Shortage of Capital at PGW for FY2021 Pt.9: Capital Loss Cumulation
Quote:
Originally Posted by
Snoopy
Parts 2 to 8 of this series have outlined the capital that has disappeared in 'extraordinary circumstances' since the sale of the seed division was contemplated. All of these events were left out of the Korda Mentha analysis, probably because they were not easy to cost out with accuracy. But now events have unfolded, the 'extra capital bill' has come in.
|
FY2018 to FY2019 |
Part 2: Cash to Fix Pension Plan Deficit (All Other Income) |
$20.677m |
Part 3: Corporate Restructuring |
$3.020m |
Part 4: Holiday Back Pay Reassessment |
$5.757m |
Part 5: Impaired Lease Losses |
$1.880m |
Part 6: Reduction in Customer Deposits |
$2.547m |
Part 7: Unusual Property Plant and Equipment Impairment |
$3.330m |
Part 8: Unusual Increase in Bad Debts (Other Income $0.450) |
$0.993m |
Total |
$38.204m |
Here at last in one place is a tally of capital that shareholders have lost since the whole seed sale deal was mooted.
Observe that the total capital lost ( $38m) exceeds the base bank debt of circa $30m at balance date for PGW today. If none of these losses had occurred, then PGW could be debt free now (at EOFY balance date anyway, we know that working capital of up to $70m is needed during the year). The circa $30m actual core debt, which may yet balloon out to $50, represents a perpetual interest bill to shareholders, at an interest rate of 5% (say) of:
$30m x 0.05 = $1.5m per year
This 'perpetual bill' is something that the Korda Mentha report didn't tell any shareholders about!
My previous summary post had the objective of showing the cumulative damage that activity, outside the continuing practices of the core business has done to the balance sheet. There was an opportunity to fix any debt issues with the sale of the seed division. However, what emerged out of that sale, the entity that I call 'PGW Rural Rump', still carries significant debt. Management are obviously not unhappy about this because they chose this capital structure. Rather than rehash the tale of where the lost capital went, I think it is more important to look at the 'non-core' capital changes since the last balance date. It is these charges that will help us to see how far PGWRR has deviated from its post restructure capital position, which we have to assume management considered 'ideal'.
Parts 2 to 8 of this series have outlined the capital that has disappeared in 'extraordinary circumstances' since the sale of the seed division was contemplated, and the capital that has disappeared over the current year. It is the latter that I wish to concentrate on in this table, as the numbers in the table here are what is moving PGWRR away from its 'ideal' post seed division separation position. The exception to this is the pension plan deficit that has accumulated over many years, and is a total 'worry figure' the IFRS standards people consider has not gone away.
|
Over FY2020 |
Part 2: Incremental Capital Pension Plan Deficit (All Other Income) |
$3.955m |
Part 3: Unpaid balance of government wage subsidy |
$0.958m |
Part 4: End of Lease Make Right Provision |
($2.680m) |
Part 5: Net Impaired Water Force Lease Losses |
$0.850m |
Part 6: Gain in Customer Deposits |
($0.432m) |
Part 7: Net Rationalisation of Stockyard Property Plant and Equipment |
($0.253m) |
Part 8: Increase in Bad Debt Provision above Bad Debt Expense |
$0.196m |
Total |
$2.202m |
Notes
Item 3/ The balance of the wage subsidy not paid out is supporting PGW's balance sheet. Once this has been paid out to staff, PGW will need to borrow this amount to keep funding the assets on the books. Next year there is unlikely to be a wage subsidy, as PGW stands on its own in a post Covid-19 environment (fingers crossed!). So next year this amount will have to be added to the company borrowings.
Item 4/ This 'make right' amount is capital needed to fix up incidental damage to a leased property at the end of a lease period. The make right expense is amortized over the length of the lease. But actually the money does not have to be paid out until PGW 'moves out' and the make right work is done. Therefore I see 'make right' capital as off balance sheet capital that could be utilized in a cashflow emergency. An asset PGW has when the books say it is not there.
Item 5/ Netting calculation: $1.40m - $2.25m = -$0.85m
Item 6/ Netting calculation: $1.474m - $1.042m = $0.432m
Item 7/ Netting calculation: $0.66m - $0.41 = $0.25m
Item 8/ Netting calculation: -$0. 147m - $0.343m = -$0.196m
In my opinion PGW has a new net $2.202m worth of 'hidden debt' that it needs to clean up.
SNOOPY
Normalised NPAT Calculation FY2020
Let's start by working out some normalized profit figures:
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 (1) |
$9.362m (2) |
$3.826m (3) |
$4.350m (4) |
$11.187m |
$0.200m (5) |
$10.987m |
75.484m |
14.6c |
(1) 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: $24.425m + $2.5m + $1.8m = $28.725m
(2) AR2019 p31
(3) Interest is calculated on the new capital structure of PGWRR. As at May 19th 2019 the total bank net debt post capital return was estimated to be: $3.920m + $31.742m = $35.662m. I have taken this figure as indicative of the 'low season debt' for FY2019. PGW have stated that they plan to borrow up to an additional $70m in working capital during the year. I will therefore estimate the 'high season debt' as: $35.662m +$70.000m = $105.662m. The average incremental debt I am modelling for the year is therefore:
$105.662m / $35.662m = 2.96 = +196%
Using a linear triangulated debt over time distribution model to adjust for the average debt increase over the entire year, the average increase in incremental debt is only half this: +98%. Throw in my indicative borrowing rate for the year of 5.6% (my post 4640) and I estimate the interest bill for the year would have been:
0.056x [$31.742m+$3.920m-$1.160m] x 1.98= $3.826m
(4) Income tax is calculated at a rate of 28%: 0.28( $28.725m - $9.362m - $3.826m ) = $4.350m
(5) AR2019 p55
PGW 'Rural Rump' for FY2020
|
EBITDA |
less D&A |
less Net Interest |
less Income Tax |
equals NPAT |
add Property devaluation |
equals Adjusted NPAT {A} |
No. Shares on Issue {B} |
eps {A}/{B} |
FY2020 |
$23.446m (1) |
$9.303m(2) |
$1.906m (3) |
$3.426m (4) |
$8.811m |
$0.200m (5) |
$9.011m |
75.484m |
11.9c |
(1) AR2020 "Impact of NZIFRS Leases"
(2) Depreciation & Amortisation: ($5.113m + $0.181m -$60m) + ($4.086m - $0.017m) = $9.303m
(3) Interest is calculated on the new capital structure of PGWRR.
a/ As at June 30th 2020 the total bank net debt was: $30.000m + $20.000m -$16.868m = $33.132m.
b/ As at December 31st 2019 the total bank net debt was: $40.000m + $20.000m - $0.682m = $59.318m.
c/ As at June 30th 2019 the total bank net debt was modelled as: $3.920m + $31.742m - $1.160m= $34.502m.
The average low season debt I am therefore modelling as: ($33.132m+$34.502m)/2 = $33.817m
The average incremental debt I am modelling for the year is therefore:
$59.318m / $33.817m = 1.75 = +75%
Using a linear triangulated debt over time distribution model to adjust for the average debt increase over the entire year, the average increase in incremental debt is only half this: +37.5%. Throw in my indicative borrowing rate for the year of 4.1% (my post 4995) and I estimate the interest bill for the year would have been:
0.041x [$33.817m] x 1.375 = $1.906m
(4) Income tax is calculated at a rate of 28%: 0.28( $23.446m - $9.303m - $1.906m ) = $3.426m
(5) AR2020 Note 16A
More comparative company performance statistics are revealed below:
|
PGW Rural Rump (FY2019) |
PGW Rural Rump (FY2020) |
Share Price 30th September {A} |
$2.55 |
$2.75 (*) |
eps {B} |
14.6c |
11.9c |
PE Ratio {A}/B} |
17.7 |
23.1 |
Normalised Profit {C} |
$10.987m |
$9.011m |
Shareholder Equity {D} |
$165.902m |
$156.702m |
ROE {C}/{D} |
6.62% |
5.75% |
Revenue {E} |
$809.295m |
$788.036m |
Net Profit Margin {C}/{E} |
1.36% |
1.14% |
Gross Earnings Yield {B}/ 0.72x{A} |
8.0% |
6.0% |
(*) Estimated
SNOOPY