Snoopy ...what’s that 10 year Govt bond rate now ...ouch
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Snoopy ...what’s that 10 year Govt bond rate now ...ouch
1.543%. So it has almost halved since EOFY2018 (was 2.85%) and more to come!
At 19th May, the date of the pro-forma balance date, the rate was 1.77%. So it has come down a lot more, even in just six weeks.
If it gets down to 1% then PGW might need a $20m (not $10m) capital injection into the pension scheme, assuming the earnings of the scheme remain flat. But if interest rates fall, then those fixed interest returns will fall as well. So even more money will have to be pumped in just to keep the future earnings stream steady.....ouch....ouch
SNOOPY
Actually - quite stupid method to determine the required capital for a pension schema. I am wondering what they are doing at the point in time the interest rate turns negative (as it already is in some parts of the world - i.e. this is a when, not an if)?
Wouldn't they need in this case an infinite amount of money to fund their funny schema?
The most underfunded super fund in the country is the Government Superannuation Fund - the funds for government employees
Is a dilemma BP butthey will find a ways around it
https://www.ipe.com/pensions/pension...016338.article
“This is for a pure economic reason,” he adds. “If a pension fund makes a promise to stakeholders, it cannot pretend that the promise is as strong as government guarantee. Pension funds cannot print money. A promise a pension fund makes to stakeholders is no different from a promise made by a corporate to repay an investor. Pension funds’ strategies should reflect that dynamic when they think about discounting and matching.”
As we get closer to the capital return vote date, I am honing in on what kind of dividend we shareholders might expect going forwards. There has been discussion on the forum over the weekend on the significant funding deficit that exists within the PGW pension program. Interest rates are falling so fast that the shortfall balance is blowing out. PGW have been trying to fix this. But my expectation is that the five year program initiated in FY2016, to do so will have to be extended. I expect the approximately $3m annual top up cash contribution to continue indefinitely into the medium term. We need to build the loss of this cash from shareholders into the dividend model.
From an end of May 2019 post capital repayment balance sheet perspective, the total bank debt on the books is:
$3.920m + $31.742m = $35.662m.
This is within the 'core debt' envelope of $25m to $50m forecast for FY2020 (p9 of the proposal). But this is only part of the debt of the company that is forecast to balloon out by way of an additional $70m for 'typical seasonal working capital'. This reality is somewhat different to the 'debt free' situation that I imagined PGW would be in all year round in 'Part 3.2'.
Using past debt balances and interest payments declared over FY2018, the indicative interest 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% (use in Step 2)
That means we can calculate the indicative annual interest payments after debt repayment as per the steps below:
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 outlined in p9 of the 'Special Meeting' explanatory documents for the date of Tuesday 23rd July 2019. Peak working capital (and hence peak debt) is forecast to be between October and January, in line with selling spring seasonal goods to farmers.
Over FY2020, the minimum net working capital required is estimated to be $35.662m on July 1st 2019 peaking at $105.662m around November 2019.
$105.662m / $35.662m = 2.9629 (an increment of 196%). Yet averaged over a financial year and using a linear model, the average increase in incremental debt is only half this:
196% / 2 = 98% => Annual debt incremental factor = 1.98
Step 2/ Calculate Annual Debt Interest Payment
Using the liabilities in the balance sheet as presented on p10 of the Special General Meeting notice:
0.057x [$31.742m+$3.920m-$1.160m] x 1.98
= $3.894m
Rural Services ($39.5m EOFY cash balance after debt repayment) EBITDA $25.000m add Unallocated S&G overhead $1.600m less DA ($6.918m) less I ($3.894m) equals EBT $15.788m x 0.72 equals NPAT {A} $11.367m less Pension Scheme Top Up ($3.000m) equals Funds available for dividends {C} $8.367m No. shares on issue {B} 754.048m dps {C}/{B} 1.11c eps {A}/{B} 1.51c
SNOOPY
Continuing my rework of the post capital repayment scenario, now based on an actual FY2019 earnings expected, and with a $3m contribution towards the pension scheme adjusted for.
Scenario $157.5m debt repayment and new FY2020 Investment dps {A} 1.11c PGW Rural Rump: Market Valuation {B} 54c - 31c = 23c PE ratio {B}/{1.51c} 15.2 Gross Dividend Yield {A}/{B x 0.72} 6.7%
Notes
1/ In the gross yield calculation I am not assuming that all earnings are paid out as dividends. This is because i believe a constant flow of earnings will be needed to bail out the company superannuation scheme which is persistently technically insolvent,
2/ The PE ratio is now looking looking reasonable this type of business, as we are in a lower part of the earnings cycle (that means PE can be higher)
3/ The potential dividend yield looks O.K, but is IMO low for this kind of business.. The lesser than expected capital repayment has not made PGWRR debt free after all. This is no doubt because PGWRR has elected to keep spending to invest in the business, even if they haven't fixed their superannuation scheme issues.
In this low interest rate environment I would be prepared to buy with a gross dividend return of 8.5%. This implies a post capital return share price of:
23c x 6.7/8.5 = 18.1c
This is a significant fall from the implied market price of 23c. Thus there is now a significant risk of shareholders losing up to 20% of their remaining capital once the entitlement to the long awaited capital repayment has been released.
As an aside at 18.1c PGWRR would be trading on a PE of:
18.1c / 1.51c = 12
At a lowish point in the business cycle, this sounds about right.
SNOOPY
18.1 cents or 23 cents.?
The market says 23 cents.
Yet 18.1 cents could be right.?
Either makes sense to me.?
We continue to live in interesting times.