PGW - PGG Wrightson

[Snoopy]

an interesting question roger. However most banking covenants seem to be based on 'cashflow'. Cashflow won't be affected by whether long term lease agreements becaome capitalised debt or not. Also these changes in accounting rules have been well signalled. So yes the debt on paper from fy2019 will look higher. But will bank managers be really worried about it?

	FY2011	FY2012	FY2013	FY2014	FY2015	FY2016
Interest Payable: {A}		$8.737m	$5.537m	$5.091m	$6.768m	$7.150m
Bank Facility Fees: {B}		$4.937m	$4.240m	$2.440m	$1.508m	$0.945m
Financial Rearrangements during year		1/ PGW Finance	1/ Goodwill $300m+	1/ New Syndicated Loan	1/ Syndicated loan	1/ Reorganisation of
		divestment to Heartland	write off	negotoiated Dec 2013	extended to Dec 2018.	Uruguayan loans:
		2/PGW Rural Capital	2/$20m of 31-07-2004	(includes Term Debt	2/ New Overdraft Facility	(Logistic Centre
		Limited repayments	loan paid back early	facility $116m (+$6m)	of $9.63m.	Facility: $US11m)
		(including Crafer Farms)	3/ Amortizing facility	& Working Capital	3/ New Trade Finance	(Committed
			$38.98m repaid.	facility $60m (same) )	facility of $6.57m	Facility: $US12m)
			4/ Trade Finance facility	until December 2016.	4/ Extra finance for	(Unsecured
			$34.16m wound up		Uruguayan operations	Facility: $US16.34m)
					$NZ11.76m + $38.32m
Loan Balance (Short Term) EOFY	$52.194m	$29.709m	$47.702m	$35.573m	$57.195m
Loan Balance (Long Term) EOFY	$124.500m	$111.500m	$62.000m	$65.000m	$66.000m
Loan Balance (Short Term) EOFY AR2016					$57.411m	$36.623m
Loan Balance (Long Term) EOFY AR2016					$69.328m	$97.551m
Average Total Loan Balance Over Year: {C}		$158.952m	$125.455m	$105.138m	$111.884m	$130.437m
Charged Interest Rate Estimate: {A}/{C}		5.50%	4.41%	4.84%	6.05%	5.48%
Bank Facility + Interest Rate Estimate: [{A}+{B}]/{C}		8.60%	7.79%	7.16%	7.40%	6.97%

----

The important figure to look at (or so I thought) was the actual interest rate the bank syndicate was charging. However the supplementary 'Bank Facility Fees' are enormous. In FY2013 those fees almost matched the interest paid! I have tried to summarize any Financial Arrangements changed during the year that could explain these 'one off' charges. They are generally reducing over the years as PGW finds a more stable operating structure. So hopefully 'Bank Facility Fees' will not play as large a part in PGWs future as they have done in the past!

'PGW Rural Capital Limited' was a company set up to take over the remaining PGW Finance Loans that Heartland did not want. It is no surprise that a few extra bank fees were payable on the wind up of some of many of these loans in FY2012. Likewise the wind up of the 'Amortising Facilities' and 'Trade Finance facilities' in FY2013 look to be have been costly. FY2014 saw the former ANZ bank loan turned into a 'syndicated loan' involving Westpac and BNZ as well. This involved winding up the previous ANZ facility early. All that rearrangment was obviously costly! It is interesting that new 'trade facilities' were opened in FY2015. I thought that side of the business had been handed to Heartland? So is this a sign that Heartland ( PGW Finance owners) are not performing, with PGW having to establish new trade facilities again in their own right?

Here is hoping for stability in the loan arrangments going forwards!

SNOOPY

[Snoopy]

Here is hoping for stability in the loan arrangments going forwards!

	FY2011	FY2012	FY2013	FY2014	FY2015	FY2016
Financial Rearrangements during year		1/ PGW Finance	1/ Goodwill $300m+	1/ New Syndicated Loan	1/ Syndicated loan	1/ Reorganisation of
		divestment to Heartland	write off	negotoiated Dec 2013	extended to Dec 2018.	Uruguayan loans:
		2/PGW Rural Capital	2/$20m of 31-07-2004	(includes Term Debt	2/ New Overdraft Facility	(Logistic Centre
		Limited repayments	loan paid back early	facility $116m (+$6m)	of $9.63m.	Facility: $US11m)
		(including Crafer Farms)	3/ Amortizing facility	& Working Capital	3/ New Trade Finance	(Committed
			$38.98m repaid.	facility $60m (same) )	facility of $6.57m	Facility: $US12m)
			4/ Trade Finance facility	until December 2016.	4/ Extra finance for	(Unsecured
			$34.16m wound up		Uruguayan operations	Facility: $US16.34m)
					$NZ11.76m + $38.32m
Charged Interest Rate Estimate: {A}/{C} (previous table)		5.50%	4.41%	4.84%	6.05%	5.48%
Interest rates used for determining value (Receivables)		13.6%	14.4%%	14.2%	14.7%	Not Mentioned%

I always get suspicious when statistics are dropped from the Annual Report with no explanation.

Note 21 in AR2016 is titled 'Financial Instruments'. The last five years of annual reports also have a section titled 'Financial Instruments'. There is some detail in there about listing values on the books at 'fair value'. The interest rate used in determining these 'fair values' of 'finanace receivables' is listed under sub-section 'e' (in previous years). I assume some value of 'determining value' interest rate was used in FY2016, even though management chose not to tell sharehodlers what that interest rate was.

I have displayed the offending interest rate (where available) alongside my calculated interest rate that our company has been paying to the bank. There is no reason for these interest rates to be the same. I might expect the trend of changes in value year to year to show some correlation though. The 'determining value' interest rate has not dropped significantly since FY2012 (actually it has gone up). In a climate over the last few years of declining interest rates I find this odd. The fact that it wasn't given for FY2016 leads me to suspect it might have gone even higher. Can anyone explain this apparent anomoly? Why would an interest rate be used to help determine the value of financial receivables in the first place?

SNOOPY

[Snoopy]

I think PGW is the highest yielding share on the NZX, at least among those shares that have any chance of a stable earnings profile going forwards. High yield is often a measure of market scepticism. The reason for this scepticism IMO is that:

1/ Commodity markets (most of PGW's customers farm commodities) are subject to price and exchange rate volatility AND
2/ PGW itself carries a not insignificant bank loan debt burden.

Unfortunately when interest rates eventually rise, PGW will get a double whammy from:

1/ Higher interest costs
2/ The ability of customers to purchase being reduced from a higher NZ exchange rate reducing commodity prices in NZD terms..

I think it is worthwhile 'stress testing' the company to see what might happen in practice under a higher interest rate scenario. FY2012 to FY2016 covers the last five years under Alan Lai's Chairmanship. I suggest that 'net profit after tax' is largely determined by the revenue turnover of the company in any particular year. This is because PGW has limited ability to respond to any 'weather event' or predict the timing of the commodity cycles, but must have stock on hand at the start of each farming season (particularly with seeds) to meet demand from farmers. Revenue form the last five years has been tabulated below. I have presented an adjusted revenue picture too, as explained by circumstances outlined in note 1.

A point of observation is that 'adjusted revenue' is surprisingly stable. $1,173.6m is the mean adjusted revenue figure. The highest and lowest revenue figures are less that 4% away from that mean figure. This can be attributed to PGW doing business across all rural sectors. When the different rural sectors are 'out of synch' this naturally smooths the overall revenue picture.

	FY2012	FY2013	FY2014	FY2015	FY2016	Stressed Year
Revenue	$1,336.8m	$1,131.8mm	$1,219.8mm	$1,202.8m	$1,181.6m
Revenue (adjusted)	$1,131.8m	$1,131.8mm	$1,219.8mm	$1,202.8m	$1,181.6m	$1,131.8m (-$50m)
Average Total Loan Balance	$158.952m	$125.455m	$105.138m	$111.884m	$130.437m
over Year: {Snoopy post 4071}
Charged Interest Rate	5.50%	4.41%	4.84%	6.05%	5.48%
estimate: {Snoopy post 4071}
Bank Facility + Interest Rate	8.60%	7.79%	7.16%	7.40%	6.97%	8.60% (+23%)
estimate: {Snoopy post 4071}

Notes

1/ Below is a quote from p5 of the PGW Annual Report for FY2013:

"Sales revenue for the group decreased, although this had no bearing on underlying business activity. Sale of the Agri-feeds molasses business resulted in it being accounted as ‘equity earnings from associates,’ meaning its revenue is no longer recognised in our accounts. In addition, a number of key product lines in the retail business are now transacted on an agency basis, meaning that,although gross profit generated by these transactions remains unchanged, only commission income is recorded as our revenue rather than the full transaction value."

SNOOPY

[arc]

Snoopy
Not being an accountant myself, your descriptions sounds like a bit of creative in-house cooking.
Do you think there is any need to be mildly concerned

[BlackPeter]

Snoopy
Not being an accountant myself, your descriptions sounds like a bit of creative in-house cooking.
Do you think there is any need to be mildly concerned

I think what Snoopy is saying is that the downward potential for the share might be currently higher than the upward potential. Cyclical stock at the top ...

Obviously - high leverage at the top of the cycle is not very clever and might point to a needy/greedy majority shareholder requesting a big dividend, no matter whether PGW could afford to pay or not. Moving now into the downcycle with high debt and in an environment of rising interest rate is not necessarily an advantage for the company and/or for holders.

30 cents - here we come again ?

Discl: don't hold;

[winner69]

F16 saw them use $$29m to pay out dividends

This wasn't funded from normal activities - $20m came from property sales and the rest was borrowed

I reckon pusing the limits of 'financial endineering' to keep shareholders (at least the majority one) happy

No wonder a high dividend yield

[arc]

Thanks guys, good feedback

Sell and borrow as well !!! just to fund divies...

Obviously the div level requires a major slash and burn


So what happens when you have sold off all the silverware to support the habit, and have just the blankets left...

planting a red flag here.

[Snow Leopard]

F16 saw them use $$29m to pay out dividends

This wasn't funded from normal activities - $20m came from property sales and the rest was borrowed

I reckon pusing the limits of 'financial endineering' to keep shareholders (at least the majority one) happy

No wonder a high dividend yield

Whilst I broadly agree with you I have underlined the bits that are plain wrong.

Best Wishes
Paper Tiger

[percy]

Whilst I broadly agree with you I have underlined the bits that are plain wrong.

Best Wishes
Paper Tiger

What a "classic" post.!.....lol.

[winner69]

Whilst I broadly agree with you I have underlined the bits that are plain wrong.

Best Wishes
Paper Tiger

You fallen in love again or something

Thanks for the generous praise anyway

Cheers