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  1. #4516
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    Quote Originally Posted by Balance View Post
    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.
    So to sum up, your suggestion that PGW is very investable at 52c-53c is largely determined by the fact that interest rates in NZ have gone down so low? Personally, I require a discount in any of my investment 'buy in prices'. This is to build in a safety net to ensure that that my whole income based portfolio won't turn to custard once there is the hint of interest rates rising again.

    Having said this, I am starting to agree with you that a PE of 10 for a company like PGW is about right. But if you are looking at current years NPAT earnings of PGWRR, with all the interest costs backed out, then the PE today is rather higher than that:

    Rural Services
    ($39.5m EOFY cash balance after debt repayment)
    EBITDA (PGWRR FY2019 forecast) $25.000m
    add Unallocated S&G overhead $1.600m
    less DA $6.918m
    less I $0.0m
    equals EBT $19.682m
    x 0.72 equals NPAT {A} $14.171m
    No. shares on issue {B} 754.048m
    eps {A}/{B} 1.88c

    Using a 'capital repayment' of $235m to determine the per share value of the capital return:

    $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 / 1.88 = 11.1

    By this measure the current market price is around 10% ahead of fair value. Although I do note that PE ratios of a cyclical do tend to expand at the bottom the business cycle. But are we at the bottom of the business cycle?

    Mycoplasma Bovis was not a factor in the FY2018 Livestock result. In the first half Livestock EBITDA plunged from $4.6m (HY2018) to $1.6m (HY2019) a fall of 65%. A big factor in this was the lack of supply of good quality dairy livestock. Wool is likely to be down as the comparative period included the clearing out on wool bales previously stock piled. Real estate looks OK. But overall, FY2019 does not look to be a good year for 'Agency' and I can't see any significant improvement in FY2020.

    The other PGWRR arm of Retail and Water may simply be renamed 'Retail' as the latter bit looks to be 'dead in the Water'. What looked like a great acquisition during the dairy farm expansion era looks to be facing a future that is indefinitely scaled back. In Retail, the defective spray settlement of $1.8m for HY2019 should not be repeated in FY2020. An extra $1.8m flowing into FY2020 profit will be welcome. The rest of Retail seems to be tracking well, particularly in horticulture. But how will Retail be affected by the partial unwinding of the 'One PGW' strategy, with the future outsourcing of seeds?

    I think there unknowns here that should see investors seek a 'yield premium' in the rural supply sector. Exactly what that is I believe is up to individual investors. Because the reduction in interest rates I believe will see interest rates lower for longer have I reduced my own required yield for PGW to 8.5% gross, down from 9.5% previously. But I am not comfortable going lower than that from a whole of business cycle perspective.

    SNOOPY
    Last edited by Snoopy; 25-06-2019 at 08:54 AM.
    To be free or not to be free. That is the cash-flow question....

  2. #4517
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    Quote Originally Posted by Snoopy View Post
    So to sum up, your suggestion that PGW is very investable at 52c-53c is largely determined by the fact that interest rates in NZ have gone down so low? Personally, I require a discount in any of my investment 'buy in prices'. This is to build in a safety net to ensure that that my whole income based portfolio won't turn to custard once there is the hint of interest rates rising again.

    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 $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
    Not really - Low interest rates & a low PER make PGW so much more appealing to invest in for the corporate upside to come.

    I have stated and will restate - PGW will not be around as a listed stock by the end of this year imo.

  3. #4518
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    Quote Originally Posted by Snoopy View Post
    discl: hold PGW and have increased my stake by 50% already since the 'Seeds of Destruction' narrative started.
    I should note that my reason for increasing my PGW stake was not that I approved of the seed division sale. It was because the destruction of shareholder value as a result of the seed division sale discounted the price of the rest of the business so that it became better value, and henceforth investable.

    SNOOPY
    Last edited by Snoopy; 25-06-2019 at 09:30 AM. Reason: spelling
    To be free or not to be free. That is the cash-flow question....

  4. #4519
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    Quote Originally Posted by Snoopy View Post
    I should note that my reason for increasing my PGW stake was not that I approved of the seed division sale. It was because the destruction of shareholder value as a result of the seed division sale discounted the price of the rest of the business so that it became better value, and hence for investable.

    SNOOPY
    Two different pathways to the same destination?

  5. #4520
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    Quote Originally Posted by Snoopy View Post
    I should note that my reason for increasing my PGW stake was not that I approved of the seed division sale. It was because the destruction of shareholder value as a result of the seed division sale discounted the price of the rest of the business so that it became better value, and hence for investable.

    SNOOPY
    Suspect you are not the only one who view it the same way.

    Elders for one passed on buying PGW last year because the asking price by Agria was too rich.

    https://www.nzherald.co.nz/business/...ectid=12086673

    https://www.afr.com/business/where-t...0190310-h1c7ag

    At PER of 10X however?
    Last edited by Balance; 25-06-2019 at 09:44 AM.

  6. #4521
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    Quote Originally Posted by Balance View Post
    Suspect you are not the only one who view it the same way.

    Elders for one passed on buying PGW last year because the asking price by Agria was too rich.

    https://www.nzherald.co.nz/business/...ectid=12086673

    https://www.afr.com/business/where-t...0190310-h1c7ag

    At PER of 10X however?
    Takeover deals are usually done on EBIT and EBITDA multiples, rather than PE ratios. If we look at where PGWRR sits today (my post 4516):

    EBITDA = $26.500m

    EBIT = $24.577m

    If we use the residual PGWRR share price that I have calculated at 20.8c. This means the market capitalisation of PGWRR is:

    20.8c x 754.048m = $157m

    This gives an EBITDA multiple of: $157m / $26.5m = 5.9

    This gives an EBIT multiple of: $157m / $24.577m = 6.4

    'Enterprise Value' = Market Capitalisation + Total Debt − Cash
    = $157m + 0m - $39.5m
    = $117.5m

    Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:

    Company Enterprise value NZD EBITDA Multiple FY2019 EBIT Multiple FY2019
    Ruralco Holdings (Oz) $465m 5.8x 7.1x
    Elders (Oz) $853m 9.0x 9.6x
    PGW Rural Rump (NZ) $117.5m 5.9x 6.4x

    So what does it all mean?

    SNOOPY
    Last edited by Snoopy; 25-06-2019 at 03:39 PM.
    To be free or not to be free. That is the cash-flow question....

  7. #4522
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    Default PGWRR as a takeover target

    Quote Originally Posted by Snoopy View Post
    So what does it all mean?
    One method that KordaMentha used to evaluate the worth of the seeds division was 'Capitalisation of Earnings'. This consisted of using an appropriate multiple on the normalised EBITDA of the seeds division. This multiple was judged to be 10 to 10.5. This was 9% to 14% above the Australasian industry mean of 9.2 for FY2018, based on a basket of rurally based listed companies (including RuralCo and Elders, both very comparable to PGWRR). KordaMentha suggested that the premium EBITDA multiple was justified because:

    1/ A takeover offer should include a control premium AND
    2/ Seeds possessed high concentration of proprietary products, the result of an extensive and ongoing R&D program and higher than average profitability.

    Clearly point 2 would not apply to the remaining divisions of PGW: 'Retail' and 'Agency' (PGWRR). So I am going to take the lower bound takeover multiple of an EBITDA of 9.5 to 10 to be appropriate for PGWRR.

    This would equate to a takeover price of between:

    $26.500m x 9.5 = $252m to $26.500m x 10.0 = $265m

    Based on 754.048m shares being on issue, this equates to a share price of:

    33 to 35 cps

    That sounds a good premium to the implied value for PGWRR based on the implied value of 20.8c. 20.8c is consistent with a trading on the market today 52c pre capital return price.

    But what if you compare that to the alternative strategy of not accepting such an offer and just waiting for the earnings yield to recover to the medium term average of 2.34c? Then 33-35cps would represent a gross earnings yield of 9.3% to 9.8%. There aren't many places alternative places in the market investors could get a gross yield like that.

    I mention this while reminding shareholders that PGW board has destroyed a lot of shareholder value by selling off the seed division. The PGW share price sank after the Danish offer was received and it has never recovered. Recommending a further takeover offer down the track from their 'ELDers and betters' in the near term could see yet more shareholder wealth destroyed. Usually I go along with what the board recommends in a takeover situation. But given the record of the PGW board, I would suggest that PGW shareholders should be vigilant!

    SNOOPY
    Last edited by Snoopy; 25-06-2019 at 08:26 PM.
    To be free or not to be free. That is the cash-flow question....

  8. #4523
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    Quote Originally Posted by Snoopy View Post
    Takeover deals are usually done on EBIT and EBITDA multiples, rather than PE ratios.

    Company Enterprise value NZD EBITDA Multiple FY2019 EBIT Multiple FY2019
    Ruralco Holdings (Oz) $465m 5.8x 7.1x
    Elders (Oz) $853m 9.0x 9.6x
    PGW Rural Rump (NZ) $117.5m 5.9x 6.4x

    So what does it all mean?

    SNOOPY
    I have different figures from you :

    1. Ruralco is being taken over by Nutrien for $446m + $117m debt (as at Sept 2018)* with EBITDA of $70.1m = Enterprise multiple of 8 times

    2. PGWRR post capital repayment has enterprise value of $117.5m with EBITDA of $26.5m = Enterprise multiple of 4.43 times

    * - Ruralco interim results to 31 March 2019 showed flat EBITDA of $37m but net debt was up $20.6m

    Anyone taking over PGWRR will have to pay at least 6.5 to 8 times EBITDA

  9. #4524
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    Quote Originally Posted by Balance View Post
    I have different figures from you :

    1. Ruralco is being taken over by Nutrien for $446m + $117m debt (as at Sept 2018)* with EBITDA of $70.1m = Enterprise multiple of 8 times

    * - Ruralco interim results to 31 March 2019 showed flat EBITDA of $37m but net debt was up $20.6m
    Those figures you quote for Ruralco are after the Nutrien takeover offer (made in February 2019) . So it isn't surprising they are different to mine. But as we write today, PGWRR is not subject to any takeover offer. I don't see that comparing the market value of Ruralco 'post a takeover' offer and the market value of PGWRR 'pre a takeover' offer is a fair comparison.

    Quote Originally Posted by Balance View Post
    2. PGWRR post capital repayment has enterprise value of $117.5m with EBITDA of $26.5m = Enterprise multiple of 4.43 times
    My table was perhaps not presented in the most logical way. The EBITDA multiple in my table is:

    'Market Capitalization'/ EBITDA

    I never worked out any enterprise value multiples because KordaMentha didn't use them for valuation purposes (but thank you for doing so Balance). My reason for putting Enterprise Values in the table was firstly that KordMentha did (in Appendix 4). I guess my own reason for including this figure was to give some idea how much cash would be needed to take over each respective company. PGWRR now looks like a real minnow compared to the others!

    Anyone taking over PGWRR will have to pay at least 6.5 to 8 times EBITDA
    I was working on 9.5 to 10 times! You really think that PGWRR would be surrendered to takeover at EBITDA multiples as low as 6.5 to 8? Mind you I was assuming that whoever might buy the Agria stake then made an offer for balance of PGWRR would want all PGW shares immediately. The buyer of the Agria stake would only require a small percentage of other shareholders to accept to get over the 50% controlling stake hurdle. Elders isn't as financially strong as it was six months ago. So it might suit any acquirer to make a derisory offer that got them just enough shares for control, but left PGW as NZX listed?

    SNOOPY
    Last edited by Snoopy; 26-06-2019 at 10:34 AM.
    To be free or not to be free. That is the cash-flow question....

  10. #4525
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    Quote Originally Posted by Snoopy View Post
    TI guess my own reason for including this figure was to give some idea how much cash would be needed to take over each respective company. PGWRR now looks like a real minnow compared to the others!

    I was working on 9.5 to 10 times! You really think that PGWRR would be surrendered to takeover at EBITDA multiples as low as 6.5 to 8? Mind you I was assuming that whoever might buy the Agria stake then made an offer for balance of PGWRR would want all PGW shares immediately. The buyer of the Agria stake would only require a small percentage of other shareholders to accept to get over the 50% controlling stake hurdle. Elders isn't as financially strong as it was six months ago. So it might suit any acquirer to make a derisory offer that got them just enough shares for control, but left PGW as NZX listed?

    SNOOPY
    Unlikely that any acquirer of PGWRR will want to leave it as a listed entity - idea will be to restructure away from market scrutiny, strip out layers of costs & overheads and derive synergies & capture value.

    Agria is a seller of its 43.3% stake - that's for sure as PGW now serves no purpose for Agria.

    Fly in the ointment will be the ability of Ngai Tahu & Cushing with their total shareholding of over 10% - they can block a compulsory full takeover.

    So I think you will most likely get your 9.5 times to 10 times in the event of a takeover.

    As for Elders, it still has a market cap of A$735m and is trading on a very high EBITDA multiple of 15.4 times (!!!!!) and a PER of 12.8 times.

    What a perfect time to takeover PGWRR and add on size & earnings!

  11. #4526
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    Cushing's REL will have approx $39 mil at the end of the month from their recent farm sales.
    Interesting.

  12. #4527
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    Quote Originally Posted by Balance View Post
    Unlikely that any acquirer of PGWRR will want to leave it as a listed entity - idea will be to restructure away from market scrutiny, strip out layers of costs & overheads and derive synergies & capture value.
    Oh I agree, eventually. I just meant that an acquirer could take a 50% PGW stake now and do the full acquisition further down the track. It would be a way to 'secure the prize' now, without putting up all the money at once. In the meantime some bulk buying synergies (for example) might be achieved.

    Agria is a seller of its 43.3% stake - that's for sure as PGW now serves no purpose for Agria.
    PGWRR could still be a good dividend cash cow for Agria. I am not sure that all of Agria's debts will be settled by the coming capital repayment. Where are Agria going to get a better dividend yield with which to pay their bills? Why would Alan Lai want to turn Agria into a shell?

    Fly in the ointment will be the ability of Ngai Tahu & Cushing with their total shareholding of over 10% - they can block a compulsory full takeover.
    Assuming Cushing has bought a few more shares on market so that the combined stake with Ngai Tahu is now over 10% - then yes.

    So I think you will most likely get your 9.5 times to 10 times in the event of a takeover.
    Where else could I get a debt free rural sector investment with a gross yield of over 10%? I am not sure that if I got an offer at 9.5 to 10 times EBITDA that I would accept it!

    As for Elders, it still has a market cap of A$735m and is trading on a very high EBITDA multiple of 15.4 times (!!!!!) and a PER of 12.8 times.

    What a perfect time to takeover PGWRR and add on size & earnings!
    Wait until your own shares are priced at a high multiple. Then almost anything you acquire will be 'earnings per share accretive' !

    SNOOPY
    Last edited by Snoopy; 26-06-2019 at 10:51 AM.
    To be free or not to be free. That is the cash-flow question....

  13. #4528
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    Quote Originally Posted by percy View Post
    Cushing's REL will have approx $39 mil at the end of the month from their recent farm sales.
    Interesting.
    Think REL may attempt a merger with PGWRR?

  14. #4529
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    Quote Originally Posted by Snoopy View Post
    Oh I agree, eventually. I just meant that an acquirer could take a 50% PGW stake now and do the full acquisition further down the track. It would be a way to 'secure the prize' now, without putting up all the money at once. In the meantime some bulk buying synergies (for example) might be achieved.



    PGWRR could still be a good dividend cash cow for Agria. I am not sure that all of Agria's debts will be settled by the coming capital repayment. Where are Agria going to get a better dividend yield with which to pay their bills? Why would Alan Lai want to turn Agria into a shell?

    SNOOPY
    Agria & Alan Lai bought PGW for the seeds business, and they have been proven right that the seeds business is the one with real international growth potential.

    https://www.nzherald.co.nz/business/...ectid=12177017

    Excerpt : "Buried deep in a Grant Samuel report at the time was the pivotal sentence: "It is likely that PGW's substantial seed business is the primary attraction to Agria."

    With the seeds business gone, PGWRR has no further purpose for Agria & Alan Lai.

    Also, he is persona non grata as far as the markets are concerned and will be much better off to do deals away from the public eye.

    Hence, why he will sell Agria's stake in PGWRR.

  15. #4530
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    Quote Originally Posted by Balance View Post
    Think REL may attempt a merger with PGWRR?
    Looks a possibility.Why else would REL be selling some farms.?
    Findlay [pgw chairman] has been a REL director for a long time.
    Cushings sold Williams and Kettle into PGW.
    Father and son have both had a long associaton with PGW.
    I am sure PGW manage some of REL's farms.
    REL are also shareholders in our old mate Chris Corrigan's WBA.

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