The Corporate Cost Conundrum.
Quote:
Originally Posted by
Balance
Also, I believe corporate costs and overheads will be trimmed back much more than $4m allocated against S&G - more like $8m once S&G is sold.
I am doing a little tweaking, trying to refine my company valuation modelling.
There are forecasts given for divisional corporate costs in the KM report.
Turn to page 19 and you will see that 'Total Corporate Functions and Overheads' add up to ($30.5m).
From p29 we can get the 'Corporate Overhead Allocation' for 'Seed and Grain' ($3.6m). From p31 we can get the 'Corporate Overhead Allocation' for 'Retail and Water' ($11.4m) and 'Agency' ($6.3m).
|
Corporate Overhead Allocation FY2018 |
KM Report Reference |
Seed & Grain |
($3.6m) |
p29 |
Retail & Water |
($11.4m) |
p31 |
Agency |
($6.3m) |
p31 |
Total |
($21.3m) |
|
The difference between the two figures: ($30.5m) - ($21.3m) = ($9.2m) must represent the 'Corporate Costs Unallocated'. No doubt these costs include those associated with the strategic review. I don't think the strategic review costs have ever been separately disclosed: No doubt they are hidden in the 'Other Expenses' classification of 'Other Operating Expenses' (Note 4 AR2018)!
So it looks like Balance may have a point about 'plenty of fat to trim' yet from the on-going corporate costs. However, management seem determined to keep up the spending on outside consultants as the financial review of the company continues. So we may have to wait a little longer for these particular corporate savings costs to be realised.
If we go back to the Segment Reporting information from AR2018 p39, then ($9.355m) of 'Other' operating EBITDA is recorded. This is close to the ($9.2m) of unallocated Corporate Costs that I calculated above. It also suggests that those Corporate Costs that could be directly linked to the EBITDA of the operating divisions of the company have already been removed from the 'head office' basket, and netted off against the respective Segmented Divisional baskets of EBITDA results.
How does one allocate the unallocated corporate costs? One method could be to divide the $9.200m into three equal parts, and add those parts to each of the three customer divisions. However, in this instance we have been told a segmented allocation of overheads that can be separated out already (p19 KordaMentha Report, Fig3.6). I prefer to allocate the so far unbasketed overheads in proportion to that.
|
Corporate Overhead Allocation FY2018 {A} |
Percentage |
Unallocated Overhead FY2018 {B} |
Total Overhead FY2018 {A}+{B} |
Seed & Grain |
($3.6m) |
17.4% |
($1.6m) |
($5.2m) |
Retail & Water |
($11.4m) |
53.6% |
($4.9m) |
($16.3m) |
Agency |
($6.3m) |
29.6% |
($2.7m) |
($9.0m) |
Total |
($21.3m) |
100% |
($9.2m) |
($30.5m) |
This curious part of all of this I can sum up in a question:
"Why did KM go to the trouble of separating back out head office functions previously grouped with the appropriate business operational business units (and offset in EBITDA terms against those) back into one overall 'head office' where all the costs totalled $30.5m?"
I don't see $30.5m in head office costs mentioned at all in AR2018!
SNOOPY
Seeds of Destruction: Part 2.1 - A lack of interest
Quote:
Originally Posted by
Snoopy
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?
I am never sure in these loan situations whether the banks net off any 'cash in the bank' against any loan commitments when interest rates on company loans are charged. If we assume they do, then I need to rework my interest calculation as follows.
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 |
Cash |
$10.926m |
$24.427m |
$9.423m |
Short Term Debt |
($30.806m) |
($91.215m) |
($26.719m) |
Long Term Debt |
($149.205m) |
($130.634m) |
($110.925m) |
Total |
($169.085m) |
($197.422m) |
($128.221m) |
We can calculate a linear approximation average of the total debt as follows:
($169.085m + $197.422m + $128.221m)/3= $164.909m
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 / $164.909m = 6.2%
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:
0.062 x $100.5m = $6.23m
How does this saving in interest payments translate to the profitability of 'PGW Rural Rump' going forwards?
Perhaps more important is another question. Is this estimate of the 'interest rate paid of 6.2% better or worse than my prior estimate of 5.7%?
SNOOPY
A further item of Interest
Quote:
Originally Posted by
Balance
I have lower interest cost (lower debt = lower interest rate charged by the banks) of around $750k.
PGW Debt Position |
Consolidated 30-06-2018 |
PGGW Rural Rump 30-06-2018 |
PGGW Seed & Grain 30-06-2018 |
Cash & Cash Equivalents |
$10.926m |
$2.7m |
$8.226m |
Overdraft & Short Term Debt |
($30.806m) |
($9.2m) |
($21.606m) |
Long Term Debt |
($149.205m) |
($118.0m) |
($31.205m) |
Total |
($169.085m) |
($124.500m) |
($44.585m) |
add Debt Repayment |
|
$100.500m |
|
Total |
|
($24.000m) |
|
In my previous post I pondered the question of offsetting the company cash position against debt. On page 35 of the KM report we find the following quote:
"Seed and Grain's net interest bearing debt was $44m (similar to table total above) at 30th June 2018, being $52m of short and long term debt (including finance leases) less $8m of cash on hand."
This suggests KM does consider cash on hand as part of the net debt picture, although it leaves over the question of whether the lending banks think the same.
Yet, assuming the S&G sale goes to plan, the net debt position of 'PGW Rural Rump' will not be $24m except at balance date. If you look at p34 and p35 of the KM report you will see graphs of 'Consolidated Net Working capital' and 'Seed and Grain' net working capital. From these graphs we can see that the 30th June balance date represents the low point in the debt cycle. Peak debt for 'PGW Rural Rump' looks to be October/November (Consolidated debt peaks in September, but S&G debt is already declining by then.)
For November, the working capital required for 'PGGW Rural Rump' (calculated by subtracting Fig 6.2.1 from Fig 6.1) looks to be:
$340m - $200m = $140m
To get a baseline figure, we do the same calculation as of July:
$275m - $170m = $105m
With a simple subtraction we can therefore calculate a likely incremental 'debt peak' at 'PGGW Rural Rump, which is:
$140m -$105m = $35m higher than at balance date.
This in turn means the funding requirements for 'PGG Rural Rump' are not based around the deconsolidated debt repaid $24m as projected in the historical deconsolidated 'PGGW Rural Rump' debt repaid balance sheet. No, the actual peak debt to be managed is:
$24m + $35m = $59m
or more than double the figure given prominence in the KM appraisal report!
Banks tend to like a 'steady debt' from which they can derive interest income. Not a debt that 'jumps around' over the year like this. So I find it difficult to believe that the interest rate charged to 'PGGW Rural Rump' will be lower than before deconsolidation. In fact I would predict the exact opposite. Interest rates at 'PGGW Rural Rump' are likely to be much higher going forwards.
SNOOPY