If they have a liability with positive interest rates then obviously it becomes an asset with negative interest rates. :t_up:
[Disc: probably left an important word out of this post like I did the last one]
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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.
Interesting. I don't follow Elders that closely, and I kind of assumed that they would have had a 'wholesale' division like PGW with 'Agricom'. Yet it turns out they don't!
Buying the unlisted private wholesale buying group 'Australian Independent Rural Retailers' will certainly fix that for Elders.
"Last month the consumer watchdog raised concerns over the proposed takeover of Elders' rival RuralCo by Canadian fertiliser giant Nutrient Ltd, stating antitrust fears and potential discrimination against some independent retail stores."
That comment indicates that RuralCo must have a wholesale division. Without a wholesale division, there would be no way to discriminate against independent retail stores.
Elders management seems to be making all the right noises about their prey:
"By preserving continuity of AIRR's key management team and independent identity through a light touch integration, AIRR will continue to deliver the benefits to its independent members which have enabled it to achieve a track record of consistent growth."
But Elders also said:
"The company said the acquisition would allow it to enter the wholesale rural services market with net synergies of $6.6 million to $9.33 million per annum to be gradually realised over the next two years."
So Elders are looking at a 'light touch integration'. Yet they are still looking for up to $9m in synergy benefits? It sounds like they might be looking at a 'sweetner deal' for their own shops and that would surely undermine the independent retail competition.
"Established in 2006, AIRR is a member-based buying and marketing group for independent rural merchandise and pet and produce stores."
If AIRR is indeed owned by downstream retailers, it would appear that the sale of AIRR to Elders is a footshot! I wonder if the existing AIRR shareholders will vote for this deal?
"Elders has made a $187 million scrip and cash offer for unlisted private wholesale buying group Australian Independent Rural Retailers."
That offer is a bit below what they would need to acquire all of PGW. But given the $137m equity raising associated with this AIRR takeover, you would have to assume that should Elders try to acquire PGW, they would have to raise at least that much in new equity again. Would Elders shareholders go for another capital raising so soon?
SNOOPY
Comes down to whether Elders is successful with integrating AIRR into its fold and realizing said synergies etc.
Elders shareholders have certainly done well since the dark days of 2014 when its sp went below $1.00 so as long as current management continue delivering, there is no reason why they would not support more growth and capital raising.
https://www.nzx.com/announcements/337127
SM to approve capital distribution now in progress.
Ten year government bond has recovered to '1.56%' at the end of 24th July. But Westpac economists reckon it is headed for 1.0%!
Maybe the 'get out of jail' tactic is to let those vulnerable pensioners get so old that they are unable to legally fight back? A ninety year old in their sick bed is ripe for exploitation. What would they do if PGW were to 'solve' their 'pension plan crisis' by ceasing to pay them?
"We cannot pretend that the promise of a pension is as strong as government guarantee."
Sounds like a good line for Stephen Guerin to roll out at the September AGM.
I abstained from voting at he recent SGM where the capital repayment was voted on. I was for a capital repayment. But I think just $10m of that repayment diverted to bail out the pension scheme (for the moment) would have been a good decision. Both for the pensioners and for shareholders as it would remove a significant reduction in funding uncertainty. And markets do not like uncertainty!
The problem has not only not gone away, it is only getting bigger in relative terms. I think we are now effectively back to FY2016 when a five year bail out of the pension plan (so far ineffective) was announced.
Whammy 1/ 10 year government bond rate, (that determines the pension scheme discount rate) down from 1.77% to 1.56% since last disclosure in mid May.
Whammy 2/ Reduced interest earned from underlying fixed interest investments that fund the pension scheme is consummately reduced. So more capital will be needed to generate the budgeted income.
Whammy 3/ As the scheme beneficiaries get older and payout requirements get closer, there will be a need to move more of the portfolio to fixed interest investments with less to growth assets.
Whammy 4/ The size of the funding company is now significantly reduced. Instead of PGW backing the pension scheme, we now have a much smaller company PGWRR that is required to service the pension scheme deficit.
I think that if pensioners are to be paid their dues, then we shareholders will need to put $20m from here into the pension scheme in the end. It could even be $30m if those interest rates stay stubbornly low for ten years. Why as a shareholder am I concerned? Because PGW is now capitalized for borrowing up to $70m to meet seasonal financing requirements. And if close to half of that funding must be fed into the pension scheme, then PGW Retail will not have the capital to stock their shelves. And that means customers will go down the road to buy their supplies from the opposition. This has the potential to turn ugly for both pension scheme beneficiaries and shareholders!
SNOOPY
discl: worried shareholder
https://www.nzx.com/announcements/338405
Capital return money in the bank in 2 weeks if you hold next week.
Hi, I’m kind of a hobby investor familiar with the basics of share investing but am finding this capital return and share consolidation confusing. If I had say 10,000 PGW shares (I have more than that) then at current share price of 55c they are worth $5500. I would get a capital return of 31c per share, so $3100? or does receiving a share for every share held mean I would i get a capital return of $6200? Then my 10,000 shares would get 1-for 10 consolidated to 1000 shares. Would those then be worth $550 at current share price? Or does the post consolidation share price change?
............................................10,000 shares at 55 cents is $5,500
..............................................less 31 cents ps................-$3,100
.................................................. ...........equals...............$2,400.
So after consolidation your 1,000 shares will be worth..........$2,400 or $2.40 per share.
Hi Bryndlefly. Here is my read on it. Like you I am in the less qualified category of investor so no guarantee I am right. The issuing of the additional shares alongside the capital return is a bit of a smokey. It is just to serve as a mechanism for the capital return. In theory when the capital is returned you will retain 10,000 shares, the share price will drop to 24c and you will receive 31c. A week or so later when the 10 for 1 consolidation occurs your number of shares will reduce to 1,000 and in theory the market response would see the share price rise to $2.40. In real life the market doesn't work on theory alone and there will be some variances to this.
Hi thanks for the replies. The other thing that I'm not sure about with a share consolidation - i keep track of my shares with the ASB Securities portfolio feature, if i paid say 50c per share for PGW shares originally, i think a post consolidation share price of possibly $2.40 would show in my portfolio as a share price increase of 480%, which wouldn't be correct. I guess post consolidation i would need to change the value of what i paid for the shares? Unless the ASB portfolio function changes that value automatically. Sorry i should really know about this sort of thing by now.