PGW - PGG Wrightson

[Snoopy]

What you think of that M-score Snoopy

You mean the one that is calculated using the following formula?

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M = -4.84 + 0.92 DSRI + 0.528 GMI + 0.404 AQI + 0.892 SGI + 0.115 DEPI – 0.172 SGAI + 4.679 TATA – 0.327 LVGI

where

Days Sales in Receivables Index (DSRI). This measures the increase in receivables and revenues between two reporting periods (the average for well-run companies is 1.031, while those companies that have manipulated sales have an average value of 1.465%).
Depreciation Index (DEPI)
Sales Growth Index (SGI)
Leverage Index (LVGI)
Total Accruals to Total Assets (TATA)
Gross Margin Index (GMI)
Asset Quality Index (AQI)
Sales, General and Administrative Expenses Index (SGAI)

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It gave me a headache thinking about it! How can someone come up with a formula as complicated as that? But since you managed to somehow work through the calculation Winner, whcih were the parameters that pushed PGW towards the edge?

SNOOPY

[Snoopy]

Snoopy - do you ever look at the bottom half of the Statement of Comprehensive Income.

The bit that reduces the $42m profit to $38m (Comprehensive Income)

Some interesting big numbers in that bit

The true believers see what they want to see - $42m - dangled in front of them and swallow it. That $42m is not indicative of what might be achieved next year. The equity earnings from associates looks like it will drop to next to nothing next year, for example. The 'fair value adjustments' are usually a lottery so I disregard those. And as for the non-operating items. Unfortunately you can only sell 4Season's Feeds once.

But are you suggesting the below the profit for the year items might derail things going forwards?

A $5m gain on closing the gap on the defined benefit liability is all about the pension plan isn't it? I know PGW Pensions have been an issue for a while. But those schemes have been closed to new employees since 2000. PGW knocked $3m off their future liabilities by changing from a post tax to a pre tax discount rate when valuing the future payout streams. Good stuff. Who said accountant's can't add value? The deficit in the pension plan is still $13.5m. But that deficit is narrowing. If you believe in trends, the deficit is on track to being wiped out.

Foreign currency differences? They wiped out $7m, but I assumed this is something to do with the rising New Zealand dollar. I guess it can't keep rising forever!

Overall, no I am not overly concerned at the below Profit for the Year adjustments. I think of it more as an exercise in swings and roundabouts. Even if the roundabout falls over, I feel there is enough equity in PGW now to clean up any mess.

I am concerned with all those one offs above the highlighted profit for the year though!

SNOOPY

[Beagle]

The true believers see what they want to see - $42m - dangled in front of them and swallow it. That $42m is not indicative of what might be achieved next year. The equity earnings from associates looks like it will drop to next to nothing next year, for example. The 'fair value adjustments' are usually a lottery so I disregard those. And as for the non-operating items. Unfortunately you can only sell 4Season's Feeds once.

But are you suggesting the below the profit for the year items might derail things going forwards?

A $5m gain on closing the gap on the defined benefit liability is all about the pension plan isn't it? I know PGW Pensions have been an issue for a while. But those schemes have been closed to new employees since 2000. PGW knocked $3m off their future liabilities by changing from a post tax to a pre tax discount rate when valuing the future payout streams. Good stuff. Who said accountant's can't add value? The deficit in the pension plan is still $13.5m. But that deficit is narrowing. If you believe in trends, the deficit is on track to being wiped out.

Foreign currency differences? They wiped out $7m, but I assumed this is something to do with the rising New Zealand dollar. I guess it can't keep rising forever!

Overall, no I am not overly concerned at the below Profit for the Year adjustments. I think of it more as an exercise in swings and roundabouts. Even if the roundabout falls over, I feel there is enough equity in PGW now to clean up any mess.

I am concerned with all those one offs above the highlighted profit for the year though!

SNOOPY

You're making my head hurt especially with post #3475. For goodness sake do you like the stock at 45.5 cents or not ? A simple and succinct answer will suffice

[Snoopy]

For goodness sake do you like the stock at 45.5 cents or not ? A simple and succinct answer will suffice

I understand why you would want a sound byte of my own valuation of PGW Roger. But as you will soon see, a glib answer is not useful because the structure of PGW is complicated. My own philosophy is to study a share in the simplest way that will give me an investment answer, but no simpler. IMO, the simplest way you can break PGW down is into three parts:

1/ An 'Agriservices' arm, using sales reps and based around the rural supplies stores you see dotted all over New Zealand.
2/ An 'Agritech' arm that is principally supplying seeds to boteh the Australian and New Zealand markets.
3/ A South American arm with a beachhead in Uruguay, which is the best medium term growth prospect for the company.

You might think that all of these business units would be correlated in terms of sales and sales trends. Unfortunately they are not, which is what causes all the headaches for analysts trying to get to the bottom of PGWs performance. IMO the only way to get a good view on where PGW is going is to regard the above three as separate businesses and evaluate them accordingly. This is what I am going to do next.

SNOOPY

[Snoopy]

1/ An 'Agriservices' arm, using sales reps and based around the rural supplies stores you see dotted all over New Zealand.

Mark 'the Deud' said

"PGG Wrightson Ltd* (PGW) today announced its strongest operating result for several years with a 28% uplift in Operating EBITDA"

As far as Agriservices go, this is an understatement. Since PGG Wrightson formed as a merged entity in 2007, this is easily the best result ever. The question going forwards is, can Agriservices go to another new level?

In the past PGW has used its finance division as a point of difference. So it was interesting to me to see this record divisional result, despite the finance division being sold to Heartland. The previous year's result disclosed Heartlands finance commission, and that disclosure gave a window as to how important PGW Finance (now Heartland owned) is important to PGW Agriservices. This information is missing in the FY2014 results disclosure so far.

I would guess that farmers, sensible chappies and chapesses that they are, would choose the lowest cost way to fund their farm running costs. When annual cashflow is good, that probably means taking a seasonal mortgage out on their land. This is bad for Heartland/PGW Finance because they are getting out of financing property. But when the season is not so good and farm prices are not so good, PGW Finance might indeed be the logical finance stop for farmers.

I don't think there is much doubt that FY2015 will be tougher for farmers that FY2014. But will PGW Finance be able to provide the competitive finance that has carried PGW Agriservices through poor years in the past? I think the jury is still out on that. My overall estimate is that Agriservices will deliver a lower result in FY2015, knocking $2m off PGWs earnings. $2m/754.9m shares = 0.26c eps reduction.

SNOOPY

[Snoopy]

2/ An 'Agritech' arm that is principally supplying seeds to both the Australian and New Zealand markets.

Agritech turned in its best result since FY2009. I use my own apportioning methods to get an after tax profit for Agritech as a division. This includes looking at the South American results separately (see later post). So in my analysis Agritech is strictly an Australian and New Zealand concern.

For 2014 I estimate Agritech earned $13.3m on $437m of sales. This is a margin of:

$13.3m / $437m = 3% ($13.3m/754.9m = 1.8cps)

For 2009 I estimated Agritech earned $15.9m on only $352m of sales. This is a margin of:

$15.9m / $352m = 4.5% ($15.9m/754.9m = 2.1cps based on today's number of PGW shares issued)


The comparison is not strictly apples with apples, because since FY2009 PGW has added all sorts of (struggling) Australian seed businesses to try and bolster their presence in the dry continent. There is no breakdown of profitability in terms of Australia and New Zealand in the annual results.

Australian sales are quoted though, and these make an interesting comparison.

FY2014: $NZ84.2m x 0.9 = $A75.8m

FY2009: $NZ67.1m x 0.83 = $A55.7m

So sales have jumped significantly in five years (+36%) but profitability for Agritech overall is still down (-17%). I guess some of that might be attributed to rollover effects of the recent Australian droughts? Barring more droughts, I believe that we will continue to see an improvement in Agritech to approach that FY2009 high point. I would hope that PGW could add around 0.2cps in NPAT because of growth in Agritech.

SNOOPY

[Snoopy]

3/ A South American arm with a beachhead in Uruguay, which is the best medium term growth prospect for the company.

Again there has been a slight shift in the reporting details for FY2014. Profitability figures for South America are no longer quoted. I am always suspicious when detail like this disappears from a report, and ask the question:

"What have management got to hide?"

Note 4 does report the revenues though: down from $NZ118.674m (FY2013) to $NZ110.880m (FY2014). Uruguay and ultimately Brazil has always been the add on with potential. South America is of course small, only 10% of sales and rather less than that in profits, in the grand scheme that is PGW now. But IMO those South American sales figures are a disappointing result. I predict PGW will continue to 'stumble along' in South America, as it has for ten years, with no increase in eps coming from there in FY2015. With the growth engine stalled, that is enough to remove any growth premium for the PGW share price going forwards IMO.

SNOOPY

[Snoopy]

For goodness sake do you like the stock at 45.5 cents or not ? A simple and succinct answer will suffice

Stir in the three ingredients above and I am predicting a lower core profit for PGW in FY2015.

I estimate core earnings to be around $37.7m in FY2014. $37.7m / 754.9m = 5.0cps.

5.0 -0.26 + 0.2 = 4.94cps NPAT is my pick, assuming the weather remains favourable.

At 42c, this is a PE of 42/4.94= 8.5. Mr Market looks about right on a long term PE basis.

If all that profit is paid as a dividend though, the net yield for FY2015 will be 5/42 = 11.9%.(gross yield 17%).

Even given the vagueries of weather dependent earnings, I would argue that is too high. That means the share price needs to appreciate to reduce the net yield to some 9%.

42c x (11.9/9 0) = 55c

Of course this will require interest rates to stay where they are now for a year (unlikely). Maybe a middle path is to halve the difference detween my two valuation methods?

(42c +55c)/2= 48.5c as my valuation target.

Happy?

SNOOPY

[Beagle]

Thanks for all your Snooping Snoopy. I appreciate your insights and in depth knowledge of the PGW.
I agree its a good hold at current level's and arguably N.Z's best yield for dividend hounds. The current spell of protracted fine weather around the country is exactly the medicine the rural sector needed after what feels like a long cold winter. Its hard to find sensible value on the NZX and realistic price earnings ratio's. Now we are done with sorting out that PGW is a good hold all we have to worry about is what to spend that dividend on

[Snoopy]

If all that profit is paid as a dividend though, the net yield for FY2015 will be 5/42 = 11.9%.(gross yield 17%).

Even given the vagueries of weather dependent earnings, I would argue that is too high. That means the share price needs to appreciate to reduce the net yield to some 9%.

42c x (11.9/9 0) = 55c

Oh dear I seem to have caught the same disease that I accused everyone else on this thread as having- dividend fever!

Please go back to my post 3457 for a sensible dividend valuation calculation!

I think PGW going ex-dividend and the anticipated arrival of that 3.5c dividend cheque in my bank account is what caused my 'infection'. When you imagine these dividend cheques going into your bank account it is very easy to focus on the short term. I can well believe that such payments will continue indefinitely into the future too, just based on 'current account lubrication'. One year out I might be right. But we all know deep down farming is a cyclical business and the endless harvests of high dividends will, must, come to an end.

From 3457

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Average that over 8 years and I get a net yield of 3.1cps. Based on a market price of 45c that gives a business cycle net yield of:

3.1 / 45 = 6.9%, or a gross yield of 6.9/0.67= 10.3%

I think that a gross yield of 9% is the sort of figure I would be looking for over the business cycle.

Based on that fair value for PGW, on a vield basis is: 45c x (10.3/9) = 51.5c

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Now redoing my valuation averaging between the two methods

(42c +51.5c)/2= 47.0c as my valuation target.

SNOOPY