oliver Mander began his questions by congratulating the board on its environmental and sustainability reporting and followed up by asking acting chair U Kean Seng what plans there were to appoint a permanent independent chair, since he had assumed the position “as a result of issues associated with Lee Joo Hai”. Those issues, some may recall, involved Lee being arrested and charged with securities offences in Singapore in March. U remarked that the appointment of an independent chair “is something the board will continue to review”. Mander thanked him. “And, just to reiterate, I think we all appreciated the swift response made by the company in relation to that situation,” he said. Just to reiterate, PGG Wrightson didn’t reveal Lee’s “lapses” until June 30 and initially said they had no bearing on his chairmanship. Four days later, the board changed its mind and said U would be acting chair while the Singapore charges were ongoing. A week later, it said Lee would not stand for re-election at the AGM. Swift? The Bin says bring back the biff.

Paywalled
https://www.nbr.co.nz/private-bin-2/ebos-royal-connection-nzsa-goes-soft-williams-corp-diversifies/

[Snoopy]

PGW is a funny business.

My understanding is

Delayed charge for seasonal items: A lot of their "inventory" doesn't have to be paid for until sold

Their markups is S*^t as far as I know

I would pick that due to PGWs 'strong market position' they might be in a position to 'strong arm their suppliers' into such deals. I don't know whether you saw my post 5463 yesterday kiora, but that post did partly allude to exactly the point you have just made. The relevant bit of that table, in post 5463, I reproduce below:




Reference Date
31/12/2021
30/06/2022
31/12/2022
30/06/2023


Reference Period Named
HY2022
FY2022
HY2023
FY2023


Trade and Other receivables
($296.772m)
($170.336m)
($321.851m)
($154.656m)


less Accounts payable & accruals
$269.311m
$189.290m
$273.959m
$164.107m






Cash balance generating position



equals Net Receivables................!
($27.461m)
$18.884m
($47.892m)
$9.451m


add Inventory
($111.939m)
($102,048m)
($129.717m)
($107.533m)



At the last balance date, the table is showing $164.107m of accounts payable, while the company has an inventory balance of $107.533m. Correct me if I am interpreting these figures incorrectly. But I think what this table is telling us is that PGW haven't paid for any of their inventory, because the accounts they have to pay vastly exceed, by about 50%, the total value of their inventory stock. LOL! What a great business model if you can make that work.

O.K. I realise it is not quite that simple.Some of those accounts for payment could be things like power bills, phone bills, rent due or even commissions from real estate sales not yet paid to the selling agent. You could pillory PGW for setting such egregious payment terms with their suppliers. But if you look at the table again you can see by the trade receivable balance, the billing total owed to them by farmers, is also very high. So another way of looking at that table is to say that PGW are using their suppliers credit to offer some pretty generous repayment terms to their farmer customers. IOW farmers are the winners and suppliers are the losers in this 'credit go around', while PGW sits roughly neutral -in terms of financial benefit-, right in the middle.

SNOOPY

[Snoopy]

To get a better idea what we are talking about with FCCR, from 'Investopedia':
What Is the Fixed-Charge Coverage Ratio?

"The fixed-charge coverage ratio (FCCR) measures a firm's ability to cover its fixed charges, such as debt payments, interest expense, and equipment lease expense. It shows how well a company's earnings can cover its fixed expenses. Banks will often look at this ratio when evaluating whether to lend money to a business."

Investopedia then goes on to show us a slightly different formula for calculating FCCR than the one used to evaluate the FCCR number for PGW in the past. That is annoying, so I will revert back to the PGW definition of FCCR used in the past, and use the 'guiding principle' expressed in the Investopedia opening paragraph (as quoted above) to keep myself straight on why we are doing this calculation in the first place.

Since PGW were not censured by their banking syndicate for their FY2023 result (publicly anyway), this is an indication that my calculation, as quoted above, may not be right.

The total interest figure of $5.521m (Note 6 AR2023) is made up of 'bank interest on loans and overdrafts' of $4.565m and a 'bank facility fee' of $0.956m. Now the bank facility fee is a fixed charge imposed by the banking syndicate. It is not part of the normal monthly operating free flow of cash in and out of the business. So it would be a little bizarre if the bank asked for an FCCR covenant test to be done, but then imposed a hefty one off charge to ensure that their customer, PGW, failed the bank's own 'FCCR test'! I don't see the benefit in a banking syndicate firing 'foot shots' into their own client base.

If I leave the bank facility fee out of the FCCR covenant equation, (while still subtracting GoIncome Interest Revenue of $6.573m from the top line, AR2023 p71) it changes to to this:

FCCR= [(EBITDA - 'GoLivestock Interest Income'] / [Total Interest(less interest income in cash)+Lease Expenses]
= [$61.194m - $6.573m] / [$4.465m + ($3.800m+$19.532m)] = 2.0 (That just scrapes in over our 'target margin of 2 or more'). Phew!




I am not too happy with my efforts so far calculating this. Despite my impassioned argument in 'attempt 2', I have decided the 'Bank Facilities Charge' is a real charge that has to be met by income. Whether that charge is imposed by the bank (which it is) or not is irrelevant. I still have to include it.

The other change I am making is to take off only the cost of the 'GoFinance' income from the top line. Not the whole of the 'GoFinance' income like I did before. I should do this because all of the other top line items have had their cost of sales removed when the EBITDA figure is given. But being a pure finance scheme earner, the cost of running that 'GoFinance' loan is the interest cost and in fact the only company cost on the capital that is needed to fund it. This gives me a bit of problem because PGW does not disclose this 'funded interest rate' cost. Fortunately I have already done my homework on this topic. Post 5441 gives an indicative cost of funds rate of 8.6% on an average debt balance of $64.552m.

In funding cost terms, this translates to a dollar amount of: 0.086 x $64.552m = $5.551m over the year. We now have the information needed to complete our bank covenant equation.

FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [Total Interest(less interest income in cash)+ Banking Facilities Charge+Lease Expenses]

= [$61.194m - $5.551m] / [($4.565m-$0.485m)+$0.956m+($3.800m+$19.532m)] = 1.96 which is less than our targeted 2.00 figure, albeit not by much. That in turn leads me to my overall conclusion as best expressed by Charlie Brown: "Arrrrrrrrrggh!"

Combine a stupid dog brain with not enough firm information and you don't get the answer. Anyone like to factor a guess on what I have done wrong this time? (Or will those errant corporate syndicate bankers, going after PGW, be at the Christchurch Airport park PGW HQ front door, baying for blood on Monday morning after all?)

SNOOPY

[Snoopy]

The next task is to work out what the profit margin is on these GoLivestock loans. To work that out, we need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over FY2023 were $5.521m (AR2023 p74). Once again we will use our three time stamp data points to average the funds borrowed across the year.



Reference Date30/06/202231/12/202230/06/2023


Cash & Cash Equivalents($4.676m)($2.484m)($4.643m)


Short Term Debt$7.500m$48.000m$19.960m


Long Term Debt$30.000m$50.000m$50.000m


Total Net Debt$32.824m$95.516m$65.317m



=> Average Debt over Year = ($32.824m+$95.516m+$65.317m) / 3 = $64.552m

So the interest rate charged by the banks on the funds loaned was: $5.521m / $64.552m = 8.6%. We know from part 1 of this analysis that the return on funds loaned by PGW was 10.8%. The difference between the borrowed and lent loan rates, multiplied by the average GoLivestock loan balance, is the NPBT earned by PGW from these GoLivestock loans:

(0.108-0.086)x $64.552m = $1.420m.

Of course it is likely that PGW earns a commission on the buying and selling of this animal stock via its own sale-yards as well. But such a commission would likely have been earned whether the animal stock was financed by PGW or not. It is the financing risk we are interested in here. It is only the $1.420m that is directly connected to that.

The $1.420m of profit earned on the funding aspect of the GoLivestock loans is taxable. The associated after tax profit figure was: 0.72 x $1.420m = $1.023m.

Now from the 'Consolidated Statement of Profit and Loss'', the declared profit for FY2023 was $17.518m. We can think of this $17.518m as money available to pay down debt, if the banks demanded that debt be fully repaid (in general this is a hypothetical situation).


This is not a correction. More an alternative point of view. I worked out PGW's borrowing costs in the past year, and I have quoted these above. But for that exercise I included the interest paid AND the borrowing establishment fees when calculating my number. Since the establishment fee does not change with account use, it is equally correct to calculate an interest rate charged while omitting the establishment fee from the calculation. I now find I need to do this because in my FCCR calculation, post 5475, I have just realised that I have double counted the establishment fee by removing it from the numerator as a cost, but then offsetting those consequently reduced earnings against that debt expense again by retaining the 'set up cost' in the denominator.

The reassessment of PGW's bank loan 'borrowing costs' is as follows. The borrowing costs over FY2023 were $4.565m (AR2023 p74). Once again we will use our three time stamp data points to average the funds borrowed across the year.



Reference Date30/06/202231/12/202230/06/2023

]

Cash & Cash Equivalents($4.676m)($2.484m)($4.643m)


Short Term Debt$7.500m$48.000m$19.960m


Long Term Debt$30.000m$50.000m$50.000m


Total Net Debt$32.824m$95.516m$65.317m



=> Average Debt over Year = ($32.824m+$95.516m+$65.317m) / 3 = $64.552m

So the interest rate charged by the banks on the funds loaned, interest charges only, was: $4.565m / $64.552m = 7.1%. That is rather different to the 8.6% figure that I was using before. That 7.1% is quite a good interest rate for a rurally based business isn't it? No wonder senior management did not want to spell it out specifically at he AGM for all to see! Ah well, it is out in the public domain now.

SNOOPY

[Snoopy]

FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [Total Interest(less interest income in cash)+ Banking Facilities Charge+Lease Expenses]



Another factor I have been thinking about in my 'Fixed Cost Coverage Ratio' formula in relation to 'the cost of doing business' is the 'cost of equity'. All that loan, sorry 'advance', money 'GoestoLivestock' 'out the door' on the strength of the PGW balance sheet. That is capital built up from 100 years of employee sweat (plus some capital from a certain Mr Lai in Hong Kong). Surely that has a cost which we need to reflect in these figures somehow? I am sure an investment banker would agree with this proposition.

Yet - it turns out, - in this context- , I believe our investment banker friend is wrong. FCCR is not about investment. It is instead an 'emergency siren warning' where 'cash coming in' is compared to 'cash going out'. I am not denying that capital has a cost. But by this FCCR measure there is no associated cash going out attached to the PGW share capital. That means, in the FCCR context, the cost of capital is zero - well maybe not quite.

There is the cost of the sausage rolls to warm the bellies of investors at the AGM. But as to the cost of that, a certain caretaker prime minister would have a much better idea than I do!

SNOOPY


'

[Valuegrowth]

I just went through their balance sheet. One positive factor is they don’t have a lot of debt, but I am concern about their cash generation. Cash is king for any business. However, they can have long term business opportunities. Any reason for stagnated stock prices for a considerable period. High cost of doing business is one factor for poor performance in many sectors. Rents, insurance, energy, and other raw materials stuff are sitting at historically high prices.

[Oliver Mander]

There is always some context involved :-). The 'biff' will be there when needed...

[Snoopy]

I just went through their balance sheet. One positive factor is they don’t have a lot of debt.


Following the sale of the PGW seed division, PGW was in a position to make a large capital repayment to shareholders, and therefore optimise debt. One way to consider what might be an optimised debt structure for this company is to look at the FY2020 balance sheet. The FY2020 balance sheet was the first produced after the capital repayment. If FY2020 was indeed 'optimal', it therefore becomes interesting to compare the debt:equity ratio at that time with the debt to equity ratio in subsequent years.



FY2020FY2021FY2022FY2023


Total Liiabilities {A}$302.751m$279,496m$337.268m$327.267m


Total Assets {B}$459.453m$453.034m$509.952m$496.528m


Debt Ratio {A}/{B}65.9%61.7%66.1%65.9%





Short Term Bank Debt$30.000m$9.900m$7.500m$19.960m


plus Long Term Bank Debt$20.000m$0m$30.000m$50.000m


equals Total Term Bank Debt$50.000m$9.900m$37.500m$69.960m





GoLivestock Asset Balance$48.111m$45.869m$66.109m$74.023m





Sales Revenue {C)$679.379m$714.894m$822.481m$854.503m


Inventory {D}$87.111m$81.498m$102.048m$107.533m


Inventory Turnover {C}/{D}7.8 times/yr8.8 times/yr8.1 times/yr7.9times/yr



At first glance, some might say the debt ratio for PGW is quite high. However, we have to remember that PGW today has become more of a hybrid 'retailer' and 'rural animal bank' (via the GoLIvestock initiative). Finance companies in general, finance loans with a small amount of their own equity in the loan, and with by far the largest amount of their loan capital made up from borrowings. This tends to give finance companies an unfavorable debt ratio compared to pure retailers. It is this 'finance company effect' that is pushing up the debt ratio of PGW above what one might expect in pure retailers. It is interesting to note that should the GoLivestock loan portfolio be called in (this isn't going to happen, the suggestion is made to make a theoretical point), then there would be enough money to pay back all of their bank debt at the end of year balance date. By this measure then, company debt may be thought of as quite low.

Further information I have included on total bank debt shows that although this is rising, such a rise has not hit the debt ratio of the company. There is an argument to be made that PGW debt is only rising, because the GoLivestock live animal portfolio is rising in value in tandem.

Meanwhile PGW stock turn looks acceptable, with total product inventory turned over at a consistent rate of 8 times per year.

SNOOPY

[Valuegrowth]

"Thanks so much- That was really helpful"
Following the sale of the PGW seed division, PGW was in a position to make a large capital repayment to shareholders, and therefore optimise debt. One way to consider what might be an optimised debt structure for this company is to look at the FY2020 balance sheet. The FY2020 balance sheet was the first produced after the capital repayment. If FY2020 was indeed 'optimal', it therefore becomes interesting to compare the debt:equity ratio at that time with the debt to equity ratio in subsequent years.





FY2020
FY2021
FY2022
FY2023


Total Liiabilities {A}
$302.751m
$279,496m
$337.268m
$327.267m


Total Assets {B}
$459.453m
$453.034m
$509.952m
$496.528m


Debt Ratio {A}/{B}
65.9%
61.7%
66.1%
65.9%






Short Term Bank Debt
$30.000m
$9.900m
$7.500m
$19.960m


plus Long Term Bank Debt
$20.000m
$0m
$30.000m
$50.000m


equals Total Term Bank Debt
$50.000m
$9.900m
$37.500m
$69.960m






GoLivestock Asset Balance
$48.111m
$45.869m
$66.109m
$74.023m






Sales Revenue {C)
$679.379m
$714.894m
$822.481m
$854.503m


Inventory {D}
$87.111m
$81.498m
$102.048m
$107.533m


Inventory Turnover {C}/{D}
7.8 times/yr
8.8 times/yr
8.1 times/yr
7.9times/yr



At first glance, some might say the debt ratio for PGW is quite high. However, we have to remember that PGW today has become more of a hybrid 'retailer' and 'rural animal bank' (via the GoLIvestock initiative). Finance companies in general, finance loans with a small amount of their own equity in the loan, and with by far the largest amount of their loan capital made up from borrowings. This tends to give finance companies an unfavorable debt ratio compared to pure retailers. It is this 'finance company effect' that is pushing up the debt ratio of PGW above what one might expect in pure retailers. It is interesting to note that should the GoLivestock loan portfolio be called in (this isn't going to happen, the suggestion is made to make a theoretical point), then there would be enough money to pay back all of their bank debt. By this measure then, company debt may be thought of as quite low.

Further information I have included on total bank debt shows that although this is rising, such a rise has not hit the debt ratio of the company. There is an argument to be made that PGW debt is only rising, because the GoLivestock live animal portfolio is rising in value in tandem.

Meanwhile PGW stock turn looks acceptable, with total product inventory turned over at a consistent rate of 8 times per year.

SNOOPY

[Snoopy]

I am concerned about their cash generation. Cash is king for any business. High cost of doing business is one factor for poor performance in many sectors. Rents, insurance, energy, and other raw materials stuff are sitting at historically high prices.




Snoopy has a point when he says ‘I remain a bit concerned about ability of PGW to generate cash in tough times. ‘

Like 12 months to June 23 PGW had negative cash flows ….and it looks like F24 is likely to be tougher.

F23 Cash Flow -

Reported cash from operations $25.5m
Less rents paid $19.5m
Gives real cash from operations of $6.0m

Spend on capex $16.8m

Gives Free Cash Flow negative $10.8m ….the old cash burn trick

But they still paid divies of $21.7 …….funded by borrowing more

The F23 cash burn was more than previous year ……so last 2 years PGW haven’t generated any cash after selling the best part of a billion of stuff.

No wonder Snoopy a bit worried …..esp as head honcho raved on things a bit tough …and volatile


Time to tabulate this cashflow issue.




FY2020FY2021FY2022FY2023



Reported cash from operations$34.227m$57.671m$23.660m$25.509m


less Repayment of Principal Portion of Lease Liabilities($17.586m)($18.399m)($18.873m)($19.532m )


less Cashflow from investing activities($11.020m)($3.430m)($7.747m)($16.758m)


equals Cashflow from day to day operations$5.621m$35.842m($2.960m)($10.781m)





Debt Ratio (refer post 5480)65.9%61.7%66.1%65.9%




Short Term Bank Debt$30.000m$9.900m$7.500m$19.960m


plus Long Term Bank Debt$20.000m$0m$30.000m$50.000m


equals Total Term Bank Debt$50.000m$9.900m$37.500m$69.960m





GoLivestock Asset Balance$48.111m$45.869m$66.109m$74.023m






Selected Expenses





FY2020FY2021FY2022FY2023Increment FY2022 to FY2023



Freight costsNot disclosed$9.814m$12.438m$14.925m+20.0%


IT & Telecommunications costs$11.641m$12.981m$13.372m$15.435m+15.4%


Rent (lease capital + interest charge)$21.771m$22.335m$22.659m$23.332m+3.0%



Employee Expenses {B}$113.964m$119.828m$132.874m$137.561m+3.5%


Travel Costs$3.044m$2.858m$2.317m$4.446m+91.9%



Selected Expenses Total (excluding employee expenses)N/A$47.988m$50.785m$58.138m


Increased Expenses Total (Year to year )N/AN/A+$2.797m+$7.353m






Sales Revenue {A)$679.379m$714.894m$822.481m$854.503m


Sales Revenue / Employee Expenses {A}/{B}6.06.06.26.2



-----------------------------------------

In an attempt to reconcile where the near $8m deterioration on operational cashflow came from between FY2022 and FY2023, I have had a look at selected disclosed expenses that are most likely to be meaningful. Labour is the biggest dollar cost increase. But this appears to me 'money well spent' because for every extra dollar spent on wages, sales revenue went up in proportion. I don't mind if wage costs go up, when there is a proportionate increase in productivity. Rent going up accounts for an $0.6m increase in the cost base. Overall rent has increased well below the rate of inflation, so we can't claim 'greedy landlords' as an excuse for restricted profitability either.

'Worst offender' appears to have been freight costs, up 20%, that accounted for a $2.5m blow out in operating cashflow on their own. FY2023 was touted as the year of the 'business improvement program' to simplify PGWs IT systems. That doesn't square up with a 15.4% increase in IT and Telecommunications costs (AR2023 p7), accounting for $2m of the deterioration in operating cashflow. Maybe it was the 'telecommunications bit' that blew the budget?

Travel expenses up $2m completes the selected expenses picture. As well as higher overseas air fares in general, the CEO indicated at the AGM that PGW had taken the trouble to reconnect with overseas suppliers when previously Covid-19 restrictions had limited international meeting opportunities during the height of the pandemic.

Sum up these incremental totals and I get: $0.6m+$2.5m+$2m+$2m= $7.1m

Moving on to 'trade and receivables', (AR2023 p80), prepayments are down by $1.3m - a direct hit to cashflow. That takes the operational revenue cashflow shortfall to $8.4m. There are smaller numbers that I have not reported on that affect cashflow both positively and negatively. Nevertheless I believe the broad story of deteriorating operating cashflow is reflected in the selected operating expense items I have chosen to highlight.

There are at least four ways to fix an operational cashflow short fall:
1/ Bring more revenue in such that the increase in revenue offsets any incremental cost increases required,
2/ Restructure the business to reduce expenses to match the lower income revenue expected.
3/ Get more customers to pre-pay for their goods.
4/ Reduce capital investments

So there is my run down on the operational revenue issue. I have suggested what could be done to address the issue. But what should be done to address the issue? That's next.

SNOOPY

[Snoopy]

There are at least four ways to fix an operational cashflow short fall:
1/ Bring more revenue in such that the increase in revenue offsets any incremental cost increases required,
2/ Restructure the business model to reduce expenses to match the lower income revenue expected.
3/ Get more customers to pre-pay for their goods.
4/ Reduce capital investments

So there is my run down on the operational revenue issue. I have suggested what could be done to address the issue. But what should be done to address the issue? That's next.


With farmers showing the least confidence since the mid 1980s, it would be a brave Fred (or Freida?) to spend big on the farm if they aren't banking on making any money this year. What is PGWs best option to deal with this grey farming picture?

Option 1/ is out of farmer's control, so scratch it.
Option 3/? Ha ha ha ha ha ha! Who says I don't have a sense of humour?
Option 4/ Well, most of the big IT spend is done, and management could pause their upgrade on a couple of stores. They could reduce their intake of trainees for year. Yes! There is also the possibility of reducing stock in the stores, and turning inventory into cash. This will require very careful consideration. With PGW pushing the 'service ethic' button, the last thing a farmer would want to hear is that the whazmo in the PGW catalogue that they need next month will take three months to get on the water ex-China. However, I definitely think that this idea is worth perusing. Maybe reduce some 'optionality of choice' rather than removing product categories entirely? Reducing inventory by 5% would add :
0.05 x $854.503m = $43m to cashflow. So where does this leave Option 2?

Option 2: I think there is room for freight rates to come down a bit internationally. So perhaps there is room to move the mark up margin on some lines, without increasing the price? $1m to be gained here? Now PGW are reacquainted with all of their suppliers, perhaps they could knock their travel plans back a bit too - $1m more saved! $1m here and $1m there? Hmmmm I can't see this overall plan generating cash of significance!

Perhaps the answer might be 'none of the above' and just wind back the 'GoLivestock' scheme? Any money PGW can withdraw from that, can go straight back to repaying debt. This sounds like a much less risky option to me than potentially damaging the business model via 'cost cutting' on the retail side, just when they had invested all that hard earned energy building up the reputation of Retail!

SNOOPY

P.S. Share price down 4.5% today to $3.20. I think that is now very close to fair value on a business cycle basis (refer post 5443). But as we know, share prices can overshoot fair value, both on the upside and the downside. (Snoopy note: Looking to increase my holding, but the price must be right!)

[kiora]

Option 3 ?
I doubt that PGW pay for any freight. Suppliers are more likely to pay any freight cost for goods

Farming hitting a wall of confounding costs :Stress test for farmers

https://businessdesk.co.nz/article/finance/rbnz-stress-testing-82-of-sheep-and-beef-farms-unprofitable-at-150t-emission-price?utm_source=7am+Headlines+from+BusinessDesk&utm_campaign=073300db55-7am+Headlines&utm_medium=email&utm_term=0_617c2ef34a-073300db55-446239310

[Snoopy]

Option 3 ?
I doubt that PGW pay for any freight. Suppliers are more likely to pay any freight cost for goods

Farming hitting a wall of confounding costs :Stress test for farmers

https://businessdesk.co.nz/article/finance/rbnz-stress-testing-82-of-sheep-and-beef-farms-unprofitable-at-150t-emission-price?utm_source=7am+Headlines+from+BusinessDesk&utm_campaign=073300db55-7am+Headlines&utm_medium=email&utm_term=0_617c2ef34a-073300db55-446239310


Hi kiora,

1/ Freight is listed as an explicit item under 'Cost of sales' (Note 2) in the PGW annual report. That means PGW did pay for 'something' categorized as freight.

2/ Furthermore in his AGM address, CEO Stephen Guerin said this:
"International travel recommenced after COVID-19 travel restrictions with visits to our suppliers in America, Europe, Australia, and Singapore. These trips are crucial to the business to ensure that we are at the forefront of new research and products coming to the market. These visits also foster and reforge relationships with our suppliers and overseas partners and create favourable trading partnerships."

3/ Under 'Other expenses' (Note 3) travel costs ballooned significantly from $2.317m to $4.446m

Those are the facts we know. At this point it is a matter of how you choose to 'join the dots'.

My take on it was that for some items they stock, PGW deals with overseas suppliers directly and buys 'zigwams', sourcing directly from the factory overseas. In that instance I would expect PGW to hire their own container and pay to get product from the factory source, where-ever that may be in the world, to NZ. $4.446m in freight charges sounds a lot. But put it in the context of $854.503m of annual product sales revenue and I get:
$4.446m/$804.503m= 0.55%

That percentage freight charge sounds low to me, indicating that 'freight expense' only partially represents the total freight movements enacted by the company. So that fits in with the narrative of most products delivered 'freight free' from an NZ local service source, while there is a small sub-section of stock that is acquired directly from overseas suppliers, where PGW pay the freight.

Another possibility is that farmers arrange carriers to pick up their orders from the local PGW outlet and PGW have a fee-bate system where they effectively go halves with the farmer on freight costs. In that instance those 'freight costs' under Note 2 would be domestic. I do know some retail businesses that operate this way. But whether PGW does, I do not know.

I could be totally wrong about all of this. But that is how I 'joined the dots'.

SNOOPY

[Snoopy]

I am not too happy with my efforts so far calculating this. Despite my impassioned argument in 'attempt 2', I have decided the 'Bank Facilities Charge' is a real charge that has to be met by income. Whether that charge is imposed by the bank (which it is) or not is irrelevant. I still have to include it.

The other change I am making is to take off only the cost of the 'GoFinance' income from the top line. Not the whole of the 'GoFinance' income like I did before. I should do this because all of the other top line items have had their cost of sales removed when the EBITDA figure is given. But being a pure finance scheme earner, the cost of running that 'GoFinance' loan is the interest cost and in fact the only company cost on the capital that is needed to fund it. This gives me a bit of problem because PGW does not disclose this 'funded interest rate' cost. Fortunately I have already done my homework on this topic. Post 5441 gives an indicative cost of funds rate of 8.6% on an average debt balance of $64.552m.

In funding cost terms, this translates to a dollar amount of: 0.086 x $64.552m = $5.551m over the year. We now have the information needed to complete our bank covenant equation.

FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [Total Interest(less interest income in cash)+ Banking Facilities Charge+Lease Expenses]

= [$61.194m - $5.551m] / [($4.565m-$0.485m)+$0.956m+($3.800m+$19.532m)] = 1.96 which is less than our targeted 2.00 figure, albeit not by much. That in turn leads me to my overall conclusion as best expressed by Charlie Brown: "Arrrrrrrrrggh!"

Combine a stupid dog brain with not enough firm information and you don't get the answer. Anyone like to factor a guess on what I have done wrong this time? (Or will those errant corporate syndicate bankers, going after PGW, be at the Christchurch Airport park PGW HQ front door, baying for blood on Monday morning after all?)


I am vacillating as to whether to incorporate the set up cost for the banking facilities as part of the interest payment or not.

The interest payments have a dual role in this calculation. One as the interest payment that PGW must make to their banking syndicate (rather obviously), with the second role being the cost base for the 'GoLivestock' loans that I am required to remove from EBITDA as a cost of doing the finance side of the business (because all operational costs of doing business should be removed when EBITDA is calculated). Time to restore the 'GoLivestock Interest Cost' figure back to just the interest cost, not including the banking facility set up cost? Not now.

I call it the 'Go Livestock Interest Cost'. But actually it is a cost derived from the interest paid on the combined short and long term bank loans. You could argue that those loans belong to PGW in general, and are not specific costs that are to be matched up against 'GoLivestock' income. I would argue that it is best not to think like that, because the 'stock loaned against' numbers have gone up with the 'GoLivestock' loan book going up in value. That means it would be possible to pay off all company debt should the GoLivestock program be completely wound down (EOFY2023 perspective). History has shown that to work through retailing business cycles, having no company debt (disregarding all of the retailers lease agreements which are quite onerous enough in themselves) can be smart business practice. So I think it is reasonable to consider at the full year balances date, the retail and agency arms of PGW as 'debt free company divisions', with an add on finance division ('GoLivestock'), which does carry an appropriate level of debt.

Post 5476 gives an indicative cost of funds rate of 7.1% (this figure excludes the bank facility set up costs, and is 'interest only') on an average debt balance of $64.552m. In funding cost terms, this translates to a dollar amount of: 0.071 x $64.552m = $4.583m over the year. We now have the information needed to complete our bank covenant equation.

FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [Total Interest(less interest income in cash)+ Banking Facilities Charge+(Lease Expenses)]

= [$61.194m - $4.583m] / [($4.565m-$0.485m)+$0.956m+($3.800m+$19.532m)] = 2.0 which is just equal to the targeted 2.0 figure.

All good then. But with a covenant like this going 'so close to the wire', you do wonder what would happen if the EBITDA falls as forecast over FY2024.

SNOOPY

[Agrarinvestor]

Dear Shareholder,

I am the German Idiot that have aquired 60000 Agria Shares a decade ago. They were delisted many years ago. Still owning these shares.
Can someone give me short update if AGRIA is still a shareholder of PGW?
I you have any usefulls hints for me, please provide them.

kindly greetings from Germany

Agrarinvestor

[iceman]

Dear Shareholder,

I am the German Idiot that have aquired 60000 Agria Shares a decade ago. They were delisted many years ago. Still owning these shares.
Can someone give me short update if AGRIA is still a shareholder of PGW?
I you have any usefulls hints for me, please provide them.

kindly greetings from Germany

Agrarinvestor

I hope this helps: https://app.companiesoffice.govt.nz/companies/app/ui/pages/companies/142962/shareholdings

[Agrarinvestor]

Many thanks Iceman.

If anyone has an idea how to convince Agria to buy back my shares it would be most welcome.
Thinking about asking Management of PGW for helpm or perhaps it is as a last not prefered chance to ask New Zealand Press for help.
I think Chinese Investors are investing everywhere and can rely on fairnss in NZ or Europe

regard

Agrarinvestor

[winner69]

PGW retail arm doing OK but competitors losing money


In their respective financial years to the end of June, Farmlands recorded a loss of nearly $680,000, while Ruralco's net loss after tax came in at $2.1 million.

https://businessdesk.co.nz/article/finance/farm-retailers-profits-hit-as-on-farm-inflation-bites

[Balance]

PGW retail arm doing OK but competitors losing money


In their respective financial years to the end of June, Farmlands recorded a loss of nearly $680,000, while Ruralco's net loss after tax came in at $2.1 million.

https://businessdesk.co.nz/article/finance/farm-retailers-profits-hit-as-on-farm-inflation-bites

The hits just keep coming at the agricultural sector, unfortunately.

Latest is China's decision to ban frozen deer velvet from June 2024. Dried velvet can still be exported but the China importers prefer frozen.

https://www.nzherald.co.nz/the-country/news/deer-industry-in-limbo-after-china-changes-frozen-velvet-import-rules/WOBS3676DNDXHEQPATPSRAIPEE/

That's after lamb prices dropped 'hard and fast' this year, impacting sheep farmers' incomes by over 20%+.

https://www.rnz.co.nz/news/country/501824/20-percent-plus-drop-in-lamb-prices-harder-and-faster-than-expected

Then, there's El Nino around the corner with farmers quitting stock units ahead of the hot, dry and windy conditions expected over summer.

[Toddy]

I cut my expenditure with PGW by 90 percent and Farmlands by 30 percent. Just went without.

Whenever I did go to PGW, the car park was empty. So surprised that they have outperformed Farmlands.

Oh for one of those cushy Wellington Government Department contracting jobs with no measurable outcomes.

[Snoopy]

The full year time periods that I have listed below are not exact matches. This is because the PGW financial year ends on 30th June and the ELD financial year ends on 30th September. I first saw the Elders version of this information in the Elders November 2023 Analyst Briefing Day Presentation. So I thought it would be worthwhile comparing how PGW's equivalent statistics panned out over the near similar time periods.

I note that, since 14th December 2022, Elders has acquired a strategic 12.5% stake in PGW. However, as far as I can tell from the FY2023 Elders annual report, the results from this investment are reported as 'Equity accounted profits', which fall below the revenue line in the income statement. Thus there is no 'cross contamination' of PGW revenue reported within the Elders revenue results. Neither is there cross contamination of 'sales costs', because PGW sales costs are included in PGW equity earnings.

'Gross profit' (or 'Gross margin'), as defined by Elders, is 'Underlying EBIT' plus 'administration and distribution' costs (AR2023 p13). PGG Wrightson does not express gross profit in this way. So it needs to be calculated from the constituent information in the annual report (details in table notes). I present the comparative table below:




Elders verses PGG Wrightson comparative performance table






FY2019
FY2020
FY2021
FY2022
FY2023
Four Years of Change (Annual compounding)



Elders Revenue
$A1,626m
$A2,093m
$A2,549m
$A3,445m
$A3,321m


Elders % Revenue Change YoY
N.A.
+28.7%
+21.8%
+35.2%
-6.50%

+104% (+19.5% p.a.)




PGG Wrightson Revenue
$NZ798.8m
$NZ788.0m
$NZ847.8m
$NZ952.7m
$NZ975.7m


PGG Wrightson % Revenue Change YoYsame
N.A.
-1.35%
+7.59%
+12.4%
+2.41%
+22.1% (+5.12% p.a.)












Elders Gross Profit (1)
$A346m
$A430m
$A518m
$A640m
$A605m


Elders % Gross Profit Change YoY
N.A.
+24.3%
+20.5%
+23.6%
-5.47%
+74.9% (+15.0% p.a.)



PGG Wrightson Gross Profit
$NZ29.074m (2)
$NZ33.918m
$NZ55.391m
$NZ60.738m
$NZ60.486m (3)


PGG Wrightson % Gross Profit Change YoY
N.A.
+16.6%%
+63.3%
+12.4%
-0.415%
+108% (+20.1% p.a.)









Elders Admin. & Distbn. Costs (%ge of earnings)
$A278m (80%)
$A317m (74%)
$A363m (70%)
$A421m (66%)
$A448m (74%)


Elders % A.& D. Costs Change YoY
N.A.
+14.0%
+14.5%
+16.0%
+6.65%
+61.5% (+12.7% p.a.)


PGG Wrightson Admin. & Distbn. Costs (%ge of earnings)
$NZ18.867m (64.9%)
$NZ18.867m (55.6%)
$NZ20.357m (36.8%)
$NZ23.092m (39.0%)
$NZ26.977m (44.6%)


PGG Wrightson % A.& D.Costs Change YoY
N.A.
N.A.(4)
+7.90%
+12.4%
+13.4%
+43.0% (+9.35% p.a.)











Elders Underlying EBIT (5)
$A67.341m
$A106.109m
$A155.476m
$A151.579m
$A156.684m


Elders % EBIT Change YoY
N.A.
+57.6%
+46.5%
-2.51%
+3.37%
+133% (+23.5% p.a.)


PGG Wrightson Underlying EBIT
$NZ10.207m
$NZ14.854m
$NZ35.034m
$NZ37.646m
$NZ33.509m



PGG Wrightson % EBIT Change YoY
N.A.
+45.5%
+136%
+12.4%
-12.2%
+228% (+34.6% p.a.)





Notes

1/ Elders gross profit has been adjusted to remove equity accounted profits.

2/ EBIT(Admin) for FY2019 for PGW was $17.478m (AR2020 p41, referred result). However, I believe much of this was tied in with PGW's sale of their seed division that was sold in that financial year. So instead I will use the figure for FY2020: $9.016m. Over the years, the freight cost has only been disclosed for FY2023, FY2022 and FY2021. For FY2020 and FY2019 I have assumed the freight cost as the same as FY2021 ($9.851m, AR2022 p53, reference data from previous year)

Sample calculation for FY2019:
Gross Profit = EBIT(P&L) + EBIT(Admin) + Freight = $10.207m + $9.016m + $9.851m = $29.074m
(Note that for the EBIT figure from the Profit and Loss Statement, I have used the referred and adjusted figure from AR2020)

Sales Administration and Distribution Costs for FY2019 = EBIT(Admin) + Freight = $9.016m + $9.851m = $18.867m

3/ Sample calculation for PGW gross profit as follows for FY2023:
Gross Profit = EBIT(P&L) + EBIT(Admin) + Freight = $33.509m + $12.052m + $14.925m = $60.486m (EBIT(Admin) is from 'Segmented Results', Freight expense from Note 2: Cost of Sales)

Sales Administration and Distribution Costs for PGW for FY2023 = EBIT(Admin) + Freight = $12.052m + $14.925m = $26.977m

4/ Not applicable because due to lack of detailed information I have assumed the PGW YoY figures to be equal.

5/ Underlying EBIT calculations for Elders (excluding equity accounting profits):
FY2023: $138.868m + $8.913m + $23.019m - $14.116m = $156.684m
FY2022: $170.010m - $14.277m + $8.571[/m - $12.725m = $151.579m
FY2021: $157.708m + $0m + $8.755m - $10.897m = $155.476m
FY2020: $104.065m + $0m + $9.325m - $7.281m = $106.109m
FY2019: $60.415m + $2.468m + $10.771m - $6.313m = $67.341m

SNOOPY

[Snoopy]

I am surprised at how much lower the sales and distribution costs are as a percentage of sales at PGW. Could it be that ELD are measuring administration costs in a different way, by including more 'local branch administration' in their administration figures? Could it also be that Elder's distribution costs are higher, because the country of Australia is so much bigger? There is no easy way to know the answer to such questions. So probably the 'year on year' (YoY) trends in the figures are of more interest than the 'actual quoted numbers'.

PGW and ELD service very similar product markets, albeit with their retail presences ensconced in different countries, New Zealand and Australia respectively. Structural differences between the two companies include:
a/ ELD owning the Killara Feedlot, which is a company owned grain fed beef fattening facility (Refer AR2023 p32, $13.7m/$691m means Killara provides 2% of ELD gross profit). By contrast in NZ, cattle are all fattened up by the farmers and usually on grass.
b/ ELD owning 30% of the 'Clear Grain Exchange' in Australia where buyers, sellers, and their agents, can bid or offer grain at their price in an open and transparent electronic market with secure settlement (gross profit $1.1m - refer AR2023 p29, $1.1m/$691m = 0.2% of ELD gross profit). Again PGW has no equivalent investment. (Trivia fact: Between 2009 and 2016 the 'Clear Grain Exchange' in Australia was wholly owned by the listed 'New Zealand Stock Exchange').
Neither of these differences are material in comparing PGW to ELD, although the Titan AG subsidiary (40% of ELD EBIT for FY2023 see paragraph below) might be!

Since selling their seed business, PGW has been focussed on optimizing its remaining retail network and organically growing its market share. Elders, by contrast, has made 43 'bolt on acquisitions' in the four year period under analysis. And these smaller acquisitions do not include the two much larger acquisitions of AIRR (Australian Independent Rural Retailers), a rural wholesaler, and 'Titan AG': an Australian based producer and supplier of crop protection and animal health chemicals and fertilizer bought over the period (PGW does not have an equivalent arm to 'Titan AG'). 'Titan AG' has actually been an exclusive supplier to Elders since its inception in 2006. The 'Titan AG' acquisition was part of Elders policy of 'backward integration', where they look to invest in their own supply chain. In addition to its physical assets, Titan possesses intellectual property to the extent of 163 Australian Pesticides and Veterinary Medicines Authority (APVMA) registrations in connection with its product range, which complements the 23 APVMA registrations already held by Elders.

Taking a closer look at the reference table above, the effect of the acquisitions on revenue at Elders has been dramatic with overall company revenue surging, even as the traditional Elders retail network saw sales fall back to FY2016 levels (refer PR2023 (November), slide 10 - although part of this may have been due to transfer pricing, now that ELD own such a major supplier as 'Titan AG'). The growth in revenue over the four reference years at PGW has been smaller. But we are looking at organic growth at PGW, not growth bumped up by supplementary business purchases. The percentage rise in gross profit was higher at PGW, probably because there would have been no workplace 'cultural integration issues'. The little things that always accompany new business units being brought 'in house', as would have occurred at Elders.

SNOOPY

[winner69]

Something wonky eh when you say -

Gross Profit = Revenue - Costs. So what about the costs? At PGW, over the study period, these rose by: $26.978m - $18.867m = $8.111m.
Meanwhile revenue rose by $975.7m - $798.8m = $176.9m. So, all things being equal, Gross Profit should have risen by $176.9m - $8.111m = $168.8m over the study period. What actually happened? The gross profit rise was $60.486m - $29.084m = $31.402m.

[Snoopy]

Something wonky eh when you say -

Gross Profit = Revenue - Costs. So what about the costs? At PGW, over the study period, these rose by: $26.978m - $18.867m = $8.111m.
Meanwhile revenue rose by $975.7m - $798.8m = $176.9m. So, all things being equal, Gross Profit should have risen by $176.9m - $8.111m = $168.8m over the study period. What actually happened? The gross profit rise was $60.486m - $29.084m = $31.402m.

That bit below my name sign off is the 'work in progress' Winner. Stay tuned!

SNOOPY

[winner69]

While looking at AR to se where some of your numbers came from I notice the old Superannuation Fund seems to be in better shape than previous years. Good they still contributing to the old timers and in some cases their partners

Also note that %age female employees has increased from 39% in 2019 to 46% in 2023

All good eh

[Snoopy]

Gross Profit = Revenue - Costs. So what about the declared costs?

At ELD, over the study period, these rose by: $448m - $278m = $170m. (AR2023 p13, AR2020 p113, referred figures)
Meanwhile revenue rose by $3321m - $1626m = $1695m. So, all things being equal, Gross Profit should have risen by $1695m - $170m = $1525m over the study period. What actually happened? The gross profit rise was $619m - $352m = $267m.

At PGW, over the study period, the equivalent costs rose by: $26.977m - $18.867m = $8.110m.
Meanwhile revenue rose by $975.7m - $798.8m = $176.9m. So, all things being equal, Gross Profit should have risen by $176.9m - $8.110m = $168.8m over the study period. What actually happened? The gross profit rise was $60.486m - $29.084m = $31.402m.

As you can see, reflecting my above observations, the first line in the table below for each protagonist, being ELD and PGW respectively, did not add up for either company. They are not even close, with the profit projections being more than five times too high. This is not surprising as there are other costs that have risen, in addition to just administration and transport, across the studied time period. In the remainder of the table below, I have itemized the rises in these other costs for PGW and ELD.







Incremental Revenue
less Incremental Costs
equals Summed Incremental Profits
c.f. Declared Incremental Profits



ELD FY2019 to FY2023
$A1,695m
($A170m) (2)
$A1,525m
$A267m










ELD Cost of Sales


($A1,192.475m)






ELD Employee Expenses


($A74,148m)






ELD Other operating expenses


($A3.368m)






ELD Net Interest

($A8.880m)
$A246m
$A267m













PGW FY2019 to FY2023
$NZ176.9m
($NZ8.110m) (2)
$NZ168.1m
$NZ31.402m










PGW Cost of Sales


($NZ138.495m)






PGW Employee Expenses


($NZ11.388m)






PGW Other operating expenses


($NZ13.063m)






PGW Net Interest

$NZ1.843m
$NZ6.997m
$NZ31.402m




Notes

1/ Referenced numbers from AR2019 are from the referred values in AR2020, some of which have been restated from AR2019.
2/ Administration costs and Distribution (Freight) costs only.



Reference Calculations

ELD

i/ Cost of sales as quoted (includes employee costs which I remove):
FY2023: $2,716.576m - $284.649m = $2,431.927m (cost of sales, excluding employee costs)
FY2019: $1,280.242m - $177.163m = $1,103.079m (cost of sales, excluding employee costs)

Distribution costs are removed, as below:
($2,431.927m-$370.478m) - ($1,103.079m-$234.105m) = $1,192.475m

ii/ Employee expenses: ($284.649m-$77.682m) - ($177.163m - $44.344m)= $74.148m
Note that I have removed administration costs from the declared employee expenses, because 'administration expenses' have already been accounted for. Note that 'Corporate Services and Other Costs' EBIT from the segmented result at Elders is an approximation but not equal to the separately quoted 'Administrative Expenses' figure (AR2023 p83).

iii/ Other operating expenses: $3.368m - $0m = $3.368m.
The listed other operating expenses appear to be one off transition expenses unrelated to the operational performance of the business. I have therefore ignored them.
For FY2023, I have reclassified the 'interest on lease liabilities' of $3.368m as part of rent (an 'other operating expense'). 'Interest on lease liabilities' was part of a change in accounting standards under IFRS16, which did not apply to the FY2019 year.

iv/ Net Interest (excluding lease liability interest): ($23.019m-$3.368m) - $10.771m = $8.880m



PGW

i/ Cost of sales less freight: ($722.849m-$14.925m) - ($579.280m-$9.851m) = $138.405m

ii/ Employee expenses less administration: ($137.561m-$12.052m) - ($123.137m-$9.016m) = $11.388m
I have removed the segmented non-operating expenses (see Segmented Results) from 'Employee expenses', as I have used these to represent administration charges that I have already accounted for.
I believe that administration expenses have been distorted over FY2019 because of seed division de-merger costs. I have therefore used the equivalent figure from FY2020.

iii/ Other operating expenses: ($54.590m+$3.800) - ($45.327m) = $13.063m.

For FY2023, I have reclassified the 'interest on lease liabilities' of $3.800m as part of rent. 'Interest on lease liabilities' was part of a change in accounting standards under IFRS16, which did not apply to the FY2019 year.

iv/ Net Interest (excluding lease liability interest): $5.036m - $6.879m = -$1.843m



--------------------------

As you can see, despite my inclusion of additional cost increase information, the tables still do not add up. But there is a reason for that. I haven't included any impairment adjustments, nor revaluation of forward exchange contracts. And in the case of PGW I may have double counted the increase in administration expenses by deducting the labour element of that twice (there is no way to know this as in the segmented results section, the labour element is not separately declared). Whatever, the point of the table was not to get the 'estimates' and the 'actual changes' in expenses exactly agreeing. Rather, the point was to put up the magnitude of changes in the administration and distribution costs, as highlighted by Elders, into a wider perspective against the changes in other costs.

It is quite clear that the rises in these 'other wider incremental costs' absolutely monster the rise in freight and administration costs at both PGW and Elders. The obvious question presents itself: Why did Elders bother singling out the changes is distribution (freight) and administration costs at all, given how insignificant they are in the 'bigger cost picture'?

SNOOPY

[Snoopy]

It is quite clear that the rises in these other incremental costs absolutely monster the rise in freight and administration costs at PGW and Elders. The obvious question presents itself: Why did Elders bother singling out the changes is distribution (freight) and administration costs at all, given how insignificant they are in the 'bigger cost picture'?


I think ELD have a different management mentality to PGW. The fact that Elders headline their profit announcement by reporting business unit 'gross margin' (that means business unit costs have already been deducted at the division level) suggests a 'core and satellite' style of management. By contrast, PGW is more integrated. This different approach may go back to the Dewdney days at PGW, where then CEO Mark Dewdney introduced the 'One PGW' vision. The vision of 'One PGW' was to use the reach of the PGW field representatives to refer clients, with needs outside of the representatives immediate sales responsibility, to other members of the PGW team who could help them. I did find it slightly ironic that after 'the Dewd' left 'One PGW' quickly became 'Two PGW' with the sale of the seed division. But no doubt the cultural change in the PGW team that remained was embedded by then.

Going back to the original post in this series. -5494-, I think PGW comes off quite well by comparison. EBIT has risen more than administration and distribution costs for both protagonists. But EBIT has risen far more relative to those cost rises at PGW. That could mean less senior staff with roles not directly connected to the productivity of the business at PGW (there aren't a lot of people at PGW looking for businesses to acquire is an example). It could mean more farmers coming to pick up their purchased goods at their own expense. Whatever the reason, it is good news for PGW, over this four year study period at least.

But now some comment on the other cost metrics, the costs that are far more significant but not highlighted by Elders. All the comparisons are from the full four year period under study, using information from post 5498:

Incremental Revenue/ Incremental Cost of Sales

ELD: $1,192m/$1,165m= 1.023 or + 2.3%
PGW: $176.9m/$138.5m= 1.277 or + 27.7%
The higher the increase in the sales, compared to the increase in costs, the better: A win to PGW.

Incremental Cost of Sales/Incremental Employee Expenses

ELD: $1,165m/$74.15m = 15.7
PGW: $138.5m/$11.39m = 12.2
The lower the increase in cost of sales outside of the increase in employee costs the better. It means the increase in pay, or the creation of new employee positions,has been worth it. The 'greater expertise' which the company is paying for is 'paying off' - by minimising other cost increases in the sales process. A win to PGW here, although there is not much in it.

Declared increase in profits/Increase in Interest Bill

ELD: $267m/$8.880m = 30.1
PGW: $31.402m/$1.843m = 17.0
There is nothing wrong with increasing the borrowing within your business to expand your retail footprint and hence profits. But the higher this number, some might say the wiser your expansion strategy has been. A win to ELD on this metric

Change in summed operating expenses/Increase in admin and distribution expenses

ELD: $1,269.991m/$170m = 7.47
PGW: $162.856m/$8.110m = 20.1

Note: Summed operating expenses are as follows:
ELD: $1,192.475m + $74.148m + $3.368m = $1,269.991m
PGW: $138.405m + $11.388m + $13.063m = $162.856m

This last statistic, a win to PGG Wrightson, is consistent with my 'hub and spoke' management theory. Namely that Elders has a strong head office core. Whereas in the case of PGW a lot more of the direction of the company is left to decisions made by trusted managers at the company branches. Yet even at Elders, incremental cost increases at the branches dwarf increases at head office and distribution costs by more than seven times.

The only way I can make sense of Elders highlighting administration costs is that they are not really connected to the day to day branch operations and that distribution costs are largely outside of the control of the company. Thus such costs should not be layered onto individual business divisions, when assessing the efficiency of those divisions in operation. That means that Elder's decision to highlight the administration and distribution was perhaps because those costs had 'fallen out of the cost tree', yet still had to be listed and accounted for 'somewhere'. Listing A&D costs as a group wasn't necessarily the result of a decision that listing administration and distribution costs as a separate and combined declaration was a good idea.

For PGW investors, it is nice to know that 'our' company is being more efficiently administrated than Elders, even if it took unfavourable comparative declarations, highlighted in the Elders reports, for us to find this out!

SNOOPY

[Snoopy]

The following commentary piece was written on 23rd October 2023:

"While some parts of the rural sector are recovering from last summer’s cyclones there is also concern about the potential for drought conditions in the coming months due to El Niño weather patterns. Demand in key export markets has declined. These factors combine to hamper confidence and reinforce cautiousness as farmers and growers anticipate the impacts on the profitability of their business operations."
"Although the sector faces a challenging year, this is nevertheless balanced by strong medium to longer-term fundamentals. We expect to see improvement as the economies of our key export markets recover. The global population and demand for protein is projected to show continued growth and the fundamentals for the agri-sector remain sound."

Another commentary piece came out on 13th November 2023 and read like this:

"FY24 brings the potential for declines in summer crop production outside of irrigated areas, as result of dry and El Niño conditions. However, some margin recovery in Rural Products can be expected as input prices, particularly fertiliser and crop protection, have returned to more sustainable levels."

"The outlook for Agency Services anticipates growth in cattle and sheep volumes, underpinned by currently high national herd and flock numbers, and production. Cattle prices are forecast to increase in the medium term as export prices rise in line with the anticipated US herd rebuild, while lamb and mutton prices are forecast to remain subdued. Wool prices are expected to remain steady"
"In Real Estate, continued challenging market conditions may place further pressure on cropping land turnover. Interest rate pressures may also see potential for subdued demand for regional residential properties."
"Financial Services expects to see continued uptake of livestock funding products."
"We expect some of the market headwinds experienced in FY23 to continue into FY24, but we are well placed to pursue opportunities."

The interesting thing is, one of these commentaries came from the top brass at PGG Wrightson. The other, from the top brass at Elders. I don't think anything significant happened in agricultural sector regionally between these two reports coming out. So we are ostensibly talking about the same market in both outlooks. But one report has a rather more downbeat outlook on the near term than the other. Which company issued which outlook report? Can you guess?

SNOOPY