If the numbers do not seem right double check them first and bark later
Quote:
Originally Posted by
Snoopy
What an amazing escape. $6m in cash disappears, and there is no effect on the balance sheet! Ronnie Biggs take note. I guess this is why corporate accountants are paid so highly!
Nevertheless a little look at the balance sheet for comparative periods is in order:
|
HY2017 |
FY2016 |
HY2016 |
Total Liabilities (A) |
$472.236m |
$482.166m |
$412.917m |
Total Assets (B) |
$748.148m |
$754.128m |
$687.216m |
Debt ratio (A)/(B) |
63.1% |
63.9% |
60.1% |
Inventories |
$214.251m |
$209.163m |
$244.074m |
Because PGW is a seasonal business, the first half of the year tends to be 'stock heavy'. Less inventory is on hand at the end of the year when the farming season is over, and the inventories have been cleaned out (see above table). The like for like period HY2017 vs HY2016 shows a lower inventory (less of the irrigation system assets on hand?) but also a higher debt ratio. Hmmmm.
SNOOPY
Hmmm indeed.
You have swapped the 2016 half and full numbers around.
Best Wishes
Paper Tiger
Dividend Capitalisation Method valuation: Part 1 (FY2017 Data)
Quote:
Originally Posted by
Snoopy
A slight change in tack to my valuation method. PGW has now largely finished restructuring. They also have a policy of paying 100% of earnings out as dividends. So I shall assume all earnings over the last five years would have been paid out as dividends and make my PGW valuation from that.
eps figures, adjusted for the removal of the finance division over the last five years were as follows:
FY2011 : $5.9m/ 754.8m = 0.8c
FY2012 : $25.2m/ 754.8m = 3.3c
FY2013 : $24.3m/ 754.8m = 3.2c
FY2014 : $33.8m/ 754.8m = 4.5c
FY2015 : $34.8m/ 754.8m = 4.6c
I calculate that as an average earnings rate of 16.4c/5 = 3.3c
For a cyclical like this I would require a 'gross return' of some 8.5%. Given a 28% tax rate (72% reatined earnings rate), my valuation over the business cycle of PGW is that it should average:
3.3 / (0.085 x 0.72) = 54c
Increase that required gross return to 9%, and the valuation drops to
3.3 / (0.09 x 0.72) = 51c
I posted the above on 31st October 2015.
I am now changing my valuation method to reflect the dividends actually paid from years 2012 to 2016 inclusive, representing the whole Alan Lai era.
Year |
Dividends Paid 'per share' |
Total |
FY2012 |
0.0cps + 0.0cps |
0cps |
FY2013 |
2.2cps + 1.0cps |
3.2cps |
FY2014 |
2.0cps + 2.5cps + 1.0cps (s) |
5.5cps |
FY2015 |
2.0cps + 2.0cps |
4.0cps |
FY2016 |
1.75cps + 2.0cps |
3.75cps |
FY2017(f) |
1.75cps + 2.0cps(f) |
3.75cps |
Average FY2012 to FY2017 inclusive |
|
3.37cps |
(f) indicates forecast result.
(s) indicates 'special dividend'
SNOOPY
Dividend Capitalisation Method valuation: Part 2 (FY2017 Calculation)
Quote:
Originally Posted by
Snoopy
Average FY2012 to FY2017 inclusive |
|
3.37cps |
Plugging in a representative yield, one that represents the ups and downs of the farming cycle of PGG Wrightson in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation
(Representative Dividend per Share) / (Acceptable Yield) = Share Price (an algebraeic manipulation of: Dividend per Share / Share Price = Yield )
3.37c / 0.72 x 0.095 = 49.2c
Note that I am using 9.5% as my acceptable gross yield. Some might argue that is high. But I think it is fair given that much of PGW's profit comes from low margin commodities subject to weather event demand. Some years ago PGW paid no dividend at all for several years in a row. This kind of risk is reflected in my selection of a 9.5% acceptable yield, about half as much again more than a tier one utility company.
This 49c valuation is measured at the average point in the business cycle. One might argue that we are now riding high in the business cycle and that this 49c valuation is consequently too low given today's circumstances (sp closed today at 54c). I wouldn't argue with that. If I use my +20% rule of thumb, one might expect a share price of 59c at the top of the business cycle. Likewise 39.5c would be the bottom. Take off the imminent 1.75c fully imputed dividend and PGW doesn't look so overvalued today (remember too that there is a strong case to say that most of the market is slightly overvalued right now). I wouldn't be selling or buying more PGW shares based on these numbers.
SNOOPY
discl: hold PGW
What debts really matter to bankers?
Quote:
Originally Posted by
Snoopy
Voracious shareholders are milking PGW of all the dividends they can. Yet PGW is not debt free. Could the long term future of PGW be at risk because of the high dividend draw down? This is a question that needs looking into:
|
2015 |
2014 |
Debt Short Term |
$57.195m |
$35.573m |
Deriv Liabilities Short Term |
$3.266m |
$0.887m |
Debt Long Term |
$66.000m |
$65.000m |
Deriv Liabilities Long Term |
$1.980m |
$0.005m |
Long Term Provisions |
$5.597m |
$6.609m |
Defined Benefit Liability |
$14.655m |
$13.528m |
Change in Receivables/Payables Adjustment (*) |
-$5.745m |
$1.304m |
Total |
$143.758m |
$120.298m |
(*) The Change in Receivables/Payables Adjustment takes into account that you can hide debt by:
1/ not paying your bills OR
2/ by collecting money that is owed to you faster than is normal, when you may not be able to do that in the future.
Alternatively if you do the opposite of 1/ and 2/ (as is the case in both years here) , then the debt is actually smaller than it appears. This is why the adjustment is negative for FY2015 and FY2014.
Taking the above debts and dividing them by normalised profits will give us a theoretical 'minimum debt repayment time - minDRT' (assuming all profits from the current year are directed to paying down debt). This assumption is not management policy. But it nevertheless gives us a measure of the indebtedness of PGW relative to underlying earnings.
min DRT(2015) = $143.758m / $34.8m = 4.1 years
Compare that with last years figure
min DRT(2014) = $120.298m / $33.8m = 3.6 years
Despite the slight deterioration, I rate this as OK. A debt repayment time of under two years I regard as low. Up to five years I would regard as a 'medium sized debt'. Once the minimum debt repayment time gets above ten years, this is a very definite warning flag for me.
I posted the above on 31st October 2015
Quote:
Originally Posted by
Roger
When looking at this whole creative accounting exercise one reaches the indicative conclusion they are selling off the silverware to prop up their pension scheme.
Its one thing to take capital profits on property and lease them back and effectively take gains to fund increasing liabilities and thereby apparently magically extinguish them them but here's some disturbing food for thought going forward. What happens in FY19 with the new accounting standard that requires accounting for lease liabilities ? It would appear that while they can temporarily craft an apparent extinguishment of an increased liability, (pension scheme)...the chooks will eventuallky come home to roost. Then what happens to their debt equity level !
An interesting question Roger. However most banking covenants seem to be based on 'cashflow'. Cashflow won't be affected by whether long term lease agreements becaome capitalised debt or not. Also these changes in accounting rules have been well signalled. So yes the debt on paper from FY2019 will look higher. But will bank managers be really worried about it?
I want to look at this PGW debt question from a slightly different angle than I did before. Banks often look at EBITDA as a measure of a company's ability to repay a loan. While this is probably the best short term indicator, depreciation and amortization, eventually do have to be paid for in 'cash' as reinvestment is required in software and motor vehicles (for example) if PGW is to keep operating. In the past the figure I have used is 'sustainable profit'. But whether the profit comes from normal customer activity or PGW selling properties and shares in businesses is neither here nor there to a bank manager - as long as the bank gets the money! So I am now thinking, maybe declared net profit after tax is the best figure to look at from a medium to longer term perspective?
The next question is, what company debt figures to use?
1/ Certainly long and short term debt to the bank should be included. BUT
2/ Short and long term derivative liabilities should come out in the wash the bank debt is rolled over. So taking the medium to long term view of PGW, my instinct is to exclude those.
3/ Employee entitlements tend to be paid out ahead of the bank being repaid. So I think the 'Defined Benefit Liability' , relating to the company pension scheme, should be included in the company debt burden. BUT
4/ 'Long Term Provisions' include all sorts of other things as well as current employee entitlements. So my instinct is to include only the current 'employee entitlements' over and above the debts I have listed above.
I am not sure if all my above inclusions and exclusions are 'right'. But I will assume that I am right for today. So what is the net result of measuring the company's ability to repay (declared net profit) against the liabilities I have set out above? Let's see.
SNOOPY
A seasonal look at the PGW business.
Quote:
Originally Posted by
Snoopy
Nevertheless a little look at the balance sheet for comparative periods is in order:
|
HY2017 |
FY2016 |
HY2016 |
Total Liabilities (A) |
$472.236m |
$412.917m |
$482.166m |
Total Assets (B) |
$748.148m |
$687.216m |
$754.128m |
Debt ratio (A)/(B) |
63.1% |
60.1% |
63.9% |
Inventories |
$214.251m |
$244.074m |
$209.163m |
Because PGW is a seasonal business, the first half of the year tends to be 'stock heavy'. Less inventory is on hand at the end of the financial year (June 30th) when the farming season is over, and the inventories have been cleaned out. However this was not true as at 30th June 2016. This might be reflecting excess stock from irrigation systems not installed, and seeds not sold due to flooding in South America, specifically Uruguay. The 'like for like' period HY2017 vs HY2016 shows a
greater inventory in FY2017 (more of the irrigation system products from last season and more seeds still on hand?) but also a (slightly) lower debt ratio. Hmmmm.
I have decided that a look over a longer timeframe at the seasonality of the PGW business would be useful for shareholders.
Here is what PGW says about the seasonality of their business, the disclaimer printed in the annual report each year:
"The group is subject to significant seasonal fluctuations. In particular Livestock and Seeds activity are significantly weighted to the second half of the financial year. Seed revenues reflects the fact that the group operates in geographical zones that suit Autumn harvesting and sowing (March to May). New Zealand generally has spring calving and lambing and so livestock trading is weighted towards the second half of the financial year (January to June) in order for farmers to maximise their incomes. Other business units have similar but less material cycles. The group recognises that this is the nature of the industry and manages its business accordingly."
Expanding on the small table I have previously created:
|
HY2017 |
FY2016 |
HY2016 |
FY2015 |
HY2015 |
FY2014 |
HY2014 |
FY2013 |
HY2013 |
FY2012 |
HY2012 |
Total Liabilities (A) |
$472.236m |
$412.917m |
$482.166m |
$385.585m |
$467.190m |
$364.800m |
$438.826m |
$363.402m |
$402.887m |
$402.698m |
$498.956m |
Total Assets (B) |
$748.148m |
$687.216m |
$754.128m |
$652.953m |
$728.460m |
$634.502m |
$700.380m |
$619.508m |
$987.272m |
$980.472m |
$1,066.012m |
Total Assets {Goodwill write off removed} (C) |
|
|
|
|
|
|
|
|
$666.129m |
$659.329m |
$744.869m |
Debt ratio (A)/(B) |
63.1% |
60.1% |
63.9% |
59.1% |
64.2% |
57.5% |
62.3% |
58.7% |
40.8% |
41.1% |
46.8% |
Debt ratio (A)/(C) |
|
|
|
|
|
|
|
|
60.5% |
61.1% |
67.0% |
Inventories |
$214.251m |
$244.074m |
$209.163m |
$246.313m |
$202.551m |
$229.498m |
$210.108m |
$243.650m |
$202.643m |
$239.440m |
$208.446m |
There was a large write off of goodwill in 2HY2013. Projecting this write off back into previous results creates a better 'like with like' comparison picture. Contrary to my previous explanation, it seems that the higher indebtedness at financial half year (the end of December) is quite normal. In tandem with the higher indebtedness at half year is lower inventory. This seems counterintuitive, so what coudl the explanation be?
PGW explain that the two most seasonal effects are livestock sales and seed sales both weighted to the second half.
1/ Livestock are more often than not sold on an agency basis. PGW does not need to own whole herds of cows themselves to make sales. Some livestock get on the books as 'biological assets', but these are not part of inventory.
2/ Seeds although peaking in stock before autumn are largely 'grown' by PGW, not 'bought in'. If PGW grows seeds, do they appear as inventory on the books if no cash is laid out? I don't know the answer, but I would guess 'no'. If that is true, it means that the main 'inventory' on the books for the seed stock is the packaging, perhaps relatively low value in dollar terms compared to the money made from selling the seeds themselves.
Taking 1/ and 2/ together, this could explain why 'inventory' on the books appears seasonally low, just as PGW are entering their high sales period (January to June).
The second point to note from my table is that, when corrected for the 2HY2013 goodwill write off, the indebtedness of the company as measured by the debt rationo has not changed much outside of the seasonal variations since the Alan Lai headed recapitalisatiuon.
SNOOPY
The wider 'interest' picture: Part 1
Quote:
Originally Posted by
snoopy
an interesting question roger. However most banking covenants seem to be based on 'cashflow'. Cashflow won't be affected by whether long term lease agreements becaome capitalised debt or not. Also these changes in accounting rules have been well signalled. So yes the debt on paper from fy2019 will look higher. But will bank managers be really worried about it?
|
FY2011 |
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
Interest Payable: {A} |
|
$8.737m |
$5.537m |
$5.091m |
$6.768m |
$7.150m |
Bank Facility Fees: {B} |
|
$4.937m |
$4.240m |
$2.440m |
$1.508m |
$0.945m |
Financial Rearrangements during year |
|
1/ PGW Finance |
1/ Goodwill $300m+ |
1/ New Syndicated Loan |
1/ Syndicated loan |
1/ Reorganisation of |
|
|
divestment to Heartland |
write off |
negotoiated Dec 2013 |
extended to Dec 2018. |
Uruguayan loans: |
|
|
2/PGW Rural Capital |
2/$20m of 31-07-2004 |
(includes Term Debt |
2/ New Overdraft Facility |
(Logistic Centre |
|
|
Limited repayments |
loan paid back early |
facility $116m (+$6m) |
of $9.63m. |
Facility: $US11m) |
|
|
(including Crafer Farms) |
3/ Amortizing facility |
& Working Capital |
3/ New Trade Finance |
(Committed |
|
|
|
$38.98m repaid. |
facility $60m (same) ) |
facility of $6.57m |
Facility: $US12m) |
|
|
|
4/ Trade Finance facility |
until December 2016. |
4/ Extra finance for |
(Unsecured |
|
|
|
$34.16m wound up |
|
Uruguayan operations |
Facility: $US16.34m) |
|
|
|
|
|
$NZ11.76m + $38.32m |
Loan Balance (Short Term) EOFY |
$52.194m |
$29.709m |
$47.702m |
$35.573m |
$57.195m |
|
Loan Balance (Long Term) EOFY |
$124.500m |
$111.500m |
$62.000m |
$65.000m |
$66.000m |
|
Loan Balance (Short Term) EOFY AR2016 |
|
|
|
|
$57.411m |
$36.623m |
Loan Balance (Long Term) EOFY AR2016 |
|
|
|
|
$69.328m |
$97.551m |
Average Total Loan Balance Over Year: {C} |
|
$158.952m |
$125.455m |
$105.138m |
$111.884m |
$130.437m |
Charged Interest Rate Estimate: {A}/{C} |
|
5.50% |
4.41% |
4.84% |
6.05% |
5.48% |
Bank Facility + Interest Rate Estimate: [{A}+{B}]/{C} |
|
8.60% |
7.79% |
7.16% |
7.40% |
6.97% |
----
The important figure to look at (or so I thought) was the actual interest rate the bank syndicate was charging. However the supplementary 'Bank Facility Fees' are enormous. In FY2013 those fees almost matched the interest paid! I have tried to summarize any Financial Arrangements changed during the year that could explain these 'one off' charges. They are generally reducing over the years as PGW finds a more stable operating structure. So hopefully 'Bank Facility Fees' will not play as large a part in PGWs future as they have done in the past!
'PGW Rural Capital Limited' was a company set up to take over the remaining PGW Finance Loans that Heartland did not want. It is no surprise that a few extra bank fees were payable on the wind up of some of many of these loans in FY2012. Likewise the wind up of the 'Amortising Facilities' and 'Trade Finance facilities' in FY2013 look to be have been costly. FY2014 saw the former ANZ bank loan turned into a 'syndicated loan' involving Westpac and BNZ as well. This involved winding up the previous ANZ facility early. All that rearrangment was obviously costly! It is interesting that new 'trade facilities' were opened in FY2015. I thought that side of the business had been handed to Heartland? So is this a sign that Heartland ( PGW Finance owners) are not performing, with PGW having to establish new trade facilities again in their own right?
Here is hoping for stability in the loan arrangments going forwards!
SNOOPY
The wider 'interest' picture: Part 2
Quote:
Originally Posted by
Snoopy
Here is hoping for stability in the loan arrangments going forwards!
|
FY2011 |
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
Financial Rearrangements during year |
|
1/ PGW Finance |
1/ Goodwill $300m+ |
1/ New Syndicated Loan |
1/ Syndicated loan |
1/ Reorganisation of |
|
|
divestment to Heartland |
write off |
negotoiated Dec 2013 |
extended to Dec 2018. |
Uruguayan loans: |
|
|
2/PGW Rural Capital |
2/$20m of 31-07-2004 |
(includes Term Debt |
2/ New Overdraft Facility |
(Logistic Centre |
|
|
Limited repayments |
loan paid back early |
facility $116m (+$6m) |
of $9.63m. |
Facility: $US11m) |
|
|
(including Crafer Farms) |
3/ Amortizing facility |
& Working Capital |
3/ New Trade Finance |
(Committed |
|
|
|
$38.98m repaid. |
facility $60m (same) ) |
facility of $6.57m |
Facility: $US12m) |
|
|
|
4/ Trade Finance facility |
until December 2016. |
4/ Extra finance for |
(Unsecured |
|
|
|
$34.16m wound up |
|
Uruguayan operations |
Facility: $US16.34m) |
|
|
|
|
|
$NZ11.76m + $38.32m |
Charged Interest Rate Estimate: {A}/{C} (previous table) |
|
5.50% |
4.41% |
4.84% |
6.05% |
5.48% |
Interest rates used for determining value (Receivables) |
|
13.6% |
14.4%% |
14.2% |
14.7% |
Not Mentioned% |
I always get suspicious when statistics are dropped from the Annual Report with no explanation.
Note 21 in AR2016 is titled 'Financial Instruments'. The last five years of annual reports also have a section titled 'Financial Instruments'. There is some detail in there about listing values on the books at 'fair value'. The interest rate used in determining these 'fair values' of 'finanace receivables' is listed under sub-section 'e' (in previous years). I assume some value of 'determining value' interest rate was used in FY2016, even though management chose not to tell sharehodlers what that interest rate was.
I have displayed the offending interest rate (where available) alongside my calculated interest rate that our company has been paying to the bank. There is no reason for these interest rates to be the same. I might expect the trend of changes in value year to year to show some correlation though. The 'determining value' interest rate has not dropped significantly since FY2012 (actually it has gone up). In a climate over the last few years of declining interest rates I find this odd. The fact that it wasn't given for FY2016 leads me to suspect it might have gone even higher. Can anyone explain this apparent anomoly? Why would an interest rate be used to help determine the value of financial receivables in the first place?
SNOOPY
Interest Rate Stress Test: Part 1 'The Data'
I think PGW is the highest yielding share on the NZX, at least among those shares that have any chance of a stable earnings profile going forwards. High yield is often a measure of market scepticism. The reason for this scepticism IMO is that:
1/ Commodity markets (most of PGW's customers farm commodities) are subject to price and exchange rate volatility AND
2/ PGW itself carries a not insignificant bank loan debt burden.
Unfortunately when interest rates eventually rise, PGW will get a double whammy from:
1/ Higher interest costs
2/ The ability of customers to purchase being reduced from a higher NZ exchange rate reducing commodity prices in NZD terms..
I think it is worthwhile 'stress testing' the company to see what might happen in practice under a higher interest rate scenario. FY2012 to FY2016 covers the last five years under Alan Lai's Chairmanship. I suggest that 'net profit after tax' is largely determined by the revenue turnover of the company in any particular year. This is because PGW has limited ability to respond to any 'weather event' or predict the timing of the commodity cycles, but must have stock on hand at the start of each farming season (particularly with seeds) to meet demand from farmers. Revenue form the last five years has been tabulated below. I have presented an adjusted revenue picture too, as explained by circumstances outlined in note 1.
A point of observation is that 'adjusted revenue' is surprisingly stable. $1,173.6m is the mean adjusted revenue figure. The highest and lowest revenue figures are less that 4% away from that mean figure. This can be attributed to PGW doing business across all rural sectors. When the different rural sectors are 'out of synch' this naturally smooths the overall revenue picture.
|
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
Stressed Year |
Revenue |
$1,336.8m |
$1,131.8mm |
$1,219.8mm |
$1,202.8m |
$1,181.6m |
Revenue (adjusted) |
$1,131.8m |
$1,131.8mm |
$1,219.8mm |
$1,202.8m |
$1,181.6m |
$1,131.8m (-$50m) |
Average Total Loan Balance |
$158.952m |
$125.455m |
$105.138m |
$111.884m |
$130.437m |
over Year: {Snoopy post 4071} |
Charged Interest Rate |
5.50% |
4.41% |
4.84% |
6.05% |
5.48% |
estimate: {Snoopy post 4071} |
Bank Facility + Interest Rate |
8.60% |
7.79% |
7.16% |
7.40% |
6.97% |
8.60% (+23%) |
estimate: {Snoopy post 4071} |
Notes
1/ Below is a quote from p5 of the PGW Annual Report for FY2013:
"Sales revenue for the group decreased, although this had no bearing on underlying business activity. Sale of the Agri-feeds molasses business resulted in it being accounted as ‘equity earnings from associates,’ meaning its revenue is no longer recognised in our accounts. In addition, a number of key product lines in the retail business are now transacted on an agency basis, meaning that,although gross profit generated by these transactions remains unchanged, only commission income is recorded as our revenue rather than the full transaction value."
SNOOPY
Why is this page so wide Snoopy
Quote:
Originally Posted by
winner69
F16 saw them use $$29m to pay out dividends
This wasn't funded from normal activities - $20m came from property sales and the rest was borrowed
I reckon pusing the limits of 'financial endineering' to keep shareholders (at least the majority one) happy
No wonder a high dividend yield
Whilst I broadly agree with you I have underlined the bits that are plain wrong.
Best Wishes
Paper Tiger