Seeds of Destruction: Pt 5.5 PE Ratio and Gross Yield calculations: PGW Rural Rump
Quote:
Originally Posted by
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 for 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.
I will now continue my rework on the now realised capital repayment scenario. I have removed from this iteration a previously stated $3m contribution towards the pension scheme that continued into the future. This is because over FY2019, new CEO Stephen Guerin authorized a one off $10.274m contribution to the Defined Benefit Pension Scheme that brings it into actuarial balance.
|
PGWRR FY2019 (EBITDA as reported plus forecast corporate savings) |
PGW Rural Rump: Multi Year Average Scenario (excluding Pension Scheme Repair) |
eps {A} |
12.8c |
18.0c |
dps {B} |
15.0c |
PGW Rural Rump: Market Valuation {C} |
$2.42 |
$2.42 |
PE ratio {C}/{A} |
18.9 |
13.4 |
Gross Dividend Yield {B}/{C x 0.72} |
8.6% |
Gross Earnings Yield {A}/{C x 0.72} |
7.3% |
10.3% |
Notes
1/ The PE ratio is now looking looking more reasonable for this type of business, as we seem to be in a lower part of the earnings cycle (that means PE can be higher). Nevertheless a PE of 18.9 is at the upper end of my comfort zone for cyclical agricultural retailer.
2/ 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.
In this low interest rate environment I would be prepared to buy with a gross earnings yield of 8.5%. This implies a 'post capital return and 10:1 consolidated' share price of:
$2.42 x 7.3/8.5 = $2.08
This is a significant fall from the market price of $2.42. I believe this means there is a fair amount of 'earnings recovery' already built into the PGW share price today. If an earnings recovery does not happen this year, then we shareholders might expect to lose around 14% of our invested capital in PGW (the downside risk).
OTOH, if earnings recover to more of a mean value from 'years recent past', that means the fair value share price for a gross earnings yield might rise up to:
$2.08 x 18/12.8 = $2.93
That represents a rise in value from today's quoted price of 21% (the upside risk)
Overall then, given the upside and downside risks, I would judge today's market price of $2.42 as not a bargain, but not overpriced either. $2.42 the epitome of 'fair value'? Looks like Mr Market might have it right with this one.
SNOOPY
discl: holding, at an average equivalent price paid per share todayof $1.38 :-), but with an average holding time of about 10 years to achieve this equivalent entry price :-(
Seeds of Destruction: Part 4.2 - Fallout from 'The great capital shuffle'
Quote:
Originally Posted by
Snoopy
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:
$235m / 754.048m = 31cps
By simple subtraction from the 52c PGW market value, we can now calculate the market value of 'PGW Rural Rump' after the seeds have split.
52c - 31.2c = 20.8c
This gives us the information we need to work out the post split PE ratio.
As we come up to the first AGM following the seed division demerger, it is timely to reflect on a few vital statistics comparing 'what we shareholders had' and 'what we shareholders have now'.
Let's start by working out some normalized profit figures:
PGW pre demerger for FY2018
|
EBITDA |
less D&A |
less Net Interest |
less Income Tax |
equals NPAT |
less Property sales |
equals Adjusted NPAT {A} |
No. Shares on Issue {B} |
eps {A}/{B} |
FY2018 |
$70.174m |
$12.974m |
$9.986m |
$12.460m |
$34.754m |
$1.700m |
$33.054m |
754.8m |
4.38c |
PGW 'Rural Rump' for FY2019
|
EBITDA |
less D&A |
less Net Interest |
less Income Tax |
equals NPAT |
less Property sales |
equals Adjusted NPAT {A} |
No. Shares on Issue {B} |
eps {A}/{B} |
FY2019 |
$28.725m(*) |
$9.362m |
$3.826m |
$4.350m |
$11.187m |
$0.200m |
$10.987m |
75.484m |
14.6c |
(*) I have boosted the declared EBITDA of $24.425m by $2.5m, this being the amount of cost savings expected from head office reduction costs AND $1.8m from a supplier claim event of which this represents an unrecovered portion.
Interest is calculated on the new capital structure of PGWRR and income tax is calculated at a rate of 28%
More comparative company performance statistics are revealed below:
|
PGW Intact (FY2018) |
PGW Rural Rump (FY2019) |
Share Price 30th September {A} |
$0.61 |
$2.55 |
eps {B} |
4.38c |
14.6c |
PE Ratio {A}/B} |
13.9 |
17.7 |
Normalised Profit {C} |
$33.054m |
$10.987m |
Shareholder Equity {D} |
$287.462m |
$165.902m |
ROE {C}/{D} |
11.5% |
6.62% |
Revenue {E} |
$1,193.462m |
$809.295m |
Net Profit Margin {C}/{E} |
2.77% |
1.36% |
The loss of the unique seed division intellectual property has halved the return on equity and halved the net profit margin for what we shareholders have left.
On 9th January a 'dissenting to the demerger' shareholder received a full payout on their 9,724 PGW shares of 58c each. With the 31c capital return, we remaining shareholders have had since, and the ensuing 1:10 share consolidation, that translates to $2.70 per share for the remaining PGWRR shares. Since the 1:10 share consolidation, the PGWRR share price has never approached that figure. So not only has the seed division demerger destroyed shareholder wealth. The remaining assets we shareholders have are of lesser earning quality. This just goes to show that directors of a company do not always act in the interest of all shareholders. For small shareholders, this demerger has been nothing but an abject failure.
SNOOPY
Updating Valuation Metrics
Quote:
Originally Posted by
Snoopy
Takeover deals are usually done on EBIT and EBITDA multiples, rather than PE ratios. If we look at where PGWRR sits today (my post 4516):
EBITDA = $26.500m
EBIT = $24.577m
If we use the residual PGWRR share price that I have calculated at 20.8c. This means the market capitalisation of PGWRR is:
20.8c x 754.048m = $157m
This gives an EBITDA multiple of: $157m / $26.5m = 5.9
This gives an EBIT multiple of: $157m / $24.577m = 6.4
'Enterprise Value' = Market Capitalisation + Total Debt − Cash
= $157m + 0m - $39.5m
= $117.5m
Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:
|
Company |
Enterprise value NZD |
EBITDA Multiple FY2019 |
EBIT Multiple FY2019 |
|
Ruralco Holdings (Oz) |
$465m |
5.8x |
7.1x |
|
Elders (Oz) |
$853m |
9.0x |
9.6x |
|
PGW Rural Rump (NZ) |
$117.5m |
5.9x |
6.4x |
So what does it all mean?
Takeover deals are usually done on EBIT and EBITDA multiples, rather than PE ratios. If we look at where PGWRR is forecast to sit for FY2020:
EBITDA = $30m
EBIT = $30m - $9.632m = $20.638m
If we use today's PGWRR share price of $2.49. This means the market capitalisation of PGWRR is:
$2.49 x 75.484mm = $188m
This gives an EBITDA multiple of: $188m / $30m = 6.3
This gives an EBIT multiple of: $188m / $20.632m = 9.1
'Enterprise Value' = Market Capitalisation + Total Debt − Cash
= $188m + ($3.920m+$31.742m) - $1.160m
= $223m
Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:
|
Company |
Enterprise value NZD |
EBITDA Multiple |
EBIT Multiple |
|
Ruralco Holdings (Oz) (FY2019) |
$465m |
5.8x |
7.1x |
|
Elders (Oz) (FY2019) |
$853m |
9.0x |
9.6x |
|
PGW Rural Rump (NZ) (FY2020f) |
$223m |
6.3x |
9.1x |
So what does it all mean?
SNOOPY