Shortage of Capital at PGW for FY2021: Pt.5. The Lease Losses
Quote:
Originally Posted by
Snoopy
In note 18 of AR2019, we learn of another capital loss shuffled into non-operating earnings.
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Onerous lease
The Group has recognised a provision in respect of property leases entered into that are now considered onerous. An onerous provision of $1.88 million has been expensed within non-operating items and represents the Directors’ best estimate of the expected excess of costs over benefits for the remaining term of the lease contracts.
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This doesn't seem consistent with the treatment of lack of holiday pay. Workers are employed to operate the company and building's are leased so that workers can operate out of them. I would have thought that both should be operating expenses or alternatively, because both adjustments are in theory one offs, both should be non-operating expenses. I don't see the logic in having different treatments for both. But let's carry on.
$1.88m is not a huge loss on its own. Yet this loss comes in the context of PGW owning a huge swag of their retail premises, and selling them off to raise capital, while consummately entering lease back arrangements to reduce debt. Of course, the net effect of all this will be undone by the new IFRS accounting rules for leases in the next accounting period. The new rules means that operating leases will now appear on the balance sheet as capitalised debt. The point I am making is that this particular lease loss looks like it could be a back flip on a very recent lease deal. And that doesn't inspire confidence in the short to medium term planning from the company.
All the leases now appear on the balance sheet as debt, as forecast last year, and as discussed above in my last post
More write off of onerous leases has occurred (p14 FY2020 stand alone accounts):
"The Group reviewed its right-of-use assets for indicators of impairment and has recognised an impairment of $2.25 million in respect of three leased properties. Most of the impairment relates to the Water Force business following the Group’s decision to restructure that business. The Group also recorded an impairment reversal of $1.40 million on a leased property previously treated as an onerous lease, as there is no longer an indication that site is impaired. The net impairment loss recognised in the profit or loss is $0.85 million."
The net effect is a capital loss of: $0.85m for the year.
SNOOPY
Shortage of Capital at PGW for FY2021: Pt.6. The Downturn in Deposits
Quote:
Originally Posted by
Snoopy
I am not quite sure why our savvy farmers are keen to outlay cash for goods or services that they have not received. But it looks like they have woken up as over the last two years these deposits are down. From the 'Trade and Other Payables' (Note 18 AR2019) sections of the respective annual reports.
|
FY2017 |
FY2018 |
FY2019 |
Deposits Received in Advance |
$3.589m |
$3.196m |
$1.042m |
This drop off could be related to the sale of the seed division. It is possible that farmers would be OK with putting up money for seeds in advance, in return for a guarantee of supply on the dates they want. Or perhaps the other retailers of wholesale seeds were the ones putting up the cash in advance? This is just a theory of mine. Perhaps someone who is closer to the farm community on the ground could confirm or deny. Yet the figures in the accounts do not lie If deposits are down by:
$3.589m - $1.042m = $2.547m
and that capital is needed. Then it must be borrowed. A $2.547m reduction in deposits is another brick in the PGW debt wall.
Deposits from farmers up a bit, albeit half what they were two years ago. From the 'Trade and Other Payables' (Note 17 AR2020) sections of the respective annual reports.
|
FY2017 |
FY2018 |
FY2019 |
FY2020 |
Deposits Received in Advance |
$3.589m |
$3.196m |
$1.042m |
$1.474m |
I am still undecided if this drop off is related to the sale of the seed division. It is true that 'PGW Seeds' has something unique (there is a lot of IP tied up in the NZ cultivars at least), so farmers might be prepared to stump up some money in advance to secure supply. OTOH there shouldn't be too much of a problem with supply. Even in a bad growing year, stored seed from the previous year should still be viable. Furthermore although PGW Seeds has spent a lot of money developing cultivars, the incremental creation cost of seed stock, once a cultivar has been developed, should be low. This means there is no 'holding capital pressure' at the PGW seeds division that would require them to demand advance payments from farmers and so allow the seed division to continue to operate.
Now that PGW Seeds is no longer owned by PGW Rural Rump, PGW Seeds might be in a position to demand an upfront payment from PGWRR? I still think it curious that the deposits in advance figure has gone down so much. Because although the seed division itself has been sold, those same seeds are still being sold through PGWRR outlets. IOW the turnover between supplier (PGWRR) and end user (farmer) has not changed, despite the change in ownership of the PGW Seed Division.
One thing we can rule out now is other retailers of wholesale seeds paying a deposit and that deposit money ending up on the books of PGWRR.
The figures in the accounts do not lie and deposits in advance are assets on the PGW books and those are down from three years ago by:
$3.589m - $1.474m = $2.115m
This is a reduction in capital that is needed by PGWRR. If farmers are not supplying this capital then it must be borrowed. A $2.115m reduction in deposits is another brick in the PGW debt wall.
SNOOPY
Shortage of Capital at PGW for FY2021 Pt.7. The Property Plant & Equipment Plunge
Quote:
Originally Posted by
Snoopy
PGW was making much needed capital by selling their company owned premises to third parties and leasing them back. So what is all this about PGW losing money on property? PGW have certainly been vocal around the sell down of their property portfolio, but rather less forthcoming about their 'IMPAIRMENT AND FAIR VALUE ADJUSTMENTS' (Note 4 AR2019):
|
FY2017 |
FY2018 |
FY2019 |
Impairment Property Plant & Equipment |
$0.0m |
$1.070m |
$2.260m |
A clue to what is going on is that the referenced FY2018 comparative figure is unchanged from when it was reported in the FY2018. Since the FY2019 reports are prepared from the point of view of a wholly owned New Zealand perspective, this indicates the 2018 write downs also solely relate to the New Zealand business. The only thing I can find in the verbal commentary of each year which even hints at NZ based property losses is the continued rationalisation of surplus stock sales yards. This rationalisation is not quantified in the text. The impairment figures quoted are not explained further in the annual report notes. I think it is reasonable to link the two (the missing quantification of the losses in the text with the unexplained effect of dollar losses in AR2019 Note 4.)
All up capital losses from property plant and equipment in the last couple of years come to:
$1.070m + $2.260m = $3.330m
PGW have released some commentary about the 'IMPAIRMENT AND FAIR VALUE ADJUSTMENTS' this year (Note 4 AR2020):
|
FY2017 |
FY2018 |
FY2019 |
FY2020 |
Impairment Property Plant & Equipment |
$0.0m |
$1.070m |
$2.260m |
($0.253m) |
Impairment Right of Use Assets |
|
|
|
$0.852m |
"During the year, the Group reviewed the status of each saleyard as strategic or non-strategic, and tested them for impairment. The Group recognised impairments of $0.41 million on two saleyards which management no longer considers strategic. The Group also reversed $0.66 million of previously recognised impairment losses on five saleyards based on updated valuations. The net impairment reversal recognised in the profit or loss is $0.25 million."
The net effect is a 'capital gain' of $0.25m for the year (that's good). A negative impairment 'write down' is actually a 'write back'. Good news for shareholders.
A $0.253m 'write back' is a result of a net change in the collective value of stockyards (two dropped in value and five improved). I had speculated about changes in stockyard value being at least a substantial contributor to the equivalent impairment figure the previous year, so it was nice to have my last year's speculation confirmed.
All up capital losses from property plant and equipment in the last three years come to:
$1.070m + $2.260m - $0.253m = $3.095m
(Note that the impairment of underused assets of $0.852m has already been dealt with under Point 5, my post 4986).
SNOOPY
Shortage of Capital at PGW for FY2021: Pt.8: The Baddening of Bad Debts
Quote:
Originally Posted by
Snoopy
PGW has on the accounts a 'Bad Debt Provision' in which management judgement is used to provide for debts that are unlikely to be fully repaid. The treatment of bad debts was changed over FY2019 with the adoption of IFRS9. From p50 in AR2019.
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NZ IFRS 9 Financial Instruments
The Group has applied NZ IFRS 9 from 1 July 2018. The new standard changes how the impairment of financial assets are calculated from an ‘incurred credit loss’ model to an ‘expected credit loss’ model. Based on the Group’s assessment of historical provision rates and forward looking analysis, the Group has recognised an additional provision of $0.45 million as at 30 June 2018 which is expensed directly to Retained Earnings upon adoption of NZ IFRS 9.
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In non accounting terms:
'expensed directly to Retained Earnings upon adoption of NZ IFRS 9'
means they have taken shareholder capital without telling them. Or at least they have excised this loss from the company's 'Profit & Loss' statement, which takes it away from plain view. That doesn't make the loss any less real though!
An increase in bad debts caused by this accounting rule change in consistent with what other NZ companies have experienced on adoption of IFRS9. There is nothing unique to PGW here.
Each year, whatever the particular standard is in place, a doubtful debt expense is used to add to the bad debt provision and there is an additional expense of bad debts actually written off. This information can be found under note 3 and note 11 of AR2019:
|
FY2019 |
FY2018 |
Increase in Provision for Doubtful Debts |
$1.072m |
$0.529m |
Bad Debts Written Off |
$0.485m |
($0.543m) |
IFRS 9 Standard Adjustment |
$0.450m |
$0m |
Total |
$2.007m |
($0.014m) |
Sometimes bad debts are unexpectedly are recovered. Evidence of that was the 'negative expense' (i.e. a net debt recovery) that took place in FY2018. Yet even if we exclude that the doubling of the bad debt provision expense and the extra capital loss adjustment means an extra:
($1.072m - $0.529m) + $0.450m =
$0.993m
or nearly $1m of extra hard earned shareholder capital has gone down the drain mitigating bad debts in FY2019 compared to the previous year.
Each year, whatever the particular standard is in place, a doubtful debt expense is used to add to the bad debt provision and there is an additional expense of bad debts actually written off. This information can be found under note 3 of AR2020. I present a table of these losses for the last three years:
|
FY2020 |
FY2019 |
FY2018 |
Increase in Provision for Doubtful Debts |
$0.343m |
$1.305m |
$0.529m |
Bad Debts Written Off |
$0.147m |
$0.298m |
($0.543m) |
IFRS 9 Standard Adjustment |
$0m |
$0.450m |
$0m |
Total |
$0.490m |
$2.053m |
($0.014m) |
Sometimes bad debts are unexpectedly are recovered. Evidence of that was the 'negative expense' (i.e. a net debt recovery) that took place in FY2018.
This is equivalent to a capital loss adjustment over three years of capital loss adjustment of:
(($0.343m+$1.305m)-$0.529m) + $0.450m = $1.569m
or over $1.5m of extra hard earned shareholder capital has gone down the drain mitigating bad debts in FY2019 and FY2020 compared to the reference year.
SNOOPY