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  1. #4511
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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 03:24 PM.
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  2. #4512
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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.

  3. #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 04:02 PM.
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  4. #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 08:07 AM.
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  5. #4515
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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 07:07 AM.

  6. #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.
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  7. #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.

  8. #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
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  9. #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?

  10. #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.

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