PGW - PGG Wrightson

[KJ]

Fair enough Snoopy-we all have our own approach and yours is obviously more complex than mine.IMO it is easy to "analyse things to death" for no gain so I try to keep it as simple as possible.

[Snoopy]

quote:Originally posted by KJ

Fair enough Snoopy-we all have our own approach and yours is obviously more complex than mine. IMO it is easy to "analyse things to death" for no gain so I try to keep it as simple as possible.

Would you buy a lotto ticket without having some idea of the chance of winning and some idea of how big the big prize is?

To 'keep things simple' you could just focus on the big prize and totally ignore the chance of getting it. I suspect many punters do, but that doesn't make such behaviour rational.

Alternatively you could 'keep things simple' and vow to never buy a Lotto ticket because whatever the prize the chances of winning are so small, why bother? Never mind that with some weekends where a jackpot must be paid out, you may find that your expected return on buying a lotto ticket is actually *positive*!

With any investment you have to consider:

1/ The chances of it coming off.
2/ Your payout if it does come off.

This is investment at the 'barest of bones' level. It doesn't get any simpler than this. Any further simplification is a misrepresentation of the investment process.

SNOOPY

[KJ]

Snoopy-what I said was to keep it "as simple as possible".You have put your own spin on this.Let me clarify for you what I mean by this
as you are painting an inaccurate picture.

When selecting stocks I look at certain basics. In brief:

-Earnings growth-history and looking ahead-important correlation between earnings growth & share price
-Sound fundamentals
-Must be in LT uptrend/do not buy in downtrend
-Good liquidity for the shares
-Be very mindful of economic issues and market sentiment
-Invest no more than 20% of fund in any one stock
-Use simple TA as an aid to FA-trend line breaks & resistance/support
levels.Helpful to determine entry & exit points.
-predetermined exit strategy

This is a summary of the approach that I use when I refer to "as simple as possible"
Do not tell me that it does not work because I have used it for yrs and it does work.

Your analogy with lotto tickets in your last post reinforces my view that you may overdo the analysis side.Your earlier post refers to "70% chance that price will go up-30% chance it will go down". Who believes this stuff?

From Mauldin-"we can never know what price is really "low" nor what price is really "high".We can however have a modest chance of knowing what the trend is." This is closer to the mark.

[nelehdine]

nice close today at 181 ... looks like a short term bottom may be in. May look to flick my 172 purchase towards 190 ... 10% gain ???

[Halebop]

quote:Originally posted by Snoopy

To 'keep things simple' you could just focus on the big prize and totally ignore the chance of getting it. I suspect many punters do, but that doesn't make such behaviour rational...

...With any investment you have to consider:

1/ The chances of it coming off.
2/ Your payout if it does come off.

This is investment at the 'barest of bones' level. It doesn't get any simpler than this. Any further simplification is a misrepresentation of the investment process...

The only tiny problems comes with those little lines "The chance of it coming off" and "Your payout if it does come off". There is no reliable model or methodology for these and it certainly won't be found in your "0.7 x (1.76-[0.9 x 1.76])= 12.3cps (expected loss, negative scenario)" math.

Its pretty much like advising the hapless neophyte investor to "Buy Low, Sell High". The barest bones simple system of them all.

[Snoopy]

quote:Originally posted by KJ

Snoopy
Just a point re your calculation for ongoing profit-the projected profit for 2006 of $27m probably needs to be adjusted for the fact that the first half results include 6 mths for PGG but under 3 mths for Wrightson and Williams & Kettle.

Good point KJ. Yes the annual PGW profit includes only 9 months of profit from the old Wrightsons. However we also need to add on the overall one off charge resulting from the Pyne Gould/Wrightson merger to the declared profit of $27m.

The ongoing overall 'partial profit' (excluding 3 months from WRI) was $27m + 0.67($7.5m)= $32m.

To complete the total picture, a little homework is required.

We know that traditionally 'W' (the ongoing profit attributable from the old Wrightson's business) has been skewed against the first half of the year, on roughly a 30:70 basis. Assuming the half year profits are evenly distributed over the each six months of the year we can think of the 'W' profit broken down on a quarterly basis as follows: 15:15:35:35. That means that the amount of the W omitted from the quoted total figures for PGW for FY2006 is 0.15W (or conversely 0.85W has been included).

Therefore 0.85W + P = $32m

Note: P the ongoing profit attributable from the old Pyne Gould Guiness business.

The Wrightson's profit for FY2005 was $20.5m. But that included $4m of 'one offs'. Therefore the ongoing Wrightson profit was $16.5m? Not quite. This $16.5 ongoing profit figure is itself distorted because of Wrightson's own takeover of William and Kettle in March 2005, three quarters of the way through the financial year for WKL.

The normalised FY2005 profit for WKL was around $6m. We need to include the 9 months of the year that WKL was not part of WRI to get a useful normalised result for WRI for FY2005.

$16.5m + 0.75($6m)= $21m.

The last year of independent trading for Pyne Gould Guinness produced a result of: NPAT= $17m which adjusted for a non taxable $1m profit due to sale of fixed assets down to P=$16m.

If these adjusted 2005 'W' and 'P' profit figures were carried over into FY2006, then we would expected a quoted PGW profit of.

0.85($21m)+ $16m= $34m, ignoring any synergy benefits of the merger.

So why is the actual result ($32m adjusted for one offs) so much worse than this? Any theories?

SNOOPY

[Snoopy]

quote:Originally posted by KJ


I would have thought that ongoing profit would be closer to $40m as merger synergies are expected to exceed $25m annually and the full impact will flow through to the 2007 yr.

I read the full FY2006 result news release on 'Stocknessmonster'

http://stocknessmonster.com/news-ite...=NZSE&N=135735

and thought it was a bit confusing. I resolved to set aside a quiet time later to reread it. I have done that, and I am afraid to say I am still confused!

"The financial result reflects trading conditions that were materially less favourable than those prevailing at the time of the merger in October 2005. At that time, expectations were for NPAT of $30 million, after amortisation of $9 million and net merger costs of $7 million after tax. The NPAT reported today is after amortisation of $10 million and includes a net gain of $7 million in non-recurring items."

If we add back those original expected net merger costs of $7m from the original prediction, my interpretation is that PGW management were looking for a NPAT excluding one offs of

$30m + (0.67)$7m= $34.7m

"The $7 million net gain on non-recurring items included restructuring costs, the sale of surplus properties, and the gains on sale of the PGG Insurance and Merino businesses, to Aon and Merino New Zealand respectively. The result also included equity accounted earnings totaling $0.4 million from the New Zealand Merino Company, the Kelso Wrightson joint venture and New Zealand Wool Handlers in the period before the merger."

Are PGW saying there has been a $14m turnaround here? From an expected $7m net loss to an actual $7m net gain as a result of the merger?

If that is true, their just announced $27m profit when 'normalised to remove one offs' is only $20m. Thus the 10% profit downgrade from $30m to $27m when announced in July, was actually a much more significant 40% profit downgrade from $34.7m to $20m when one off items are stripped out of the results.

Or am I misreading what PGW management have said?

"Earnings before interest and tax were $54.5 million, including:

o$29.4 million from Rural Services (Livestock, Wool, Rural Supplies,
Real Estate, Insurance, Training)
o$6.3 million from Finance
o$17.1 million from Seeds & Grain
o$1.7 million from Uruguay

In addition to the above contributions, there was $6.6 million in net one offs and $10.6 million in amortisation costs."

OK, so the total EBIT from ongoing businesses is $54.5m. Net bank debt for the financing of the ongoing business is $202m. At say 8% interest (a guess) that equates to an annual interest bill of $16m.

That gives ongoing EBT of $54.5m-$16m= $38.5m. Tax at 33% produces a NPAT= $25.8m from ordinary items. That compares badly with the equivalent 2005 figures, calculated in my previous post, of $34m.

Was ongoing FY2006 really that much worse than ongoing FY2005? Remember that the FY 2006 results should include some (most?) of the $25m of synergy benefits referred to!

"The merger had a favourable effect on group earnings, with synergies captured to date totaling more than $25 million on an annualised basis. The full effect of these synergies will flow in the 2006-07 year."

I am unclear what makes up this '$25m synergy captured' figure. Does it include the one off property sales as a result of PGW holding properties surplus to requirements? Such sales are not going to be repeated in subsequent years.

If the $25m entirely relates solely to ongoing operating costs, how much was captured in the current year? Presumably 3/4 of it, if the merger was completed in a legal sense in early October 2005, one quarter of the way through the financial year. That means the remaining $6.25m to be captured will effect the base line profitability in FY2007 to an extent of 0.67x$6.25m= $4m NPAT.

I

[Snoopy]

quote:Originally posted by Halebop


The only tiny problems comes with those little lines "The chance of it coming off" and "Your payout if it does come off".

There is no reliable model or methodology for these and it certainly won't be found in your "0.7 x (1.76-[0.9 x 1.76])= 12.3cps (expected loss, negative scenario)" math.

That fact that there is 'no reliable model' is the point Halebop. That is why I advocate a more probabilistic approach. Look at different possible models of what might happen and try to assess what the chances are of each of those different models being right.

IMO the only sensible investing methodology is to consider all possible outcomes (within reason). Certainly focussing on one particular most likely outcome is a flawed technique, if you consider the chance of all other outcomes to be nil.

Your statement that there is 'no reliable methodology' for doing this stuff is correct too Halebop, but not of any practical use. A 'reliable methodology' to me would suggest that movement of investment valuations is somehow pre-ordained and predictable if we could just harness the 'right tool' or 'right technique' of analysis. Whatever investment tool or method you use, even if you apply it perfectly, sometimes you will be wrong. Even the best methods cannot be reliable in a system that is not deterministic. IMO making use of the best tools you have got is certainly better than doing nothing because 'you might be wrong'.

SNOOPY

[KJ]

Snoopy-you are busy.
My understanding (loosely)is this:

-if the coy had not made unbudgeted net gains of $7m from property/business sales,profit would have been around $20m

-at the time of the merger, revenue was expected to be $912m-actual $849m

-underlying earnings are down $17m on the investment statement

-synergy benefits of $25m are on a pa basis-should be higher in 2007.

-some of reasons for poorer than forecast profit:

(1)downturn in rural services sector
(2)livestock,rural supplies & seeds & grain most affected
(3)livestock trading lower due to unusual weather and reduced prices.
-reduced NPBT by $3.9m-reduced prices cut earnings by a further $1.7m.

(4)sheep and beef farm net incomes fell by 30%-big affect on rural supplies business.
(5)wool prices hit by high NZ$

They seem comfortable with NPAT projections of $45m to $55m.

[Snoopy]

quote:Originally posted by KJ


My understanding (loosely)is this:

-if the coy had not made unbudgeted net gains of $7m from property/business sales, profit would have been around $20m

-underlying earnings are down $17m on the investment statement

-synergy benefits of $25m are on a pa basis-should be higher in 2007.

Unless you are mistaken KJ, and I'm not saying you are, this paints a grim picture. It means that, but for the $25m merger synergies, these busineses would have collectively lost money in FY2006!

Yet despite PGW having only existed in its current form for 9 months, we shareholders have already received a fully imputed interim dividend of 4cps. Furthermore PGW have declared a:

"fully imputed final dividend of six cents per share."

That makes a total of 10cps. Yet underlying earnings are only just over 7cps.

This company has only just been formed (October 2005). So it should have no extra imputation credits on account from previous years to attach to this year's final dividend. Can anyone explain the mismatch of imputation credits declared to be paid, compared to imputation credits on the books? Something is wrong here.

Remember than land sales are not taxable. So PGW is unlikely to have made any extra imputation credits from selling off the land.

quote:
They seem comfortable with NPAT projections of $45m to $55m.

At those profit levels the forward PER improves to around 7.6-9.3 at today' share prices. That is probably reasonable at the top of the business cycle, for a cyclical business. So I see no compelling reason why the PGW share price should go higher from here.

SNOOPY

discl: hold PGW