PGW - PGG Wrightson

[Snoopy]

Using: Price Earnings Ratio= (Share Price) / [(Normalised earnings)/(No. Shares on Issue) ]

2007: $1.93 / [$27.9m/289.3m] = 19.6
2008: $1.60/ [$47.9m/289.3m] = 9.7
2009: $0.64/ [$19.3m/754.8m] = 25.0
2010: $0.56/ [$18.0m/754.8m] = 23.4
2011: $0.40/ [$7.1m/754.8m] = 42.5
2012: $0.35/ [$24.0m/754.8m] = 11.0

For some companies, typically those that follow a steady growth path I tend to use an average historical PE when trying to judge how a share might be priced in the future. If I did that for PGW that figure would be 18.6.

Nevertheless this is an instance when simple averaging will get you into trouble. PGW has no historical record of being a growth company. Indeed in FY2012, widely regarded as a 'good' year for farming their earnings ($24.0m) are less than they were in FY2007 ($27.9m) before all those merger benefits had flowed through and before Craig Norgates failed growth path was trod.

If you look at the year when the PE was highest (FY2011) you will see that underlying earnings were at a near disastrous low point. This is probably a correct reflection by Mr Market. Surely things could not get worse than FY2011 and earnings did indeed rebound in FY2012.

If you look all through the earnings history you can see that the share price has not been as volatile as the earnings. This is again what I would expect as one good year does not imply that the following years earnings will be good. This is the reason why in FY2012, the share price ended at 'only' 35c. Because there can be no certainty or even likelihood that FY2013 would be any better.

Since that time some brokers are predicting a much better ayer and the share price has appreciated accordingly. However, at no stage has PGW itself forecast a good year in FY2013, nor released any profit hints to support that view. In fact quite the contrary. The information coming from George Gould of late indicates the year may be difficult. Given that the growth path is so uncertain I have a lot of difficulty paying for PGW a price that assumes a PE above 12.

SNOOPY

[Snoopy]

Graham Number is calculated by multiplying P/E by Price/Book (in NZ, we often call this Price/NTA).

If the Graham number is less than 22.5, with P/E ideally 15 or under, then the stock is a buy.

I don't agree with this methodology as regards PGW Sparky. This simple Graham calculation does not differentiate between companies in different industries. PGW has a lot of lazy assets by the nature of the company it is. Graham is assuming the utilization of these assets will improve to some average figure thus boosting PGWs profitability. I say that PGW has already rationalized their asset base and that closing more branches and reducing stock levels further will not help the company (PGW) to grow.

Graham is also saying that anything with a PE under 15 is a buy which I would caution to be a simplistic assumption.

PGW's NTA per share was 31c according to page 55 of the 2012 annual report.

So 35c/31c = a P/B of 1.13. Call it 1.1

Agree with your calc.

On a P/E number of 11, and a P/B of 1.1, PGW was an absolute screaming buy (if you like Ben Graham's thinking) - scoring 12.1
Hence why I see this as a real value play, and value plays are what I love the most.

Sorry I can't agree with your conclusion because it attempts to put alll companies in a "one size fits all' bucket. IMO PGW does not fit into that bucket.

SNOOPY

[Snoopy]

Also, Gould indicated what I considered to be optimism over the Australian seeds division, rather than pessimism.

"In New Zealand we're pretty confident about our position, we've got a pretty good robust business here. In Australia it's newer and the climate changes are more extreme. The worry we have, which we have every year, is just how will Australia pan out. It does look quite promising to the extent that there have been some early recent rains in some very dry areas."

I think you need to take your cue from the baseline view that has been established.

Look at Note 26 in the FY2012 annual report. Baseline assumption is that EBITDA for Agritech will grow by 40%. Now George is saying if the weather is more favourable (based on a summer of unfavourable weather and a hint of good), then profits might be OK.

I see this as a downgrade from the annual report position. This is the main reason that I don't see my original forecast modelled profit of $24.2m being achieved.

SNOOPY

PS Although I do agree that 'Agriservices' in NZ might surprise on the upside.

[Snoopy]

You misunderstand slightly. Graham said that a P/E x P/B under 22.5, AND where the P/E was (preferably) under 15 was a buy.

I think what you are saying is that buying a company on an underlying PE of 15 is OK, but if you can get it for a lower PE then so much the better. I agree with that, in the most general sense.

However, I think you should ask yourself why the PE of PGW was only 11 as at 30th September last year. The underlying reason is that the business has volatile earnings and has seasonal risks. IOW there is a very good reason that the PE is lower than average and IMO why it should always be lower than average.

The basic logic that applies to your Graham staistic is IMO in the instance of PGW flawed. PGW will not 'revert to the mean' of all companies from a PE perspective.

SNOOPY

[Snoopy]

The information from George Gould of late (if you mean the comment re lamb prices) needs more than a cursory sweep over.

Here's the link again

http://www.stuff.co.nz/business/farm...n-sheep-prices

Analysts have told me that livestock typically contributes little to 1H numbers for PGW, meaning the impact from lower lamb prices will be minimal for the upcoming announcement. Forsyth Barr's analysts have said that they had pulled back their estimates from livestock already, though they felt this could be revised further if needed once the earnings announcement was made.

OK I agree that the fall in lamb prices will not be a big deal in the coming result. Nevertheless the sharemarket works on future expectations. I believe that the fall in stock prices in general will have a bigger effect on the second half and the outlook into FY2014.

I seem to be writing a lot of negative stuff, but there is something positive to come out of this dry weather for PGW. Apparently it is a great season for grapes (think Fruitfed).

SNOOPY

[Snoopy]

Using that calculation HNZ is a screaming buy at 10.5. Sweet, thanks!

Moosie please tell me you are only eighteen and weren't around the markets when virtually the entire NZ finance industry went belly up in 2008 and 2009. If you are older than that, well, it might pay to cut the consumption of weed just a bit. There were plenty of finance companies around that were a screaming buy on a 'PE' or 'asset' or 'yield' basis. It didn't stop them all going belly up though.

SNOOPY

[Snoopy]

I think you need to take your cue from the baseline view that has been established.

Look at Note 26 in the FY2012 annual report. Baseline assumption is that EBITDA for Agritech will grow by 40%. Now George is saying if the weather is more favourable (based on a summer of unfavourable weather and a hint of good), then profits might be OK.

I see this as a downgrade from the annual report position. This is the main reason that I don't see my original forecast modelled profit of $24.2m being achieved.

SNOOPY

PS Although I do agree that 'Agriservices' in NZ might surprise on the upside.

OK, prediction time. I am picking a steady as she goes first half of $8m in NPAT earnings. I predict the second half, while much better than the first (as is traditional) will be much tougher than expected. In number terms I am looking for $13m NPAT. So total for the year will be $21m. With 754.8m shares on issue that equates to 2.78cps. Based on a PE of 11 (same as last year), this gives a fair value share price of 31c. So quite a bit of pain could be in store for shareholders buying in at the 45c level then!

Looking further out things should get a bit better. South America is a bit of a dark horse and I think earnings there could surprise on the upside as they (hopefully) come out of the drought of last season. Australia though remains a real worry. PGW has been busy adding to their seed portfolio by buying up local businesses in South Australia and Queensland at great prices. The problem is they only managed to buy these businesses at great prices because these so called great acquisitions were coming out of bankruptcy. The idea of integrating these businesses sounds good in theory. But they are so diverse and so widely spread geographically an Australian head office for seeds could very easily stuff things up in a big way. I do feel there is a real risk that PGW might have to walk away from their Australian investments. And the delicate PGW balance sheet will not be agreeable to yet more writedowns!

At 32c I effectively paid almost nothing for that Australian Agritech arm. I feel there is a very real chance my 'valuation' will prove accurate.

SNOOPY

[Minerbarejet]

"In order to be wise, one must first be an idiot".

Who came up with that doozer? (as an interested bystander of course)

[Balance]

OK, prediction time. I am picking a steady as she goes first half of $8m in NPAT earnings. I predict the second half, while much better than the first (as is traditional) will be much tougher than expected. In number terms I am looking for $13m NPAT. So total for the year will be $21m. With 754.8m shares on issue that equates to 2.78cps. Based on a PE of 11 (same as last year), this gives a fair value share price of 31c. So quite a bit of pain coul dbe in store for shareholders buying in at the 45c level then!

Looking further out things should get a bit better. South America is a bit of a dark horse and I think earnings there could surprise on the upside as they (hopefully) come out of the drought of last season. Australia though remains a real worry. PGW has been busy adding to their seed portfolio by buying up local businesses in South Australia and Queensland at great prices. The problem is they only managed to buy these businesses at great prices because these so called great acquisitions were coming out of bankruptcy. The idea of integrating these businesses sounds good in theory. But they are so diverse and so widely spread geographically an Australian head office for seeds could very easily stuff things up in a big way. I do feel there is a real risk that PGW might have to walk away from their Australian investments. And the delicate PGW balance sheet will not be agreeable to yet more writedowns!

At 32c I effectively paid almost nothing for that Australian Agritech arm. I feel there is a very real chance my 'valuation' will prove accurate.

SNOOPY

If you believe what you have written, you should be out.

[Balance]

Precisely. So Snoopy either doesn't believe what he wrote, or is irrational.

Sadly, Snoopy reminds me of another character who has since disappeared from ST. That individual was always right. Yet he lost so much money! Guess why?