PGW - PGG Wrightson

[percy]

That you paying $2.45 to finish your order, Percy?

Updated EPS forecast from one broker :

F20 20.1c
F21 23.3c

With bugger all debt and capacity to increase dividends to 100% of EPS, F20 and F21 could see gross yields of 11.4% and 13.2% respectively!

Should get the yield seekers charge the stock to higher levels.

No we finished this morning.Took a couple or three days.
Also brought on Monday NZR and SKL.Approx same amounts in each three companies.
PGW agreed on yield.I like Findlay and Cushing being directors, and having skin in the game.They know the sector.
And there could be corporate fun.!..lol.
I will list The Trust holdings.ATM,AIR,EBO,FPH,FRE,HGH,HLG,MCY,MEL,NZR,O CA,PGW,RBD,RYM,SKL,SPK,SUM,THL,TRA.

[percy]

WBA in Aussie have just received a takeover offer,and their shares have taken off.
This is of interest to us, as REL Rural Equities [on usx.co.nz] is controlled by PGW's Chairman Rodger Finlay, and director David Cushing.REL have a large shareholding in WBA.
We did note,a few weeks ago REL have an increasing war chest, from selling a number of farms in NZ.
ps.Good to see David Cushing spending $729,799 taking his shareholding up to 5,165,045 shares.

[Balance]

WBA in Aussie have just received a takeover offer,and their shares have taken off.
This is of interest to us, as REL Rural Equities [on usx.co.nz] is controlled by PGW's Chairman Rodger Finlay, and director David Cushing.REL have a large shareholding in WBA.
We did note,a few weeks ago REL have an increasing war chest, from selling a number of farms in NZ.
ps.Good to see David Cushing spending $729,799 taking his shareholding up to 5,165,045 shares.

http://nzx-prod-s7fsd7f98s.s3-websit...214/309266.pdf

And great to see the Chairman taking the opportunity of the sp weakness to pick up shares.

One of the best dividend and corporate activity potential stocks on the market imo.

[tim23]

Agree I used my capital return to buy more at $2.19 happy with that and 7.5c share dividend too!

[percy]

I added to my holding today,at av.$2.4256.
Should the share price come back a bit, I will add to the wife's holding.

[Snoopy]

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:

	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)

1/ This period covers the 'modern' era where Mark Dewdney's 'One PGW' philosophy started to permeate the group.
2/ I have used only 'Operating EBITDA'. That metric Leaves out all 'Equity Accounted Investee Profit', and consequently removes the profit contribution from 'Agimol', representing the 50% interest in 'Agricentro' in Uruguay, an equity investment that was subsequently fully taken in house (FY2019) and latterly sold (EOFY2019). Equity accounted New Zealand based investments retained, being a 50% interest in 'Canterbury Saleyards' and a now 33% interest in 'Agri Optics New Zealand', I do not consider have contributed materially to EBITDA.
3/ Results for FY2014 to FY2018 inclusive include the full head office corporate costs. I have not quantified any potential EBITDA benefits to PGWRR shareholders from any future reduction in the corporate cost base, as a result of no longer having to service overseas offices, and any unique corporate seed related expenses. Such savings are liable to be significant: several million dollars per year. However the expense of 'right sizing' the corporate head office will also be significant, yet is unknown as I write this. I have therefore decided not to account for any long term reduction in head office employee numbers, until the real effect of this 'corporate restructure' becomes clear.

From AR2019 p7, we now have an indication of how the 'corporate structure review' will affect earnings going forwards.

"We expect to see the benefit of reduced costs flowing through progressively with savings in excess of $2.5m expected in FY2020"

With the seed business gone, expectations are reset. As an exercise I have gone through the last few years results and removed 'Seed & Grain' EBITDA from the Operating EBITDA. This time, I have added back in the recently announced 'corporate savings'.

Here is the multi-year earnings picture that results:

	Combined EBITDA	less Seed & Grain EBITDA	add Corporate Savings	equals PGWRR EBITDA
FY2014	$58.747m	$33.965m	$2.500m	$27.282m
FY2015	$69.631m	$40.506m	$2.500m	$31.675m
FY2016	$70.181m	$41.862m	$2.500m	$30.819m
FY2017	$64.499m	$37.045m	$2.500m	$39.974m
FY2018	$70.174m	$35.607m	$2.500m	$37.067m
FY2019			$2.500m	$26.925m
Average				$32.290m

1/ This period covers the 'modern' era where Mark Dewdney's 'One PGW' philosophy started to permeate the group.
2/ I have used only 'Operating EBITDA'. That metric Leaves out all 'Equity Accounted Investee Profit', and consequently removes the profit contribution from 'Agimol', representing the 50% interest in 'Agricentro' in Uruguay, an equity investment that was subsequently fully taken in house (FY2019) and latterly sold (EOFY2019). Equity accounted New Zealand based investments retained, being a 50% interest in 'Canterbury Saleyards' and a now 33% interest in 'Agri Optics New Zealand', I do not consider have contributed materially to EBITDA.

SNOOPY

[Snoopy]

As Balance has hinted, I need to look at the Segmented Result (p38 AR2018) to see how the Depreciation and Amortisation is allocated between 'Seeds & Grain' and 'Rural Rump'. However, only some of the D&A is segmented. There is a significant amount of D&A falling into the heading 'Other', perhaps mostly relating to head office. When there is no other guidance given on how to allocate 'Other Depreciation & Amortisation' I use a 'rule of thumb' to allocate this in proportion to the revenue of each working division.

	Rural Rump	Seed & Grain	Other	Total
Revenue FY2018	$806.750m (64.2%)	$449.495m (35.8%)		(100%)
Depreciation & Amortisation FY2018	$4.183m	$6.056m	$2.735m	$12.974m
D&A with 'Other D&A' reallocated FY2018	$5.939m	$7.035m		$12.974m

Another method would be to assume that because 'Seeds & Grain' D&A is generally lower. Then you could add all the 'Other' D&A' onto 'Rural Rump'. This would produce a 'Rural Rump' Depreciation and Amortisation figure of:

$4.183m + $2.735m = $6.918m

This looks like the method favoured by Balance. And given this D&A figure is higher than the $5.939m that I calculated, the Balance figure is the more conservative assumption.

The seed business separation has forced PGWRR to do their own 'Depreciation & Amortization' reallocation. How does this compare with what I had previously assumed?

	Rural Rump
Revenue FY2018 (from AR2019)	$808.695m
Depreciation & Amortisation FY2018 (from AR2019)	$6.918m

A method for reallocating previously unallocated D&A was to assume that 'Seeds & Grain' D&A is generally lower. Then you could add all the 'Other' D&A' onto 'Rural Rump'. This would produce a 'Rural Rump' Depreciation and Amortisation figure of:

$4.183m + $2.735m = $6.918m

This looks like the method favoured by Balance. With hindsight this is how PGWRR seems to have done it too. So Balance was 'spot on'.

Now moving on to FY2019, the corresponding figure for Depreciation & Amortisation is up considerably:

	Rural Rump
Revenue FY2019	$809.255m
Depreciation & Amortisation FY2019	$9.362m

What can explain this rise in D&A charging by 35% YOY (in dollar terms $2.444m higher) ?

At first I thought it might be connected with the new accounting treatment of leased assets under IFRS16, From AR 2019 p71

"There is expected to be an increase in depreciation expense of approximately $16.00m and interest expense of approximately $6.00m. Operating expenses are expected to reduce by an estimated $21.40m resulting in a corresponding increase in EBITDA,"

However, this change was not implemented for FY2019. And the net effect looks small anyway: $21.40m - ($16.00m+$6.00m) = -$0.60m (a drop in earnings)

So I can't explain why depreciation and amortization has increased over the year to the extent that it will virtually negate the gains made by the future trimming of head office costs. Nevertheless I will have to accept these increased D&A costs in my earnings modelling going forwards.

SNOOPY

[Balance]

Good update & work, Snoopy.

Thanks!

[Snoopy]

I am never sure in these loan situations whether the banks net off any 'cash in the bank' against any loan commitments when interest rates on company loans are charged. If we assume they do, then I need to rework my interest calculation as follows.

The problem with estimating an 'interest rate equivalent paid' for the PGW debt is that company debt quite seasonal, as the table below shows:

	FY2018	HY2018	FY2017
Cash	$10.926m	$24.427m	$9.423m
Short Term Debt	($30.806m)	($91.215m)	($26.719m)
Long Term Debt	($149.205m)	($130.634m)	($110.925m)
Total	($169.085m)	($197.422m)	($128.221m)

We can calculate a linear approximation average of the total debt as follows:

($169.085m + $197.422m + $128.221m)/3= $164.909m

Over the year the 'interest funding expense' (AR2018 note 7) was $10.235m. (Note that I am leaving out the foreign exchange changes which I don't believe are representative of true funding costs.)

So the indicative interest rate that PGW pays on the average outstanding balance is:

$10.235m / $164.909m = 6.2%

If as a result of the seeds transaction $100.5m is repaid, then interest will no longer have to be paid on that amount into the future. The total interest saved on an annual basis for 'PGW Rural Rump' will therefore be:

0.062 x $100.5m = $6.23m

How does this saving in interest payments translate to the profitability of 'PGW Rural Rump' going forwards?

Perhaps more important is another question. Is this estimate of the 'interest rate paid of 6.2% better or worse than my prior estimate of 5.7%?

The problem with estimating an 'interest rate equivalent paid' for the PGW debt is that company debt is quite seasonal. Shareholders were presented with a picture of this in Figure 6.1 on page 34 of the "PGG Wrightson Independent Report, (outlining the case for divesting the seed division, and dated October 2018). Disclosure to this level of detail is not available in the annual report. But we can make a 'triangulated approximation' to the variability of the debt via three data points that are in the annual and half year reports:

1/&2/ End of year net debt position of the current year and the previous year AND
3/ The half year net debt position in between.

From AR2019 p8

"PGW negotiated and entered into new bank facilities in July 2019.....It is pleasing to note that very competitive terms have been struck for these banking arrangements"

This interest rate renegotiation makes all of my indicative interest rate calculations up to now, including calculations based around AR2019, historical. However, exactly what 'very competitive terms' means has not been revealed. One thing we can assume is that PGW is now paying a lower interest rate compared to what they have done in the recent past. So let's dive back into last years PGW history and try to figure out what is the figure they were paying that, by way of comparison, makes the new terms so good.

Distorting the end of FY2019 capital picture is the gain on the sale of the seeds business on 1st May 2019 of $134.281m. If this gain had not happened, the debt position of the company at EOFY balance date would be very different. We don't know exactly the position of the company just before the seed sales proceeds came through. But I am guessing it was something like I have outlined in the table below:

	30th April FY2019	EOHY2019	EOFY2018	EOHY2018	EOFY2017
Cash	$0m	$3.884m	$10.926m	$24.247m	$9.403m
less Short Term Debt	$2.680m (*)	$79.635m	$30.806m	$91.215m	$26.719m
less Long Term Debt	$134.281m	$130.000m	$149.205m	$130.634m	$110.925m
equals Total	$136.961m	$205.751m	$169.085m	$197.602m	$128.241m
Half Year Increment		+$36.666m		+$69.361m

(*) This figure from EOFY is used as an estimate of the short term loan balance two months earlier.

For the purposes of calculating an 'average loan balance', I feel it is best to consider the financial year split into three time periods:

P1/ An intiial six months, WITH
P2/ an ensuing four months FOLLOWED BY
P3/ a final two months.

The calculation of the average loan balance over these three time periods, using a linear interpolation model, is as follows:

P1/ ($169.085m + $205.751m)/2 = $187.418m
P2/ ($205.751m + $136.961m)/2 = $171.856m
P3/ $0m (debt repaid)

The time proportional average debt of these three periods added together is as follows:

( 6 x P1 + 4 x P2 + 2 xP3 ) / 12 = ( 6x$187.419m + 4x$171.856m) / 12 = $150.994m

The Annual Report declared net interest bill for the year has been split into interest expense allocated to 'Seed and Grain' ($4.481m) and PGWRR ($6.067m), for a total of ($10.548m). This equates to an implied net interest rate for PGW over FY2019 of:

$10.548m / $150.994m = 7.0%

CEO Stephen Guerin has negotiated the new banking facilities so that there is an incremental seasonal funding amounts to $70m. Considering the business has now been roughly 'half sized', this seems a lot, although I guess it is prudent to allow for less than ideal weather circumstances. The reduction in interest rate paid also announced must be meaningful for Stephen Guerin to crow about it. A 10% reduction might be more in line with what is happening in the markets as a matter of course. I am picking Stephen has got a 20% reduction. That would take PGW net interest rates down to: 0.8 x 7% = 5.6% for FY2020.

SNOOPY

[Snoopy]

A big day with the announcement of when and how that capital repayment of $235m will be returned to shareholders, But what has not been revealed until now is the indicative debt level of the PGWRR company that is left.

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'.

A greater amount of debt outstanding means our indicative interest bill going forwards needs to be reworked.

Using past debt balances and interest payments declared over FY2018, the indicative interest rate 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	$29.875m
less DA	$6.918m
less I	$3.894m
equals EBT	$19.063m
x 0.72 equals NPAT {A}	$13.725m
No. shares on issue {B}	754.048m
eps {A}/{B}	1.82c

I am using the pro-forma post capital return balance sheet, as explained under the "Why is the board recommending this scheme" section of the July 2019 SGM, and the information provided in the annual report to provide the most up to date earnings projection I can for FY2020

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'.

Using past debt balances and interest payments declared over FY2019, the indicative net interest rate bill 'before' was $10.548m based on an average debt balance of $179.834m, this implies an indicative interest rate of:

$10.548m / $150.994m = 7.0%

Yet I am discounting this figure by 20% going forwards, as we have been told that PGW have negotiated much more favourable banking arrangements. I will use the interest rate of 5.6% instead (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 up to $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 triangulated debt over time distribution 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:

0.056x [$31.742m+$3.920m-$1.160m] x 1.98
= $3.826m

	PGW Rural Rump: Multi Year Average Scenario (excluding Pension Scheme Repair)	Reference	PGWRR FY2019 (EBITDA as reported plus forecast corporate savings)
EBITDA	$32.290m	My post 4636	$26.925m
less DA	$9.632m	My post 4637	$9.632m
less I	$3.826m	This post 4640	$3.826m
equals EBT	$18.832m		$13.467m
x 0.72 equals NPAT {A}	$13.559m		$9.696m
No. shares on issue {B}	75.484m		75.484m
eps {A}/{B}	18.0c		12.8c

Notes

1/ The previous few years have seen several top up payments to the PGW Pension scheme. However, it seems that current accounting conventions do not require these top ups to go through the profit and loss statement. This is why I have stated the historically based earnings scenarios do not include any money diverted to repair the on the books company pension schemes.

Discussion

FY2019 was the worst year for PGWRR out of the last six. That means it is probably unnecessarily pessimistic to consider last years operational performance as indicative of what we might see for FY2020. Eventually we should see earnings rebound to some kind of 'mean' level, even if 'eventually' actually means 'after FY2020'.

Dividends from FY2019 amount to the equivalent of two 7.5cpc dividends , fully imputed, for a total of 15cps. These dividends are lower than those historically paid out.
But those historical dividends also came from seed division profits, a division that has been sold. A 15cps annual dividend was more than the company earned on an adjusted basis as I have shown in the table above. That means it is wishful thinking to suggest that the dividend will be raised this year, even if profits rise.

SNOOPY