Seeds of Destruction: Part 1 - Introduction
Quote:
Originally Posted by
Sideshow Bob
Seed sale approved
Although there are still some boxes to tick, it looks like the deconstruction of PGW is going ahead. My question now is, is there an arbitrage opportunity for those buying in today to make on the deal?
To find that out, you need to study the Korda Mentha report on the proposed transaction.
http://nzx-prod-s7fsd7f98s.s3-websit...209/288491.pdf
The key information potential shareholders should look at may be found on page 36 (or page 49 where the same table is repeated). The table is labelled 'Rural Services Balance Sheet Summary'. The starting point is the 'Consolidated Pro-forma' column on the left. This column is a 'balance sheet' of the company 'pre-split', assuming the split had happened on 30th June 2018 (the most recent balance date).
This left hand column then, should line up with the balance sheet in AR2018. The net assets certainly do ($287.5m in KM report, $287.462m in AR2018). However once you look a little deeper the parallels become puzzlingly murky. The declared debt position is what I am puzzling over the most:
|
Korda Mentha Report |
Annual Report FY2018 |
Cash & Cash Equivalents |
$2.7m |
$10.926m |
Overdraft and Short Term Debt |
($9.2m) |
($30.806m) |
Long Term Debt |
($118.0m) |
($149.205m) |
Defined Benefit Superannuation Scheme Provision |
($9.5m) |
($9.669m) + ($0.905m) |
Total |
($134m) |
($179.659m) |
Here I come up against the limitations of my tiny dog brain. The debt position of the company should be the same in a balance sheet snapped on the same date. So why is it so different? If any other species reading can untangle this I am all ears (and beagle ears are big ones).
In the meantime I will continue to look at the KM table assuming that it is correct, despite my doubts.
The most important row for shareholders is the one showing 'cash and cash equivalents', because there you can see the $413m cash offer from DLF seeds come into play. If the actual future cashflows match the table, then we shareholders will see long term debt fall from $118m to just $17.5m, with that debt repayment of $100.5m. Or will the long term debt fall from $149.205m to $48.705m, assuming a $100.5m payment?
Whatever happens there will be a big saving on the interest bill going forwards on the 'Rural Rump' that remains. But how much will that saving be?
SNOOPY
Seeds of Destruction: Part 2 - A lack of interest
Quote:
Originally Posted by
Snoopy
We shareholders will see long term debt fall from $118m to just $17.5m, with that debt repayment of $100.5m. Or will the long term debt fall from $149.205m to $48.705m, assuming a $100.5m payment?
Whatever happens there will be a big saving on the interest bill going forwards on the 'Rural Rump' that remains. But how much will that saving be?
The problem with estimating an interest rate equivalent for the PGW debt is that company debt quite seasonal, as the table below shows:
|
FY2018 |
HY2018 |
FY2017 |
Short Term Debt |
$30.806m |
$91.215m |
$26.719m |
Long Term Debt |
$149.205m |
$130.634m |
$110.925m |
Total |
$180.011m |
$221.849m |
$137.664m |
We can calculate a linear approximation average of the total debt as follows:
($180.011m + $221.849m + $137.664m)/3= $179.834m
Over the year the 'interest funding expense' (AR2018 note 7) was $10.235m. (Note that I am leaving out the foreign exchange changes which I don't believe are representative of true funding costs.)
So the indicative interest rate that PGW pays on the average outstanding balance is:
$10.235m / $179.834m = 5.7%
If as a result of the seeds transaction $100.5m is repaid, then interest will no longer have to be paid on that amount into the future. The total interest saved on an annual basis for 'PGW Rural Rump' will therefore be:
0.057 x $100.5m = $5.73m
How does this saving in interest payments translate to the profitability of 'PGW Rural Rump' going forwards?
SNOOPY
Seeds of Destruction: Part 3 - NPAT of 'PGW Rural Rump' going forwards
Quote:
Originally Posted by
Snoopy
0.057 x $100.5m = $5.73m
How does this saving in interest payments translate to the profitability of 'PGW Rural Rump' going forwards?
If the indicative interest rate bill 'before' was $10.235m based on an average debt balance of $179.834m, this implies an indicative interest rate of:
$10.235m / $179.834m = 5.7%
That means the indicative annual interest payments after debt repayment will be:
0.057 x ($179.834m - $100.5m) = $4.522m
For comparison I will also look at an alternative scenario where $118m of debt is repaid:
0.057 x ($179.834m - $118m) = $3.525m
|
Rural Services ($100.5m debt repayment) |
Rural Services ($118m debt repayment) |
EBITDA |
$34.567m |
$34.567m |
less DA |
$12.974m |
$12.974m |
less I |
$4.522m |
$3.525m |
equals EBT |
$17.071m |
$18.069m |
x 0.72 equals NPAT {A} |
$12.291m |
$13.009m |
No. shares on issue {B} |
754.048m |
754.048m |
eps {A}/{B} |
1.63c |
1.73c |
There is a complicating factor that comes into my 'greater debt repayment' scenario. If extra debt is repaid then that money will no longer be available to shareholders (as part of any capital repayment). Under the original scenario a capital repayment of $292m was modelled. Under the 'alternative scenario' this capital repayment drops to:
$292m - $18m = $274m
Putting all of this together, how does this effect the forecast future returns of 'PGG Rural Rump' going forwards?
SNOOPY
Seeds of Destruction: Part 4 - Fallout from 'The great capital shuffle'
Quote:
Originally Posted by
Snoopy
Putting all of this together, how does this effect the forecast future returns of 'PGG Rural Rump' going forwards?
Immediately after the AGM the PGW share price was 57c. If we take this as Mr Market's 'reference figure', then this 57c will be split into a capital payout amount and the remainder which is Mr Market's worth of 'PGW Rural Rump'.
There are 754.048m PGW shares on issue. So working through both scenarios, for each share held, PGW shareholders can expect a capital repayment of either:
$292m / 754.048m = 38.7cps OR $274m / 754.048m = 36.3cps
By simple subtraction from the 57c PGW market value, we can now calculate the market value of 'PGW Rural Rump' after the seeds have split.
57c - 38.7c = 18.3c OR 57c - 36.3c = 20.7c
This gives us the information we need to work out post split PE ratios and dividend yields for both scenarios.
SNOOPY
Seeds of Destruction: Part 5 - PE Ratio and Gross Yield calculations: PGW Rural Rump
Quote:
Originally Posted by
Snoopy
Immediately after the AGM the PGW share price was 57c. If we take this as Mr Market's 'reference figure', then this 57c will be split into a capital payout amount and the remainder which is Mr Market's worth of 'PGW Rural Rump'.
There are 754.048m PGW shares on issue. So working through both scenarios, for each share held, PGW shareholders can expect a capital repayment of either:
$292m / 754.048m = 38.7cps OR $274m / 754.048m = 36.3cps
By simple subtraction from the 57c PGW market value, we can now calculate the market value of 'PGW Rural Rump' after the seeds have split.
57c - 38.7c = 18.3c OR 57c - 36.3c = 20.7c
This gives us the information we need to work out post split PE ratios and dividend yields for both scenarios.
|
Scenario $100.5m debt repayment |
Scenario $118m debt repayment |
eps {A} |
1.63c |
1.73c |
PGW Rural Rump: Market Valuation {B} |
18.3c |
20.7c |
PE ratio {B}/{A} |
11.2 |
12.0 |
Gross Dividend Yield {A}/{B x 0.72} |
12.4% |
11.6% |
Notes
1/ In the gross yield calculation I am assuming that all earnings are paid out as dividends. With 'Agria' better capitalized following the capital repayment and with some potential investment to be made on 'PGW Rural Rump' going forwards, this might not happen.
2/ I feel the PE ratios are looking quite high for this type of business. This leads me to believe that at 57c, PGW pre break up is looking quite fully valued.
3/ The potential dividend yield looks fantastic, with the slightly better capitalized version of 'PGW Rural Rump' showing a lower yield. But perhaps that better capitalization could be handy in an industry notorious for 'rural downturns'. And in such downturns I would expect any dividend yield to drop .
4/ Have I missed anything?
5/ I don't seem to be very enthusiastic about getting out my wallet to top up on PGW shares before the split. In retrospect those near 70c prices that Mr Market was paying only a few months back look a bit crazy!
SNOOPY