PGW - PGG Wrightson

[Snoopy]

Yes I get the fact that PGW majority share holder share price is not performing well, but their current $ 2 million loss is not that bad.

My initial reaction was identical to yours Snapiti. In the grand scheme of things a $US2m loss was a lot less than I was expecting. But look at the result a little closer.

With all of Agria's own corn growing operations in China net profit was zero, within the margins of rounding error. So all of that declared profit was derived from Agria's share of PGW earnings.

PGW made around $NZ24m or $US19.2m. 50.22% of that profit (Agria's share) was $US9.6m.

Somehow Agria turned $US9.6m in earnings from PGW into a $2m loss! I think that is a dreadful result, but it is almost inevitable when you borrow money to invest in a business that does not return its cost of capital. I believe borrowing big time to invest in a business that is already heavy with borrowing is described a "pork on a pig" in accounting circles.

SNOOPY

[Snoopy]

Being delisted from the nyse who cares, they could easily avoid that if they wanted too.

The Agria shares as listed are actually American Depository Receipts (ADR) where each quoted share represents two underlying Agria shares. In theory Agria could just change their own ADR ratio so that each quoted share represents four underlying shares. That would double the NYSE listed Agria share price overnight.

However, ultimately unless shares have a positive underlying earnings stream, or the prospect of one, the share price will continue on a relentless downward price to zero, regardless of the level the price starts at. I don't see any fix for Agria unless they can get some cashflow to offset their leveraged debt. A dividend from PGW is I believe the only positive way out for Agria at this point.

SNOOPY

[Snoopy]

Do you think the PGW current share price(35 cents) is over valued ?
What do you think is fair value ?

Interesting to hear through the farming grape vine that cropping seed sales are booming and demand and price's for this years harvest in NZ are expected to be at record levels thanks to the US drought.

I am not acutely aware of how much of PGW business value is in seeds.

It is quite obvious that due to the drought in the US there is going to be a shortage of seed for them to replant next season.

In my post 2183, I settle on a PE of 10 to be about right in a good year. Looking forward you can get some idea of where profits might be going by looking at PGW management's own growth assumptions. See the top of page 66 in AR2012.

Management are predicting a big fall in earnings for FY2013 from Agriservices (excluding livestock) of 48%. They expect it to be largely made up by a 40% increase in EBITDA from Agritech. The net effect is to be a 1% increase in EBITDA earnings. Five years ago PGW derived nearly half their profits from seeds before they expanded madly into various loss making seed producers in Australia. There is room for seeds (Agritech) to perform much better.

Those assumptions are consistent your "grape vine" information Snapiti, although possible Agriservices may not decline as much as management think? I am thinking that a lift in after tax earnings for FY2013 to $26m is possible, if the PGW Agritech seed business does indeed start to get back into gear. Unfortunately PGW does not do any business in the United States that I know of. However maybe things are likely to go well in South America where PGW have an ever increasing seed marketing presence?

$26m/754m shares = 3.4cps (earnings) . Put on a PE of 10 and you get a fair value share price of 34c for PGW for FY2013. That is my best guess of where the share price should end up.

SNOOPY

[Snoopy]

· acquisition debt denominated in New Zealand dollars of NZ$10.0 million ($7.9 million) that matures on October 31, 2012 provided by Livestock Improvement Company. If the bank which provided the acquisition debt referred to above extends the NZ$25.0 million acquisition debt facility, Livestock Improvement Company is restricted in its ability to enforce security in the event of them not being repaid on October 31, 2012.

Why did Livestock Improvement Corporation provide a $10m loan to Agria? It seems to be nothing to do with any previous core business function they might have!

Agria seems a bit worried LIC will want to be paid out by October 31st and seems to be hoping that their other banking facilities in NZ will be extended to allow this loan to continue. Alan Lai dancing on the point of a knife? Let's hope for his sake he does not slip. If he has to sell down even a few PGW shares to repay that debt, then the $100m capital loss from Agria purchasing their PGW majority stake that he is sitting on will come out of the cupboard to haunt him.

SNOOPY

[Snoopy]

I think Percy makes a very strong point. How will PGW's seed sales be affected if Agria continue to have difficulties? Will PGW's real estate or insurance division strike sales issues? Will fewer farmers come in the door of their rural supply stores and buy less sheep dip?

I agree with both Percy and yourself Sparky. PGW is now sound and will remain in business despite what happens to their majority shareholder. However, any corporate disruption with Agria may result in some PGW share price volatility where canny PGW investors might take advantage. Patience!

Longer term difficulties for Agria might mean that selling seeds into China will not work for PGW, if Agria turns out to be the wrong partner. I am not sure that is necessarily a disaster. The PGW expansion in South America does at last seem to be gaining some traction. And South America is a very big place.

I think the jury is still out on George Gould. When his business units start earning more than their cost of capital, only then will I start singing his praises.

My main reason for going so heavily into the detail on Agria is to dispell any thoughts that a takeover offer for the rest of PGW from Agria is imminent. I think it would be very foolish to invest in PGW on that basis. I believe it is far more likley that Agria will be forced into selling down their PGW holding at a discount. That might represent another opportunity for canny NZ investors to pick up some PGW at bargain prices. More patience!

SNOOPY

[upside_umop]

Repeating this exercise for the FY2012 financial year...

Time to try and disentangle the PGW debt from the underlying Agria debt.

From the PGW FY2012 Balance sheet:

PGW Total Liabilities: $NZ402.698m
PGW Total Equity: $NZ577.774m
PGW Total L & E: $NZ980.472m

Convert that to USD using $NZ1= US79.64c

PGW Total Liabilities: $US320.708m
PGW Total Equity: $US460.139m
PGW Total L & E: $US780.847m

Reduce value to allow for Agria owning 50.22% of shares as at 30th June 2012

Agria PGW Liabilities: $US161.060m
Agria PGW Equity: $US231.082m
Agria PGW L & E: $US392.141m

Now we go to the Agria Balance Sheet for the same 30th June 2012 date, which includes the 50.22% share of PGW as a consolidated entity.

Agria Liabilities: $US415.033m
Agria Equity: $US406.596m
Agria L & E: $US821.629m

Now use subtraction to look at the underlying Agria balance sheet.

Underlying Agria Liabilities: $US253.973m
Underlying Agria Equity: $US175.514m
Underlying Agria L & E: $US429.488m

That means the underlying Agria itself has an equity ratio of:

$US175.514m /$US429.488m= 40.8%

That is heavily indebted but manageable (perhaps), until you remember the $US100m in PGW share writedowns that have been shuffled off balance sheet

($US175.514m-$US100m) /$US429.488m= 17.6%

With no income to service a $US430m debt and an equity ratio of just 18% it is at this point that I declare Agria technically bankrupt.

SNOOPY

Snoopy, I'm saying you don't need to do this step highlighted above in bold as these are already 100% consolidated into Agria's accounts. Therefore, using your numbers:

Time to try and disentangle the PGW debt from the underlying Agria debt.

From the PGW FY2012 Balance sheet:

PGW Total Liabilities: $NZ402.698m
PGW Total Equity: $NZ577.774m
PGW Total L & E: $NZ980.472m

Convert that to USD using $NZ1= US79.64c

PGW Total Liabilities: $US320.708m
PGW Total Equity: $US460.139m
PGW Total L & E: $US780.847m

Now we go to the Agria Balance Sheet for the same 30th June 2012 date, which includes the 100% share of PGW as a consolidated entity.

Agria Liabilities: $US415.033m
Agria Equity: $US406.596m
Agria L & E: $US821.629m

Now use subtraction to look at the underlying Agria balance sheet.

Underlying Agria Liabilities: $US94.325m
Underlying Agria Equity: - $US53.543m
Underlying Agria L & E: $US40.782m

The above shows basically what Agria has on their books and controls excluding PGW. They look to be in negative equity...when you back out the consolidation.

They have much less debt than you originally propose, but are in a worse equity ratio position than thought. Does this make sense?

[Agrarinvestor]

Snoopy, I'm saying you don't need to do this step highlighted above in bold as these are already 100% consolidated into Agria's accounts. Therefore, using your numbers:

Time to try and disentangle the PGW debt from the underlying Agria debt.

From the PGW FY2012 Balance sheet:

PGW Total Liabilities: $NZ402.698m
PGW Total Equity: $NZ577.774m
PGW Total L & E: $NZ980.472m

Convert that to USD using $NZ1= US79.64c

PGW Total Liabilities: $US320.708m
PGW Total Equity: $US460.139m
PGW Total L & E: $US780.847m

Now we go to the Agria Balance Sheet for the same 30th June 2012 date, which includes the 100% share of PGW as a consolidated entity.

Agria Liabilities: $US415.033m
Agria Equity: $US406.596m
Agria L & E: $US821.629m

Now use subtraction to look at the underlying Agria balance sheet.

Underlying Agria Liabilities: $US94.325m
Underlying Agria Equity: - $US53.543m
Underlying Agria L & E: $US40.782m

The above shows basically what Agria has on their books and controls excluding PGW. They look to be in negative equity...when you back out the consolidation.

They have much less debt than you originally propose, but are in a worse equity ratio position than thought. Does this make sense?

>>They have much less debt than you originally propose, but are in a worse equity ratio position than thought. Does this make sense?<<

It makes no sense because you have a wrong number fort he assets
Agria Liabilities: $US415.033m 415,033
Agria Equity: $US406.596m <- (Wrong) 821,629 Page 116
Agria L & E: $US821.629m <- (Wrong) 1236662

Now use subtraction to look at the underlying Agria balance sheet.

Underlying Agria Liabilities: $US 94.325m
Underlying Agria Equity: $US 361.490m
Underlying Agria L & E: $US 455.815m

That means DEBT/Equity ratio: 5,83

Please compare that with US Heavyweights like IBM or HPQ
I think Agria is a safe bank. They have still credit to get money for the rest of PGW.

Here is a very nice overview in Yahoo:
http://finance.yahoo.com/q/bs?s=GRO+...e+Sheet&annual

[upside_umop]

>>They have much less debt than you originally propose, but are in a worse equity ratio position than thought. Does this make sense?<<

It makes no sense because you have a wrong number fort he assets
Agria Liabilities: $US415.033m 415,033
Agria Equity: $US406.596m <- (Wrong) 821,629 Page 116
Agria L & E: $US821.629m <- (Wrong) 1236662

Now use subtraction to look at the underlying Agria balance sheet.

Underlying Agria Liabilities: $US 94.325m
Underlying Agria Equity: $US 361.490m
Underlying Agria L & E: $US 455.815m

That means DEBT/Equity ratio: 5,83

Please compare that with US Heavyweights like IBM or HPQ
I think Agria is a safe bank. They have still credit to get money for the rest of PGW.

Here is a very nice overview in Yahoo:
http://finance.yahoo.com/q/bs?s=GRO+...e+Sheet&annual

Hi Agriainvestor,

I note you will be very interested in these numbers, being an "Agria Investor".

I haven't looked at yahoo, but take them with a grain of salt at times - it appears they have placed the minority interest under liabilities instead of in equity. This is incorrect. Here's the link to the NYSE releases (the 20F is the one you're after) - you should really look at these when doing your research as they're originals.

If you look to the "balance sheet" on page 128/129 you will see the numbers above that I quoted.

The numbers I posted above make sense as Agria has only posted losses (negative retained earnings), and then invested all of it's spare change into PGW (which is consolidated - I backed this out per above). It took out extra debt itself to do this. The bankers won't be so worried (as long as they get cashflow soon) as the consolidation shows just that....the consolidated amount that Agria controls. Agria just need to control PGW to make a dividend payment to help their own cashflow out.

[Agrarinvestor]

Hi Agriainvestor,

I note you will be very interested in these numbers, being an "Agria Investor".

I haven't looked at yahoo, but take them with a grain of salt at times - it appears they have placed the minority interest under liabilities instead of in equity. This is incorrect. Here's the link to the NYSE releases (the 20F is the one you're after) - you should really look at these when doing your research as they're originals.

If you look to the "balance sheet" on page 128/129 you will see the numbers above that I quoted.

The numbers I posted above make sense as Agria has only posted losses (negative retained earnings), and then invested all of it's spare change into PGW (which is consolidated - I backed this out per above). It took out extra debt itself to do this. The bankers won't be so worried (as long as they get cashflow soon) as the consolidation shows just that....the consolidated amount that Agria controls. Agria just need to control PGW to make a dividend payment to help their own cashflow out.

Hi upside_umop,

but the number you used for Assets must be wrong. I found on page 116 that the assets are worth $US821.629m, from these number i substracted te PGW Assets of
460.139 MIO PGW Assets, the result is in Germany :

Underlying Agria Equity: $US 361.490m

and if my calculation are correct,

i can say that the assets are 4 times higher than the debt !

And that means that Agria has the power to raise more money if they want.
If i made an error please point the finger on it. It is important for me, because i would like
to invest more. Thank you very much in advance, and also to all the others here. If i compare
the contribution on shareholders, with the contribution in yahoo, or in Germany, i must admit i am very impressed.

[upside_umop]

Agriainvestor,

I never quoted the assets number, but given liabilities + equity = assets, the numbers I previously posted agree to your $821m. See above, that I have quoted liabilities + equity = $821m.

PGW have assets of $980m NZD --> ~$784m USD @ 80 nzd/usd cross rate. See here for the link to PGG Wrightsons 2012 Annual Report.

In summary, I believe that post 2249 is still the correct "underlying" position excluding consolidated amounts of PGW.