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  1. #4501
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    Default Seeds of Destruction: Part 5.2 PE Ratio and Gross Yield calculations: PGW Rural Rump

    Quote Originally Posted by Snoopy View Post
    Reworking these calculations with the figures re'Balance'd

    Scenario $100.5m debt repayment Scenario $118m debt repayment
    eps {A} 2.49c 2.60c
    PGW Rural Rump: Market Valuation {B} 18.3c 20.7c
    PE ratio {B}/{A} 7.2 8.0
    Gross Dividend Yield {A}/{B x 0.72} 18.9% 17.4%

    Notes

    1/ In the gross yield calculation I am assuming that all earnings are paid out as dividends. With 'Agria' better capitalized following the capital repayment and with some potential investment to be made on 'PGW Rural Rump' going forwards, this might not happen.

    2/ The PE ratios are looking fair for this type of business. But remember we are in a favourable time period in the rural cycle.

    3/ The potential dividend yield looks fantastic, with the slightly better capitalized version of 'PGW Rural Rump' showing a lower yield. But perhaps that better capitalization could be handy in an industry notorious for 'rural downturns'. And in such downturns I would expect any dividend yield to drop .

    4/ Have I missed anything else?
    Scenario $157.5m debt repayment
    eps {A} 2.19c
    PGW Rural Rump: Market Valuation {B} 20.8c
    PE ratio {B}/{A} 9.5
    Gross Dividend Yield {A}/{B x 0.72} 14.6%

    Notes

    1/ In the gross yield calculation I am assuming that all earnings are paid out as dividends. With 'Agria' better capitalized following the capital repayment and with some potential investment to be made on 'PGW Rural Rump' going forwards, this might not happen.

    2/ The PE ratios are looking fair for this type of business, because I have considered a business cycle average value of earnings.

    3/ The potential dividend yield looks fantastic. The lesser than expected capital repayment looks to have made PGWRR debt free going forwards. This could be handy in an industry notorious for 'rural downturns'.

    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:

    20.8c x 14.5/8.5 = 35.5c

    Post 'capital repayment' and a couple of years down the track into more favourable farming times, I am therefore guessing a capital appreciation of around 15cps, plus dividends of 2cps per year, are on the table, with the share now trading at 52c.

    SNOOPY
    Last edited by Snoopy; 18-06-2019 at 10:25 PM.
    To be free or not to be free. That is the cash-flow question....

  2. #4502
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    Quote Originally Posted by Snoopy View Post
    3/ The potential dividend yield looks fantastic. The lesser than expected capital repayment looks to have made PGWRR debt free going forwards. This could be handy in an industry notorious for 'rural downturns'.
    From the May 9th 2019 announcement to the market

    "On settlement of the Seed and Grain business PGW repaid its bank facilities while the Board assessed the appropriate quantum of the capital return. Prior to making a formal recommendation to shareholders, new bank facilities will be arranged and shareholders will be provided with detailed explanatory information to assess the merits of the proposal. These materials will inform PGW shareholders about the proposed capital distribution and the pro-forma financial position of the company post-distribution."

    Given that after a $235m capital repayment to shareholders, PGWRR should be able to run 'debt free'(*), I wonder why they even need new bank facilities?

    SNOOPY

    (*) Having just sold off the store network, the resultant leases are now - no doubt - waiting to appear on the PGWRR balance sheet as debts, that to the new accounting standards regarding leases has created.
    To be free or not to be free. That is the cash-flow question....

  3. #4503
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    Quote Originally Posted by Snoopy View Post
    ...Having just sold off the store network, the resultant leases are now - no doubt - waiting to appear on the PGWRR balance sheet as debts, that to the new accounting standards regarding leases has created.
    I think that you will find that leases will appear as liabilities (current and non-current?) which are more or less offset on the asset side by 'use of leases' (proper terminology escapes me for the moment and I am not going to look it up).


    It is just the latest bit of fiddling about the accountant bodies of the world feel they need to do to make adding up look difficult and thus worth using their services.
    om mani peme hum

  4. #4504
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    Quote Originally Posted by Snow Leopard View Post
    I think that you will find that leases will appear as liabilities (current and non-current?) which are more or less offset on the asset side by 'use of leases' (proper terminology escapes me for the moment and I am not going to look it up).
    Yes, quite correct.

    It is just the latest bit of fiddling about the accountant bodies of the world feel they need to do to make adding up look difficult and thus worth using their services.
    I don't see the situation quite as cynically as that. If a company, such as PGG Wrightson, operates a retail business, they can make a decision to:

    1/ Own their own retail footprint (albeit usually funded by bank debt) OR
    2/ Lease a retail premesis, by paying rent to a third party landlord.

    The third party landlord may have themselves borrowed money to buy the building. So the rent they will charge to the likes of PGW must at least cover the mortgage for the third party landlord to remain cashflow positive. I say that being cashflow positive is a likely necessary condition, because there is less potential for an equivalent 'loss offsetting capital gain' in the rural town sites, where PGW operates.

    For the likes of PGW, up until 1st January 2019, taking path 'number 2' did not result in any increase in debt on the PGW balance sheet. From a cashflow perspective going forwards, it is likely the rent bill paid by PGW will be greater than the alternative mortgage commitments that PGW could have signed up to under 'scenario 1'. Yet from a snapshot balance sheet perspective, 'scenario1' (pre 1st January 2019) is the higher debt option. The historical accounting convention would suggest that 'scenario1' means the company is in a weaker financial position than a company that follows 'scenario 2'. In fact there is very little difference in the financial position going forwards between the two paths. Thus the new accounting standard regarding leases is correcting a significant anomaly.

    Notwithstanding the existence of a 'right of use' asset offsetting a 'lease liability' on the balance sheet, the fact remains that future lease liabilities will be brought onto the balance sheet as debts (for that is what a lease liability is). So it will no longer be possible for a company to to claim they are 'debt free' if there are lease liabilities on the balance sheet. And that in my view is as it should be. Yet the new balance sheet lease liabilities could be netted off against extra cash on the balance sheet, if a company such as PGW wants to be seen as 'debt free' after 1st January 2019.

    SNOOPY
    Last edited by Snoopy; 20-06-2019 at 10:46 PM.
    To be free or not to be free. That is the cash-flow question....

  5. #4505
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    Quote Originally Posted by Snoopy View Post
    Closing PGW share price was 52c today. If we take this as Mr Market's 'reference figure', then this 52c will be split into a capital payout amount and the remainder which is Mr Market's worth of 'PGW Rural Rump'.

    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 = 31.2cps

    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.
    From the 9th May announcement:

    Proposed Capital Distribution to Shareholders

    “The Board has also determined that it intends to recommend a capital return of $235 million be made to shareholders which should equate to approximately 31 cents per share. The proposed capital distribution would be implemented by way of a pro-rated share buyback."

    Some readers may have noticed that the number of shares that will be on issue after the 'pro-rated share buyback' (sic) is presently unknown. We don't know how many shares will be bought back and what price per share PGW will pay. One thing that is certain is that the number of shares remaining will be short of 754.048m. So does that make my calculation predicting the price of each PGWRR share after the share buy back meaningless, because I have assumed 754.048m shares still exist?

    In a word, no. We only need to know the dollar value of the buyback, and that has been given. If 377.024m shares end up being cancelled (exactly one in two) then the underlying value of the remaining shares will double, to:

    20.8c x 2 = 41.6c

    Whatever the actual number of shares cancelled, the theoretical post buyback price can be estimated by using this 'proportional method'. And because the theoretical share price going forwards will for a start be determined by the number of shares being cancelled via the buyback, that means the dollar value of the shares that are left ('Pre-break Up Value' minus $235m) does not change. The number of shares cancelled makes no difference to the value of PGWRR post the share cancellation transaction going forwards.

    SNOOPY
    Last edited by Snoopy; 20-06-2019 at 11:22 PM.
    To be free or not to be free. That is the cash-flow question....

  6. #4506
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    Quote Originally Posted by Snoopy View Post
    From the May 9th 2019 announcement to the market

    "On settlement of the Seed and Grain business PGW repaid its bank facilities while the Board assessed the appropriate quantum of the capital return. Prior to making a formal recommendation to shareholders, new bank facilities will be arranged and shareholders will be provided with detailed explanatory information to assess the merits of the proposal. These materials will inform PGW shareholders about the proposed capital distribution and the pro-forma financial position of the company post-distribution."

    Given that after a $235m capital repayment to shareholders, PGWRR should be able to run 'debt free'(*), I wonder why they even need new bank facilities?

    SNOOPY

    (*) Having just sold off the store network, the resultant leases are now - no doubt - waiting to appear on the PGWRR balance sheet as debts, that to the new accounting standards regarding leases has created.
    May 9th was 6 weeks ago* and still no news whatsoever from PGW re the capital repayment.

    So what's happening behind the scenes?

    *To put the 6 weeks in perspective, Tower announced a capital repayment in 2012, announcement 29 Nov and update given to market of repayment details 17 Dec - 2 weeks and a bit.

  7. #4507
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    I suspect they have taken a 3 month term deposit and don't want to break it! ho-hum

  8. #4508
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    Quote Originally Posted by steveb View Post
    I suspect they have taken a 3 month term deposit and don't want to break it! ho-hum
    So Agria are going to use their share of the 3% 3 month term deposit income to pay off the 6%+ bill they are paying on their own borrowings with NZ banks? It doesn't seem a likely motivation!

    From the 9th May press release:

    ------

    PGW have promised to produce a full forward looking report:

    Prior to making a formal recommendation to shareholders, new bank facilities will be arranged and shareholders will be provided with detailed explanatory information to assess the merits of the proposal. These materials will inform PGW shareholders about the proposed capital distribution and the pro-forma financial position of the company post-distribution. Shareholders will have this information prior to being called to vote in respect of the scheme proposal. Details relating to the dates for dispatch of materials will be announced in the coming weeks.”

    -------

    'Assessing the merits of the proposal' looks like another job for KordaMentha to me! It will take time to research this and put the detail in front of the board before dispatching the proposal to shareholders.

    --------

    “The PGW Board is also reviewing the corporate service structure for the business to ensure that we have an efficient model going forward that will best serve our customers and operations. As previously indicated, we will consult with the business in relation to any proposed changes that arise from that review and we would hope to be in a position to announce outcomes from that work-stream before the end of the financial year on 30 June 2019.

    -------

    Perhaps something will be released next week?

    SNOOPY
    To be free or not to be free. That is the cash-flow question....

  9. #4509
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    Default Seeds of Destruction Part 7.1: A new beginning PGWRR

    Quote Originally Posted by Snoopy View Post
    With the seed business gone, expectations will have to be reset. As an exercise I have gone through the last few years results and removed 'Seed & Grain' EBITDA from the Operating EBITDA. Here is the multi-year earnings picture that results:

    1/ This period covers the 'modern' era where Mark Dewdney's 'One PGW' philosophy started to permeate the group.
    Even for long term shareholders, 'PGGW Rural Rump' is now a new investment prospect. Sometimes to put in context where we are going, it is useful to look back on where we have come from. What follows is a condensed history of 'PGW Rural Rump', as if it had been a stand alone company for the last five years.

    Year PGWRR EBITDA AR Commentary
    FY2014 $24.782m Record dairy payout Dec 2013. Challenging year for arable farmers - Sept 2013 windstorm damaging irrigators. Wet autumn challenges harvests.
    Strong returns from grapes, apples and kiwifruit.
    Strong livestock market for dairy and beef cattle with a better market for sheep (+20% yoy per stock unit, despite stock numbers reducing 3.2% yoy).
    Wool volume down, profitability not offset by small increase in price.
    Like for like revenue for new irrigation systems +4%.
    Real Estate Revenue +25%, because of increase in farm sales including dairy conversions.
    FY2015 $29.125m Reduced dairy forecast from Dec 2014. Reduced arable sector demand for grain and dairy grazing by sheep and beef farmers.
    Livestock EBITDA up 15% with export sales bounce back.
    Improved returns for grapes, apples and kiwifruit. Summer drought in second half of the year.
    Wool flat, higher prices offsetting lower volumes.
    Irrigation and Water sales +32%, but margins lower.
    Real Estate revenues down 8%.
    FY2016 $28.319m Extremely challenging for dairy farmers, with dairy commodity prices at ten year lows (below cost of production for most). Reduced demand for grain and low international prices for arable farmers.
    In Livestock, high beef prices offset falling sheep meat prices. 'Go Lamb' and 'Go Beef' in house financing for livestock introduced.
    Horticultural sales thriving, with good growing conditions and strong markets. (Sales +$12.9m over previous year record). Irrigation and Water sales well down with delayed or cancelled projects from the dairy downturn.
    Wool increased revenue with higher wool prices on a smaller crop, while maintaining Operating EBITDA.
    Real Estate increased revenue by 16% and had a 123% EBITDA increase with strong growth in Lifestyle and Residential, and Horticulture, despite limited dairy opportunities.
    FY2017 $37.454m Retail increasing market share, not so affected by wet conditions (two tropical cyclones in April 2017) in the final quarter.
    Livestock: Record EBITDA due to sheep and cattle prices up on last year, because of sustained international demand for NZ Protein. Better dairy sales, offset by tough conditions for live exports.
    Horticultural sales up on previous year, particularly in grapes, kiwifruit, apples and avocados.
    Water and Irrigation revenue sank 30%, due to continued slowing of irrigation development on farms.
    Collapse of wool crossbred price (price halved over 15 months) has meant less sales and the formation of a grower stock pile. But fine wool prices are up 30%
    Good Real estate result similar to FY2016 with resurgence of rural property sales in Southland, Otago, Waikato and the Bay of Plenty, aided by good sales in horticulture, residential and lifestyle.
    FY2018 $34.567m Retail continues to target the science of soil management and crop production (agronomy), based on technical advice and service PGW can deliver, delivered at the right time. EBITDA increased by $2.25m.
    Dairy export revenues were up 14%. Arable sector had a wet spring delaying planting and a dry hot summer lowering yields.
    Meat and wool sector export revenues were up 12%. To date Mycoplasma Bovis has not affected performance of Livestock, which matched last years record EBITDA figures. There were strong beef and lamb prices throughout the year.
    Horticulture export revenues increased 6%. Hot summer largely positive for kiwifruit and apples. Company revenues were up again thanks to pip fruit, kiwifruit, grapes and other subtropical crops, and retaining a high market share.
    Water and Irrigation has increased EBITDA by $2.25m, despite the lack of on farm development.
    Wool business bounced back with an increased number of bales transacted,. Crossbred wool growers are now prepared to reduce their stores to match the much lower market price of a year ago.
    Real Estate down with new government regulations on overseas investment and tightened bank lending affecting the first six months, offset by renewed rural sector momentum in the second half.
    FY2019 $25m (est) Report not yet published.

    SNOOPY
    Last edited by Snoopy; 23-06-2019 at 04:11 PM.
    To be free or not to be free. That is the cash-flow question....

  10. #4510
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    Very useful, Snoopy.

    Thanks!

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    Default Seeds of Destruction: Part 3.3 - NPAT of 'PGW Rural Rump' going forwards

    Quote Originally Posted by Snoopy View Post
    I am doing a little tweaking, trying to refine my company valuation modelling.

    There are forecasts given for divisional corporate costs in the KM report.

    Turn to page 19 and you will see that 'Total Corporate Functions and Overheads' add up to ($30.5m).

    From p29 we can get the 'Corporate Overhead Allocation' for 'Seed and Grain' ($3.6m). From p31 we can get the 'Corporate Overhead Allocation' for 'Retail and Water' ($11.4m) and 'Agency' ($6.3m).

    Corporate Overhead Allocation FY2018 KM Report Reference
    Seed & Grain ($3.6m) p29
    Retail & Water ($11.4m) p31
    Agency ($6.3m) p31
    Total ($21.3m)

    The difference between the two figures: ($30.5m) - ($21.3m) = ($9.2m) must represent the 'Corporate Costs Unallocated'. No doubt these costs include those associated with the strategic review. I don't think the strategic review costs have ever been separately disclosed: No doubt they are hidden in the 'Other Expenses' classification of 'Other Operating Expenses' (Note 4 AR2018)!

    So it looks like Balance may have a point about 'plenty of fat to trim' yet from the on-going corporate costs. However, management seem determined to keep up the spending on outside consultants as the financial review of the company continues. So we may have to wait a little longer for these particular corporate savings costs to be realised.

    If we go back to the Segment Reporting information from AR2018 p39, then ($9.355m) of 'Other' operating EBITDA is recorded. This is close to the ($9.2m) of unallocated Corporate Costs that I calculated above. It also suggests that those Corporate Costs that could be directly linked to the EBITDA of the operating divisions of the company have already been removed from the 'head office' basket, and netted off against the respective Segmented Divisional baskets of EBITDA results.

    How does one allocate the unallocated corporate costs? One method could be to divide the $9.200m into three equal parts, and add those parts to each of the three customer divisions. However, in this instance we have been told a segmented allocation of overheads that can be separated out already (p19 KordaMentha Report, Fig3.6). I prefer to allocate the so far unbasketed overheads in proportion to that.

    Corporate Overhead Allocation FY2018 {A} Percentage Unallocated Overhead FY2018 {B} Total Overhead FY2018 {A}+{B}
    Seed & Grain ($3.6m) 17.4% ($1.6m) ($5.2m)
    Retail & Water ($11.4m) 53.6% ($4.9m) ($16.3m)
    Agency ($6.3m) 29.6% ($2.7m) ($9.0m)
    Total ($21.3m) 100% ($9.2m) ($30.5m)

    This curious part of all of this I can sum up in a question:

    "Why did KM go to the trouble of separating back out head office functions previously grouped with the appropriate business operational business units (and offset in EBITDA terms against those) back into one overall 'head office' where all the costs totalled $30.5m?"

    I don't see $30.5m in head office costs mentioned at all in AR2018!
    Quote Originally Posted by Snoopy View Post
    Previously I have speculated how large the capital return will be, that we PGW shareholders are due to receive. It has now been announced that it will be $235m; somewhat lower than the $292m shown in the projected balance sheet that we shareholders all voted on! Of the originally projected capital injection, $100.5m was shown to be used to retire debt, leaving just $17.5m of debt remaining inside 'PGW Rural Rump'. Yet because the projected capital return will be $57m lower, that means the amount of money available for debt to be retired is consummately higher - by $57m.

    From an end of June 2018 balance sheet perspective, the maximum debt that can be retired is $100.5m + $17.5m = $118m. This means that with all debt retired, we still have:

    $57m - $17.5m = $39.5m

    of net cash on the balance sheet, after the $235m capital repayment has been made.

    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 best measured by changes in 'Net Working Capital'. An annual picture of this variation in net working capital is graphed in the 'KordaMentha' October 2018 report on p34, Figure 6.1. Over FY2018, the minimum net working capital required was around $275m on July 1st 2017 peaking at just over $340m in November 2017. If more net cash was on hand through more capital going to debt repayment, then the funding requirements of the working capital, via interest payments, would be consummately reduced.

    The half year balance sheet reported to the NZX for FY2019 (my post 4499) shows working capital requirements $29m higher that at the EOFY2018. However, based on the previous year, the half yearly reported debt is still $10m below annual peak debt. The annual peak debt of $29m + $10m = $39m will therefore be wiped out by the $39.5m of new net cash on the balance sheet. PGWRR can effectively be debt free all the year round going forwards.

    This means there is not longer any need to calculate 'incremental debt' over a business year: All interest payments should be wiped out going forwards.

    Step 2/ Calculate Annual Debt Interest Payment

    Answer: Zero

    In a departure from the previous calculation, this time I am going to use average EBITDA over the business cycle, as worked out in post 4486.

    Rural Services ($39.5m EOFY cash balance after debt repayment)
    EBITDA $29.875m
    less DA $6.918m
    less I $0.0m
    equals EBT $22.975m
    x 0.72 equals NPAT {A} $16.529m
    No. shares on issue {B} 754.048m
    eps {A}/{B} 2.19c
    I am making a small adjustment to my EBITDA figures, adding back into EBITDA the incremental overhead that was an unallocated expense for the sold Seed Division.

    Rural Services
    ($39.5m EOFY cash balance after debt repayment)
    EBITDA $29.875m
    add Unallocated S&G overhead $1.600m
    less DA $6.918m
    less I $0.0m
    equals EBT $24.557m
    x 0.72 equals NPAT {A} $17.681m
    No. shares on issue {B} 754.048m
    eps {A}/{B} 2.34c

    SNOOPY
    Last edited by Snoopy; 24-06-2019 at 04:24 PM.
    To be free or not to be free. That is the cash-flow question....

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    Quote Originally Posted by Snoopy View Post
    I am making a small adjustment to my EBITDA figures, adding back into EBITDA the incremental overhead that was an unallocated expense for the sold Seed Division.

    Rural Services ($43.5m debt repayment)
    EBITDA $29.875m
    less DA $6.918m
    less I $0.0m
    equals EBT $22.975m
    x 0.72 equals NPAT {A} $16.529m
    No. shares on issue {B} 754.048m
    eps {A}/{B} 2.19c

    SNOOPY
    Put the stock on a PER of 10X and the current share price of 52c/53c is pretty much bang on.

  13. #4513
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    Default Seeds of Destruction: Part 5.3 PE Ratio and Gross Yield calculations: PGW Rural Rump

    Quote Originally Posted by Snoopy View Post
    Scenario $157.5m debt repayment
    eps {A} 2.19c
    PGW Rural Rump: Market Valuation {B} 20.8c
    PE ratio {B}/{A} 9.5
    Gross Dividend Yield {A}/{B x 0.72} 14.6%

    Notes

    1/ In the gross yield calculation I am assuming that all earnings are paid out as dividends. With 'Agria' better capitalized following the capital repayment and with some potential investment to be made on 'PGW Rural Rump' going forwards, this might not happen.

    2/ The PE ratios are looking fair for this type of business, because I have considered a business cycle average value of earnings.

    3/ The potential dividend yield looks fantastic. The lesser than expected capital repayment looks to have made PGWRR debt free going forwards. This could be handy in an industry notorious for 'rural downturns'.

    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:

    20.8c x 14.5/8.5 = 35.5c

    Post 'capital repayment' and a couple of years down the track into more favourable farming times, I am therefore guessing a capital appreciation of around 15cps, plus dividends of 2cps per year, are on the table, with the share now trading at 52c.
    Closing PGW share price was 52c today. If we take this as Mr Market's 'reference figure', then this 52c will be split into a capital payout amount and the remainder which is Mr Market's worth of 'PGW Rural Rump'.

    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 = 31.2cps

    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.


    $39.5m EOFY cash balance after debt repayment
    eps {A} 2.34c
    PGW Rural Rump: Market Valuation {B} 20.8c
    PE ratio {B}/{A} 8.9
    Gross Dividend Yield {A}/{B x 0.72} 15.6%

    Notes

    1/ In the gross yield calculation I am assuming that all earnings are paid out as dividends. With 'Agria' better capitalized following the capital repayment and with some potential investment to be made on 'PGW Rural Rump' going forwards, this might not happen.

    2/ The PE ratios are looking fair for this type of business, because I have considered a business cycle average value of earnings.

    3/ The potential dividend yield looks fantastic. The lesser than expected capital repayment looks to have made PGWRR debt free going forwards. This could be handy in an industry notorious for 'rural downturns'.

    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:

    20.8c x 15.6/8.5 = 38.2c (c.f. 20.8c pre capital repayment price).

    SNOOPY
    Last edited by Snoopy; 24-06-2019 at 05:02 PM.
    To be free or not to be free. That is the cash-flow question....

  14. #4514
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    Default My PGW purchasing strategy

    Quote Originally Posted by Balance View Post
    Snoopy wrote: "eps {A}/{B} 2.19c"
    Put the stock on a PER of 10X and the current share price of 52c/53c is pretty much bang on.
    Using a capital repayment of $235m

    $235m / 754.048m = 31.2cps

    By simple subtraction from the 52c PGW market value, we can now calculate the 'market value per share' of 'PGW Rural Rump' after the seeds have split.

    52c - 31.2c = 20.8c

    To calculate the PGWRR PE ratio:

    20.8 / 2.19 = 9.5

    That is near enough to your PE of 10 Balance for it not to matter. Actually the figures you have used Balance are before I adjusted for the 'Unallocated S&G Overhead'. That makes the PGWRR PE ratio going forwards just 8.9.

    I wonder what a suitable PE ratio is for a rural supplies company though? The stereotype is a company of volatile earnings and minimal growth. To me this speaks of a company with a PE of 6 to 8. Yet with all the company debt repaid, that should reduce the volatility of earnings going forwards.

    Consider the multi-year history of the PGWRR EBITDA figures, which are not subject to interest rate payments:

    Combined EBITDA less Seed & Grain EBITDA equals PGWRR EBITDA
    FY2014 $58.747m $33.965m $24.782m
    FY2015 $69.631m $40.506m $29.125m
    FY2016 $70.181m $41.862m $28.319m
    FY2017 $64.499m $37.045m $37.454m
    FY2018 $70.174m $35.607m $34.567m
    FY2019 $25m (est)
    Average $29.875m (est)

    The average of $29.875m is 25.4% below the $37.754m multi year peak and 20.6% above the multi year low of $24.782m. Those figures aren't too far out of line from my 'rule of thumb', which says for a no growth company with a reasonably steady outlook, the share price will vary over the business cycle within a range of 20% of the mean (assuming the share variation price reflects the cyclical earnings). On that basis maybe we will see less volatile headline NPAT earnings figures into the future, and a PE of 10 is fair?

    In these days of low interest rates, PE seems to have gone out the window and more attention is paid to yield. In all of my analyses, I have assumed that all of the NPAT earnings are paid out as dividends. Going forwards I feel this is unlikely to continue. If the immediate cash needs of Agria are satisfied by the S&G payout, then perhaps more earnings can be retained for growth? The 'GoBeef' and 'GoLamb' livestock financing seems to be a success, but is capital intensive. It might make sense to deploy some retained earnings in that direction?

    I suspect the proposed dividend payout ratio will determine the value of PGWRR going forwards. And only the board and senior management will know those figures until the 'Scenario of the future' is released for shareholders to vote on, perhaps as early as this week. My heart tells me I should be stocking up on even more PGW shares right now. My head tells me we are in an 'earnings downturn'. The weaker outlook for PGW for FY2019 (and FY2020?) would suggest my expected handsome capital gains, based on a return to more average EBITDA earnings, may take some years to materialise. So probably the right thing to do is to wait for any seasonal earnings dips before stocking up some more.

    SNOOPY

    discl: hold PGW and have increased my stake by 50% already since the 'Seeds of Destruction' narrative started.
    Last edited by Snoopy; 25-06-2019 at 09:07 AM.
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    Quote Originally Posted by Snoopy View Post

    The average of $29.875m is 25.4% below the $37.754m multi year peak and 20.6% above the multi year low of $24.782m. Those figures aren't too far out of line from my 'rule of thumb', which says for a no growth company with a reasonably steady outlook, the share price will vary over the business cycle within a range of 20% of the mean (assuming the share variation price reflects the cyclical earnings). On that basis maybe we will see less volatile headline NPAT earnings figures into the future, and a PE of 10 is fair?

    In these days of low interest rates, PE seems to have gone out the window and more attention is paid to yield.
    I can recall using an equity risk premium of 5% to 8% back in the 1990s and 2000s to do financial modelling and stock valuation.

    Long term interest rates were then well over 5% and in fact at times, were over 10% - so we were using equity cost of capital at anywhere between 10% to 18%!

    The PER of 8X to 10X were widely used back in those days for low growth cyclical stocks like the Wrightsons of the world.

    NZ's current 5 and 10 year bond rates are 1.2% and 1.52% respectively - so cost of capital is more like 6% to 10%, depending on how risky you view a stock.

    PGW at PER of 10X? Very happy to add to my portfolio.
    Last edited by Balance; 25-06-2019 at 08:07 AM.

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