I want to revisit my earnings projection, because the last one did not take into account the reduction in unallocated corporate costs. i am in two minds about doing this. The detail of corporate head office restructuring was meant to come out by the end of June. So far the only announcement has been the departure of former CEO Ian Glasson, to be replaced by Stephen Guerin, an internal appointee. If that is all the restructuring that happens, then my cost reduction assumptions will go to custard. However, if my ongoing corporate head office cost reduction is realistic it won't be a free lunch. There will be a capital cost in redundancy that I have not considered. Nevertheless in the interests of 'looking down the road' I think this is a worthwhile exercise to complete.

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 addUnallocated S&G overhead$1.600m lessDA$6.918m lessI$3.894m equalsEBT$20.663m x 0.72 equalsNPAT {A}$14.877m No. shares on issue {B} 754.048m eps {A}/{B} 1.97c

SNOOPY

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