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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!
I am making a small adjustment to my EBITDA figures, adding back into EBITDA the incremental overhead that was an unallocated expense for the sold Seed Division.Quote:
Previously I have speculated how large the capital return will be, that we PGW shareholders are due to receive. It has now been announced that it will be $235m; somewhat lower than the $292m shown in the projected balance sheet that we shareholders all voted on! Of the originally projected capital injection, $100.5m was shown to be used to retire debt, leaving just $17.5m of debt remaining inside 'PGW Rural Rump'. Yet because the projected capital return will be $57m lower, that means the amount of money available for debt to be retired is consummately higher - by $57m.
From an end of June 2018 balance sheet perspective, the maximum debt that can be retired is $100.5m + $17.5m = $118m. This means that with all debt retired, we still have:
$57m - $17.5m = $39.5m
of net cash on the balance sheet, after the $235m capital repayment has been made.
Step 1/ Calculate the incremental peak seasonal debt multiplication factor:
PGW has various seasonal funding requirements that are met by taking on extra debt. The seasonal funding requirements are best measured by changes in 'Net Working Capital'. An annual picture of this variation in net working capital is graphed in the 'KordaMentha' October 2018 report on p34, Figure 6.1. Over FY2018, the minimum net working capital required was around $275m on July 1st 2017 peaking at just over $340m in November 2017. If more net cash was on hand through more capital going to debt repayment, then the funding requirements of the working capital, via interest payments, would be consummately reduced.
The half year balance sheet reported to the NZX for FY2019 (my post 4499) shows working capital requirements $29m higher that at the EOFY2018. However, based on the previous year, the half yearly reported debt is still $10m below annual peak debt. The annual peak debt of $29m + $10m = $39m will therefore be wiped out by the $39.5m of new net cash on the balance sheet. PGWRR can effectively be debt free all the year round going forwards.
This means there is not longer any need to calculate 'incremental debt' over a business year: All interest payments should be wiped out going forwards.
Step 2/ Calculate Annual Debt Interest Payment
Answer: Zero
In a departure from the previous calculation, this time I am going to use average EBITDA over the business cycle, as worked out in post 4486.
Rural Services ($39.5m EOFY cash balance after debt repayment) EBITDA $29.875m less DA $6.918m less I $0.0m equals EBT $22.975m x 0.72 equals NPAT {A} $16.529m No. shares on issue {B} 754.048m eps {A}/{B} 2.19c
Rural Services
($39.5m EOFY cash balance after debt repayment)
EBITDA $29.875m add Unallocated S&G overhead $1.600m less DA $6.918m less I $0.0m equals EBT $24.557m x 0.72 equals NPAT {A} $17.681m No. shares on issue {B} 754.048m eps {A}/{B} 2.34c
SNOOPY