PGW - PGG Wrightson

[steveb]

I suspect Snoops will need more info,their announcement is as clear as mud.What is wrong with a cash payout for goodness sake!!!

[winner69]

I suspect Snoops will need more info,their announcement is as clear as mud.What is wrong with a cash payout for goodness sake!!!

Need it to be ‘tax effective’ I suppose

[BlackPeter]

I suspect Snoops will need more info,their announcement is as clear as mud.What is wrong with a cash payout for goodness sake!!!

I suspect they don't want to crash the share price (which they would with paying out half the SP). Pro rata buy back makes a lot of sense (if properly done) ... maintains the share price and still returns the money. Might be as well advantageous from a tax perspective. IRD used to treat capital returns as taxable income, but if you are selling your shares to the company, than it is clearly no income unless you are a trader.

Discl: not a tax expert - DYOR

[Snoopy]

"Proposed Capital Distribution to Shareholders
“The Board has also determined that it intends to recommend a capital return of $235 million be made to
shareholders which should equate to approximately 31 cents per share. The proposed capital distribution
would be implemented by way of a pro-rated share buyback pursuant to a court approved scheme of
arrangement............"

I read this as a share buyback, not a per share payout. Not that good IMO.
Think there is a spelling mistake, "pro-rated" perhaps means "pro-rata".

You need to keep up with the lingo 'Greater Fool'. "Pro-rated' means the board asked a whole lot of highly paid accountants if they would like to design an extremely complicated way to return shareholder capital at vast expense, instead of just paying the cash out as a straight capital return in the form of a non taxable 'dividend'. Every one of these professionals thought designing such a scheme was a great idea, as did the lawyers required for 'court approval'. Hence the complex pro-rata buyback is 'pro-rated'.

SNOOPY

[Snoopy]

Immediately after the AGM the PGW share price was 57c. If we take this as Mr Market's 'reference figure', then this 57c will be split into a capital payout amount and the remainder which is Mr Market's worth of 'PGW Rural Rump'.

There are 754.048m PGW shares on issue. So working through both scenarios, for each share held, PGW shareholders can expect a capital repayment of either:

$292m / 754.048m = 38.7cps OR $274m / 754.048m = 36.3cps

By simple subtraction from the 57c PGW market value, we can now calculate the market value of 'PGW Rural Rump' after the seeds have split.

57c - 38.7c = 18.3c OR 57c - 36.3c = 20.7c

This gives us the information we need to work out post split PE ratios and dividend yields for both scenarios.

They say the market doesn't like uncertainty. So why does the share price of PGW continue to sink, the more details on the capital repayment are made public? Since the 9th May announcement of a likely $235m capital return, the 57c share price has sunk to 50c. Prior to this, we shareholders had voted on a likely $292m capital return (see p36 of the KM report evaluating the seed division sale). So shareholders have some reason to be disappointed in that they will only receive 80% of the money that PGW suggested they would get (a $57m shortfall). But why are investors considering themselves disappointed so slowly? On the NZX we are used to seeing shares 'bid up' or 'sold down' on a whim.

To be fair that $292m proposed capital return was never cast iron guaranteed. But it is disappointing to be asked to vote on a particular restructuring deal, when the reality of that deal turns out to be a little different. So what will the $57m that we shareholders aren't going to be getting do exactly? The proforma balance sheet for 'PGGW Rural Rump' shows 'Long Term debt of $17.5m, short term debt of $9.2m and a defined superannuation plan debt provision of $9.5m. This totals $36.2m. But $57m is more that enough to pay the company debts off. What will PGGW Wrightson do with the $20m they still have in the bank over and above this? I will take a wild guess. The Finance Division of the firm will re-emerge, officially!

SNOOPY

[percy]

SNOOPY,
Have you read last Friday's NBR with the article by Tim Hunter about how naughty a boy was former chairman Alan Lai.?

Perhaps one of Tim Hunter's best.

[Snoopy]

But if the seed division is losing money at NPAT level as suggested in the last update,I can't see the SP bouncing back up, if the seed sale is called off.It will be interesting to see the half year results in a couple of weeks.

I wanted to further examine the spin being put out by PGW management, that they are getting rid of a useless loss maker in selling the 'Seed and Grain' division.

I wouldn't be leaving the seed division out of this just yet, Yes, that after tax loss for seeds of $8.6m for the half year was a shock. But it seems to be related to the Seed and Grain division acquiring the other half of the joint venture in Uruguay called 'Agrocentro' (otherwise known as 'Aggrocentro'?). PGW's initial 50% stake in 'Agrocentro' was acquired in 31st August 2015 (i.e. during FY2016).

PGW has not yet disclosed how much they paid to acquire the 50% of 'Agrocentro' they did not already own during HY2019. Partly that is because it is not material. But after one 'budgeted for tough year' at 'Agrocentro' in FY2017, and no significant improvement in FY2018, it could well have been less than they paid for the first 50% stake. If that happened, that means that first 50% would have been written down in the books to match the second 50% acquisition price. I think that the $8.6m loss for Seeds in the first half very likely includes a significant equity loss in the form of a write down on that initial 'Agrocento' stake. The underlying seeds business should have remained profitable during this period. PGW Seeds is also weighted in earnings terms towards the southern hemisphere autumn. And that means a substantially higher second half operating profit for PGW Seeds.

The first half report reveals the missing 'write down' information.

From AR2016, page 46, when acquiring 50% of the business the comment was:

"The acquisition required an up front payment and an earn out component of between nil and USD $11.5m (using the exchange rate on acquisition day USD0.6465 = NZD1, this works out at $NZ17.79m) over the next three years, based on the financial performance of the business. The initial investment recorded for the investee is $NZ16.37m, which includes management's estimate of the fair value of the earn out."

I note the earn out payment looks to be potentially a very large part of the total price to be paid for 'Agrocentro', the value already inked in the PGW books (potentially 100%).

In AR2017 p21 we learn that: "South America achieved their FY2017 budget expectations."

By AR2018 p21 we learn that: "The key challenges for FY2018 were related to weather issues and the continuation of the very difficult financial situation facing our farming customers due to the low profitability and adverse climatic events of previous years."

It does sound like the 'earn out component' could end up being a lot lower than originally thought!

From p27 of HYR2019:

"Following an impairment of $6.00m (USD 3.64m, - which implies an exchange rate of NZD1 =60.67c), the fair value of the Group's pre-existing equity accounted interest in the AgroCentro Uruguay Group was $5.83m (USD3.95m - which implies an exchange rate of NZD1= 67.75c). This fair value was supported by the value attributed to the AgroCentro Uruguay Group as part of a conditional sale of PGG Wrightson Seed Holdings Ltd.. Consideration provided for the remaining 50% of the investment amounted to $1.25m (USD 0.85m, which implies an exchange rate of NZD1=USD0.68c)."

If I interpret that correctly the current book value for AgroCentro Uruguay Group is USD3.95m + USD0.85m = USD4.8m

Note that the second half of the business is valued at less than the first half on the same valuation date. This seems odd, until you remember that the first half valuation included an earn out payment and was valued at the time at USD11.5m. Subtract from this the value of today's USD3.64m write down and the residual USD3.95m value and I get an 'earn out payment' on the books back in FY2016 of USD3.91m.

This means that of the goodwill reflected on the books today:

1/ The earn out payment has had to be written off.
2/ The future value of the Uruguayan business of USD4.8m is way down on the FY2016 valuation of:

2x(USD11.5m - USD3.91m) =USD15.2m

That means that since PGW became involved in AgroCentro Uruguay Group, the wealth destruction has been disastrous. However, only a small part of AgroCentro Uruguay Group is actually involved in seeds. So to put all of this disaster under the 'Seed and Grain' mast head is very unrepresentative of how the Seed and Grain business is trading in Uruguay.

There is one additional 'poison seed' to swallow from the South American escapade though. Further down on p27

"During the period the group recorded an impairment of of $NZ1.57m (USD1.06m) against the carrying value of South American entities 'Arauca Seeds Sociedad Anonima' and 'Patagonia Seeds Sociedad Anonima.' ''

Adding together the two capital write downs (in bold above): $US3.64m +$US1.06m = $US4.70m

At half year balance date, the exchange rate was NZD1.00 equals USD0.6707

$US4.70 / 0.6707 = $NZ 7.01m

This is a capital loss that has come straight off the 'Seed and Grain' bottom line. The quoted loss for the 'Seed and Grain' division net of tax was $8.703m (HYR2019, Note 3). Weirdly 'Seed and Grain' has paid $1.691m in tax in arriving at this loss. I am guessing this tax payment must relate to a prior earnings period, so I am removing it from the half year result.

($8.703m) - ($1.691m) = ($7.01m)

By co-incidence, this figure is exactly equal to the capital write downs which I converted to NZD above. This means that from an operational perspective absolutely no money was lost by 'Seeds and Grain' over the last half year. The whole 'get rid of the loss making division' was IMO a fiction, no doubt dreamed up to make PGW management look better!

From Note 9 HYR2019 on 'Seasonality':

"Seed and Grain revenues reflects the fact the group operates in geographical zones that suit Autumn harvesting and sewing."

It hasn't been the best year for Seeds. Nevertheless we can expect full year NPAT for the 'Seed and Grain' division to be somewhere near $NZ10m.

SNOOPY

[Snoopy]

SNOOPY,
Have you read last Friday's NBR with the article by Tim Hunter about how naughty a boy was former chairman Alan Lai.?

Perhaps one of Tim Hunter's best.

Tim Hunter has certainly had it in for Alan Lai and Agria for a long time. I liked his two part expose titled "The China Files", run over two issues (December 14th and December 21st 2018). The latter issue contained Alan Lai's 'right of reply' too.

Then there was the 30th November 'Shoeshine' column on Lai titled: "Investing is war - watch out for self serving double agents"

All good stuff. I guess the latest article you reference helps explain why Tim Hunter was so well informed.

The problem with all these articles is that Alan Lai did not commit any of these alleged misdemeanours in New Zealand. Lai has paid fines but never admitted any wrong doing. And no alleged wrong doings relate directly to PGG Wrightson. His main 'crime' if you want to think of it that way is that he does not have enough money to support PGW further. Selling the seeds business is the fix, for him. Unfortunately that same 'fix' is profoundly negative for other shareholders.

I was interested to see from your referenced article Percy, that Mr Fixit, turned whistleblower, suggested to Lai that he write off every part of the Agria business except their stake in PGW!

SNOOPY

[Snoopy]

I don't think it is any secret that PGW is structured to be 'an efficient user of equity'. Non-core assets will be put up for sale if doing so improves the overall financial strength of the company. Particularly so in this era of 'building depreciation' being disallowed as an expense.

Big advert on page C9 of the Press today. Oamaru, Gore, Fairlie, Tapanui, Kurow, Roxburgh and Tuatapere branches of PGW, all up for tender! I wonder if this big property sell down has a mirror image sale going on for PGW's North Island branches?

A comment of concern is listed under Note 16 in HYR2019 under the sub heading:

"Standards and Interpretations That Have Been Issued or Amended But Are Not Yet Effective"

The quote is a follows:

"The group does not plan to adopt IFRS 16 early. An initial review has determined that this new standard will likely have a significant financial impact on both the balance sheet and profit and loss given the extent of operating leases that the group is exposed to."

This standard is apparently effective right now (from 1st January 2019)

The new standard requires lessees to recognise most leases on their balance sheets as lease liabilities with corresponding right-of-use assets. Having just sold off their retail footprint, this means a substantial new debt will appear on the balance sheet of PGW, albeit offset with a corresponding 'right of use' asset. But I guess a debt is a debt and that new debt must be included in any banking covenant calculations? Anyone know?

I wonder if this is behind the reduction in capital return , from $292m down to $235m, that has now been announced?

There seems to have been a significant deterioration in the balance sheet too, over the last six months. Yes I know some of that is seasonal. But even since the equivalent half year period last year, that debt ratio has significantly sickened:

Debt Ratio HYR2018

$551.180m / $845.314m = 0.652 ( 65.2% )


Debt Ratio FY2018

$471.164m / $758.626m = 0.621 ( 62.1% )


Debt Ratio HYR2019

$657.285m / $931.355m = 0.706 ( 70.6% )

SNOOPY

[Agrarinvestor]

Hi,

i still own my Agria shares, and wonder if it will be possible to sell my shares in the future. Always thought in the past that AGRIA will be different as other chinese stocks. But i have learned that they are all the same.
The replies i received so far from Agrias CFO are not helpful. If there is a significant development regarding sale of PGW share i think that this thread will be updated, right?