It is now ;-)
SNOOPY
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And then there is the overhanging larger foreign stakeholder with a habit of trying to rule the roost
also to consider on top of domestic market conditions ;)
Who knows -- a prolonged economic drought with little happening / improve on the rural scene might even persuade them to head for the exit door ..
Talk about a one way conversation exercise in obfuscation! (it took four follow up questions to the one quoted above before our analyst got his answer). I sort of understand it, because you don't want to give too much away to your competitors. But I reckon if you had two trainee blood donor technicians and you sent one into 'cubicle A' with Steve Guerin and the other into 'cubicle B' with a large river boulder, there is no way you could be sure that the larger blood donation would come out of 'cubicle A'!
If we take what Steve said at the half year result analyst briefing about the contribution of 'Agency', -principally 'Livestock'- , holding up during 2HY2024 at face value, yet PGW came out with a third profit downgrade barely a month later, I think it is most likely this downgrade came from the other business segment: 'Retail & Water'. That is what would come of farmers 'closing their wallets early' which anecdotally sounds like what might have been happening. It sounds very out of sync with what has happened in previous years though. But we do live in interesting (farming) times.
SNOOPY
I open this post with a disclaimer. I am not a farmer and I have never been to a PGW saleyard auction. But if I want to forecast where PGW is going over FY2025, I need a better understanding of the livestock business. So I may be making a fool of myself in this post (feel free to correct me). But here goes.
In all the PGW reports I have read mentioning livestock, the emphasis is always on the sale of cattle (be they for meat or diary) and sheep. This is not surprising as they are the two most widely farmed four legged herbivores on New Zealand. But we also farm pigs and deer in some numbers. Why are those animals never mentioned? The closest I have come is seeing references to PGW auctioning off 'deer velvet' but never deer. Why is that? Pigs are more multiplicative breeders and seem to be less fussy about their feed. So do pig farmers never need to trade their animals? Do they just feed them up and send them straight to the works? I would be interested to know.
This leads to what I call my 'first foolish assumption' which I am calling 'FA1'. "All of the trade through the PGW saleyards is sheep and cattle". Perhaps other animals do go through the saleyards. But what I am saying that in percentage terms, the headcount of these other species of animals is so small, we can forget about them in the overall revenue picture.
In AR2023 on p27 we learn:
"Over 350,000 cattle and 2.3 million lambs (have been) purchased via the GoStock (finance) program since it launched during the 2016 financial year."
I now make 'FA2', that the GoStock numbers are indicative of the animals passing through the PGW saleyards.
If I look at the beef and lamb New Zealand lamb price guide.
https://beeflambnz.com/sites/default...%20%284%29.pdf
This is showing me that over the 2017 to 2023 period, lamb prices averaged about $140 per head. (I will call that FA3)
Moving on to the beef and lamb recorded cow price over that same period,
https://beeflambnz.com/sites/default...%20%283%29.pdf
the cows seem to have been selling at around $3.80 per kilo. For animals averaging 180-195kg in weight (average 187.5kg). So cows traded at $713 per animal (I will call that FA4)
Now I combine all four of my 'foolish assumptions' to make a guess at the indicative turnover going through those PGW saleyards.
350,000 x $713 = $249,550,000 = $250m (cattle)
2,300,000 x $140 = $322,000,000 = $320m (sheep)
This works out at a split of 44% cattle and 56% sheep in dollar terms. This is of course before the much touted 28% fall in lamb prices which has been punishing our sheep farmers recently. From a keyboard farmer, does that make sense?
SNOOPY
Yes, beef trading at significantly less than 20 years ago and that's NOMINAL.
So farmers are getting a fraction of what they got 20 years ago which is insane.
While supermarket beef is near all time highs.
I have been looking for the data on beef farm gate prices going back 30 years or even 20 years but so far zero luck.
Snoopy your claims pigs are not fussy eater is correct, but pig farmers are fussy what they feed their livestock.
If you want to live a rich and varied life do not ask a pig farmer to explain feed conversion ratios.
Boop boop de do
Marilyn
Snoopy
What episode of Jeremy Clarksons farm are you up to.
Make sure you screenshot the whiteboard workings and apply to PGW.
Just joking.
From my limited knowledge of being to sale yards etc, it is mainly beef and sheep I see there.
I think Deer would have a field day (pardon the pun) jumping out of the pens...
Not sure why pigs don't go that route but I think it is because generally pig farmers are of the larger variety and they go straight to the works...
I am concentrating on EBITDA, because that is the figure that PGW itself likes to quote. Operating EBITDA for FY2023 was $61m, and I would like to think of that as a 'base year' (FY2022, when everything freakishly aligned, was higher at $67m). The PGW EBITDA forecast for FY2024 was downgraded from the 'base year' to $52m, then $50m and most recently $43m. Thus the profit downgrade from our base year is $61m-$43m=$18m.
The reason why revenue comes straight off profit (in the quote above) is that there is no incremental cost saving in running less sales lots through an established and existing auction platform.
If the lost EBITDA from Agency cannot be recovered over FY2025, is there some other part of the business that can 'bounce back' to offset that? I say yes and it comes from reversing the FY2024 downgrade in 'Retail & Water', particularly the grower based sub section. The relevant aspect of the HY2024 downgrade in 'Retail and Water' is reported below.
Refer to post 9656 and you will see that 'retail and water' revenue is always skewed towards the first half. In FY2023 that skew was 64%/36%, for a total revenue of ($785.298m-$1.151m-$0.363m)=$783.784m. Apply that same split to FY2024 and total retail and water revenue is an expected ($478.301m-$0.387m-$0.207m)/0.64 = $746.417m. he revenue difference year to year is: $783.784m - $746.417m = $37.367m,
Using the FY2023 EBITDA margin for 'Retail and Water' of 6.9%, this equates to incremental profits of: 0.069 x 0.35 x $37.367m = $1m. This is the expected incremental EBITDA should horticultural sales return to FY2023 levels, but other retail sales remain flat at FY2024 levels into FY2025.
The rise in corporate costs since FY2022, detailed below, which subtracts from EBITDA, is unlikely to be pulled back. So we aren't using that $2m figure in any adjustment calculation.
This means that if animal farming continues in its funk for another year, but horticulture improves back to FY2023 levels, then EBITDA for PGW over FY2025 becomes: $43m + $1m = $44m. yay! (given the magnitude of the potential EBITDA increase, using capital letters to express my joy would seem an overkill.)
SNOOPY
I want to open this post by saying I don't try predict where interest rates are going within a two year time horizon. That kind of exercise is too hard, even for a Snoop. But what I am interested in predicting is the quantum of bank borrowing that is likely for PGW over FY2025.
We do know that the full year EBITDA for FY2024 is forecast to be $43m.
We do know that the half year EBITDA for HY2024 was $37m. So that means a forecast EBITDA of $43m - $37m = $6m is expected for the second half.
In round figures the interest bill for the second half year will be $4.7m (see post 5696). That leaves a the princely sum of $6m - $4.7m = $1.3m To pay down debt. great :(.
Actually the real amount of cash available to pay down debt is different to this. If you look at HYR2024 and the balance sheet on p23, it looks like debt has blown out massively from the full year, by a net more than $30m. (from $65.317nm to $96.833m). But this is an operational seasonal effect. Put simply PGW has to buy in stock to sell to their farmer clients over Spring. So the apparent 'blow out in debt' is offset against a rise in inventory ($107.533m -> $130.769m). As store merchandise is sold down, PGW will need to decide how much inventory to hold for the next farming year. And if the next farming year is going to be difficult then PGW could elect to hold less stock in store, and put that 'saved stocking capital' into reducing debt.
What I am suggesting here is that although at first glance PGW has only $1.3m to pay down their long term debt, the reality could be a lot higher as 'inventory money' gets recycled. I don't think it is possible to know by how much management may seek to pay down debt. But it might be possible to work out by how much the banks would like debt to be paid down. So let's try to get an estimate of that figure. And so we dive into the thorny topic of 'banking covenants.' I have looked at this previously. The main 'covenant of contention' looks likely to be the 'Fixed Cost Coverage ratio' or FCCR for short.
SNOOPY
We don't have (and won't until the FY2024 results are released) all of the information needed to calculate the Fixed Cost Coverage ratio for FY2024. But we can do a quick approximation by putting the one figure that management has managed to forecast (EBITDA for FY2024) into the FCCR equation for FY2023. We are of course assuming that bank facilities charges and lease expenses are not going to change much year to year when we do this.
FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [Total Interest(less interest income in cash)+ Banking Facilities Charge+(Lease Expenses)]
= [$43.000m - $4.583m] / [($4.565m-$0.485m)+$0.956m+($3.800m+$19.532m)] = 1.35 which is well less than the targeted 2.0 figure.
As an alternative hypothetical scenario, what would happen if all bank facilities were repaid?
FCCR= $43.000m / [($3.800m+$19.532m)] = 1.84 which is still less than the targeted 2.0 figure.
'Paying back all debt' would also entail winding back the 'GoStock' finance lending program. That is definitely something that PGW would not want to do. Neither would it please their banking syndicate, as this program is very beneficial for both.
My pick is that PGW will be given a waver for meeting their FCCR covenant on the 30th June 2024 reference date, on the understanding that if the GoStock program was wound down on that date, then all of the bank debt could be repaid. But without an improvement in farm commodity prices, things could get 'interesting' at PGW over FY2025.
Traditionally when New Zealand as a nation cannot earn enough to pay its import bill the NZ dollar takes a hit, thus improving farmers returns on an NZD basis. That may indeed happen, which would help out PGW. The other thing that could give PGW a more immediate boost would be 'asset sales'. PGW have sold off most of the family silver. But one jewel does remain that is not so tightly integrated into the group that it could be let go: Fruitfed. As a shareholder I would feel the pain if that were to go. But with prospects looking up at Fruitfed, PGW could get a good price. And if that would eliminate the bank debt worries, such a strategy might be worth pursuing.
Back to the subject of this post. A 10% reduction in inventory levels from the HY2024 peak would allow $13.1m to be directed to paying down debt. Add that to the $1.3m pay down identified in 'Part 1' and I get $14.3m of long term debt 'paid off'. At an interest rate of 7.1%, this would reduce the annual interest bill by: 0.071x $14.3m= $1.0m.
This means the net interest bill for PGW over FY2025 reduces from $4.7m to $3.7m
SNOOPY
Finally the post that 'the Sailor' (and Charlie Munger) have been waiting for.
FY2025 FY2024 Reference EBITDA $44.000m $43.000m Post 5709 less I $3.700m $4.700m Post 5714 less DA $28.656m $28.656m Post 5696 equals NPBT $11.644m $9.644m less T @28% $3.260m $2.700m equals NPAT $8.384m $6.944m No. Shares on Issue 75.484m 75.484m eps 11.1cps 9.2cps
Based on a share price of $1.65, this means PGW is currently trading on a PER of 18 on FY2024 earnings and 15 on FY2025 earnings. Based on these numbers, and the ongoing need to reduce debt, I would expect no final dividend, and the dividend to remain suspended over FY2025. Nevertheless for shares at the bottom of an earnings cycle I see value here. Yet with no dividend on the horizon, I feel no urgency to increase my holding.
SNOOPY
An indication of what's going on out there - Rural:
https://www.nzherald.co.nz/nz/rural-...GRJY5VYNV4C5A/
Rural banking: Farming families facing ‘huge pressure’ - Federated Farmers
Quote:
Farmer confidence in their banks has plummetted to the lowest level in nearly a decade while the government considers the need for an independent inquiry.
Federated Farmers carried out a banking survey of more than 640 farmers in May that found only 51 per cent of them were satisfied with their banks.
This was down from 80 per cent in 2018.
While a quarter of survey respondents were neutral on the topic, more than 23 per cent said they were dissatisfied or very dissatisfied with their banks - a new record high for the survey that has been running since 2015.
The lobby group’s commerce and competition spokesman Richard McIntyre said farmers faced higher interest rates than their urban counterparts.
Went to my local PGW yesterday to buy a salt block. Store was empty bar one other customer. I did ask the girl at the counter how business was and she said quiet. There is a lot of stuff that PGW etc sell that farmers can easily defer for better times... There are essentials but also not. Hard times at the moment and that is why PGW is trading at cyclical lows. Possibly a good entry point. I am trying to buy more at $1.61 and will keep topping up if it declines further.
If they can't afford to put the inputs in they won't be able to get the outputs
https://www.rnz.co.nz/news/country/5...erated-farmers
This is serious for farmers
One only needs to look at what happened to Sri Lanka when inputs were cut
https://reason.com/2022/09/07/when-s...ntry-imploded/
https://www.rnz.co.nz/news/country/5...fertiliser-use
Yes the situation is serious for some farmers at least. But there is some relief in those references you posted. I see the global fall in the price of fertilizer over the year to February 2024 was 50%. That will be a massive shot in the arm for farmers. And the article on Sri Lanka was primarily about the banning of synthetic fertiliser. Synthetic fertiliser is not banned in New Zealand.
You seem to be a bit 'nervous nellie' about the state of our farmers Kiora. What is your angle in this? I thought the last two articles you referenced were actually quite bullish for NZ farmers in the medium term at least. Did you even read the articles?
SNOOPY
Correct Snoopy, the Sri Lankan debacle has no relevance to NZ. They fell hook line and sinker for the no fertiliser nonsense and really buggered up their economy.
Farmers are struggling, but they are resiliant and cycles change. PGW should be able to weather this short term storm.