PGW - PGG Wrightson

[Snoopy]

Continuing my rework of the post capital repayment scenario, now based on an actual FY2019 earnings expected, and with a $3m contribution towards the pension scheme adjusted for.

	Scenario $157.5m debt repayment and new FY2020 Investment
dps {A}	1.11c
PGW Rural Rump: Market Valuation {B}	54c - 31c = 23c
PE ratio {B}/{1.51c}	15.2
Gross Dividend Yield {A}/{B x 0.72}	6.7%

Notes

1/ In the gross yield calculation I am not assuming that all earnings are paid out as dividends. This is because i believe a constant flow of earnings will be needed to bail out the company superannuation scheme which is persistently technically insolvent,
2/ The PE ratio is now looking looking reasonable for this type of business, as we are in a lower part of the earnings cycle (that means PE can be higher)
3/ The potential dividend yield looks O.K, but is IMO low for this kind of business.. The lesser than expected capital repayment has not made PGWRR debt free after all. This is no doubt because PGWRR has elected to keep spending to invest in the business, even if they haven't fixed their superannuation scheme issues.

In this low interest rate environment I would be prepared to buy with a gross dividend return of 8.5%. This implies a post capital return share price of:

23c x 6.7/8.5 = 18.1c

This is a significant fall from the implied market price of 23c. Thus there is now a significant risk of shareholders losing up to 20% of their remaining capital once the entitlement to the long awaited capital repayment has been released.

As an aside at 18.1c PGWRR would be trading on a PE of:

18.1c / 1.51c = 12

At a lowish point in the business cycle, this sounds about right.

I will now continue my rework on the now realised capital repayment scenario. I have removed from this iteration a previously stated $3m contribution towards the pension scheme that continued into the future. This is because over FY2019, new CEO Stephen Guerin authorized a one off $10.274m contribution to the Defined Benefit Pension Scheme that brings it into actuarial balance.

	PGWRR FY2019 (EBITDA as reported plus forecast corporate savings)	PGW Rural Rump: Multi Year Average Scenario (excluding Pension Scheme Repair)
eps {A}	12.8c	18.0c
dps {B}	15.0c
PGW Rural Rump: Market Valuation {C}	$2.42	$2.42
PE ratio {C}/{A}	18.9	13.4
Gross Dividend Yield {B}/{C x 0.72}	8.6%
Gross Earnings Yield {A}/{C x 0.72}	7.3%	10.3%

Notes

1/ The PE ratio is now looking looking more reasonable for this type of business, as we seem to be in a lower part of the earnings cycle (that means PE can be higher). Nevertheless a PE of 18.9 is at the upper end of my comfort zone for cyclical agricultural retailer.
2/ The potential dividend yield looks O.K, but is IMO low for this kind of business.. The lesser than expected capital repayment has not made PGWRR debt free after all. This is no doubt because PGWRR has elected to keep spending to invest in the business.

In this low interest rate environment I would be prepared to buy with a gross earnings yield of 8.5%. This implies a 'post capital return and 10:1 consolidated' share price of:

$2.42 x 7.3/8.5 = $2.08

This is a significant fall from the market price of $2.42. I believe this means there is a fair amount of 'earnings recovery' already built into the PGW share price today. If an earnings recovery does not happen this year, then we shareholders might expect to lose around 14% of our invested capital in PGW (the downside risk).

OTOH, if earnings recover to more of a mean value from 'years recent past', that means the fair value share price for a gross earnings yield might rise up to:

$2.08 x 18/12.8 = $2.93

That represents a rise in value from today's quoted price of 21% (the upside risk)

Overall then, given the upside and downside risks, I would judge today's market price of $2.42 as not a bargain, but not overpriced either. $2.42 the epitome of 'fair value'? Looks like Mr Market might have it right with this one.

SNOOPY

discl: holding, at an average equivalent price paid per share todayof $1.38 :-), but with an average holding time of about 10 years to achieve this equivalent entry price :-(

[Snoopy]

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:

$235m / 754.048m = 31cps

By simple subtraction from the 52c PGW market value, we can now calculate the market value of 'PGW Rural Rump' after the seeds have split.

52c - 31.2c = 20.8c

This gives us the information we need to work out the post split PE ratio.

As we come up to the first AGM following the seed division demerger, it is timely to reflect on a few vital statistics comparing 'what we shareholders had' and 'what we shareholders have now'.

Let's start by working out some normalized profit figures:

PGW pre demerger for FY2018

	EBITDA	less D&A	less Net Interest	less Income Tax	equals NPAT	less Property sales	equals Adjusted NPAT {A}	No. Shares on Issue {B}	eps {A}/{B}
FY2018	$70.174m	$12.974m	$9.986m	$12.460m	$34.754m	$1.700m	$33.054m	754.8m	4.38c

PGW 'Rural Rump' for FY2019

	EBITDA	less D&A	less Net Interest	less Income Tax	equals NPAT	less Property sales	equals Adjusted NPAT {A}	No. Shares on Issue {B}	eps {A}/{B}
FY2019	$28.725m(*)	$9.362m	$3.826m	$4.350m	$11.187m	$0.200m	$10.987m	75.484m	14.6c

(*) I have boosted the declared EBITDA of $24.425m by $2.5m, this being the amount of cost savings expected from head office reduction costs AND $1.8m from a supplier claim event of which this represents an unrecovered portion.

Interest is calculated on the new capital structure of PGWRR and income tax is calculated at a rate of 28%

More comparative company performance statistics are revealed below:

	PGW Intact (FY2018)	PGW Rural Rump (FY2019)
Share Price 30th September {A}	$0.61	$2.55
eps {B}	4.38c	14.6c
PE Ratio {A}/B}	13.9	17.7
Normalised Profit {C}	$33.054m	$10.987m
Shareholder Equity {D}	$287.462m	$165.902m
ROE {C}/{D}	11.5%	6.62%
Revenue {E}	$1,193.462m	$809.295m
Net Profit Margin {C}/{E}	2.77%	1.36%

The loss of the unique seed division intellectual property has halved the return on equity and halved the net profit margin for what we shareholders have left.

On 9th January a 'dissenting to the demerger' shareholder received a full payout on their 9,724 PGW shares of 58c each. With the 31c capital return, we remaining shareholders have had since, and the ensuing 1:10 share consolidation, that translates to $2.70 per share for the remaining PGWRR shares. Since the 1:10 share consolidation, the PGWRR share price has never approached that figure. So not only has the seed division demerger destroyed shareholder wealth. The remaining assets we shareholders have are of lesser earning quality. This just goes to show that directors of a company do not always act in the interest of all shareholders. For small shareholders, this demerger has been nothing but an abject failure.

SNOOPY

[sb9]

I added to my holding today,at av.$2.4256.
Should the share price come back a bit, I will add to the wife's holding.

Have dipped my toes into this one earlier in the week.

[percy]

Have dipped my toes into this one earlier in the week.

Share price looks "firm".
I thought after I added to my holding it may have come back a little.
Still have not added to the wife's holding.
Not bidding at present.

[Balance]

Share price looks "firm".
I thought after I added to my holding it may have come back a little.
Still have not added to the wife's holding.
Not bidding at present.

Who knows - we may wake up and find that Agria has done a deal to sell its stake, triggering a takeover at $3.00?

[percy]

We live in interesting times.?

[Balance]

We live in interesting times.?

Not a question of ‘if’ but ‘when’ Agria will sell imo.

[percy]

Agree.................
In the meantime,excellent new Chairman with a refreshed board,sensible CEO,strong balance sheet and an excellent yield.
All confirmed today.
Pleasing to see bank lending now on better terms too.

[Snoopy]

Takeover deals are usually done on EBIT and EBITDA multiples, rather than PE ratios. If we look at where PGWRR sits today (my post 4516):

EBITDA = $26.500m

EBIT = $24.577m

If we use the residual PGWRR share price that I have calculated at 20.8c. This means the market capitalisation of PGWRR is:

20.8c x 754.048m = $157m

This gives an EBITDA multiple of: $157m / $26.5m = 5.9

This gives an EBIT multiple of: $157m / $24.577m = 6.4

'Enterprise Value' = Market Capitalisation + Total Debt − Cash
= $157m + 0m - $39.5m
= $117.5m

Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:

	Company	Enterprise value NZD	EBITDA Multiple FY2019	EBIT Multiple FY2019
	Ruralco Holdings (Oz)	$465m	5.8x	7.1x
	Elders (Oz)	$853m	9.0x	9.6x
	PGW Rural Rump (NZ)	$117.5m	5.9x	6.4x

So what does it all mean?

Takeover deals are usually done on EBIT and EBITDA multiples, rather than PE ratios. If we look at where PGWRR is forecast to sit for FY2020:

EBITDA = $30m

EBIT = $30m - $9.632m = $20.638m

If we use today's PGWRR share price of $2.49. This means the market capitalisation of PGWRR is:

$2.49 x 75.484mm = $188m

This gives an EBITDA multiple of: $188m / $30m = 6.3

This gives an EBIT multiple of: $188m / $20.632m = 9.1

'Enterprise Value' = Market Capitalisation + Total Debt − Cash
= $188m + ($3.920m+$31.742m) - $1.160m
= $223m

Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:

	Company	Enterprise value NZD	EBITDA Multiple	EBIT Multiple
	Ruralco Holdings (Oz) (FY2019)	$465m	5.8x	7.1x
	Elders (Oz) (FY2019)	$853m	9.0x	9.6x
	PGW Rural Rump (NZ) (FY2020f)	$223m	6.3x	9.1x

So what does it all mean?

SNOOPY

[Snoopy]

Not a question of ‘if’ but ‘when’ Agria will sell imo.

Why would Agria want to fully sell down their PGW stake though, or could they even fully sell down?

Why would Alan Lai downgrade himself from being a 'notable global captain of Agriculture' to a non-descript head of a shell company? The capital repayment should have got the bankers off Alan Lai's back. So unlike before, Agria selling down from here on in would be purely voluntary.

Would the minority Agria shareholders agree to the sale of their only substantial asset so that the cash proceeds could be returned to the effective sole control of Alan Lai with no path available to get their cash returned to them?

Would Agria shareholders agree to sell 'in one lot' their PGW stake for no premium at the current market price, for the current market looks to be already near maximum valuation on comparative metrics? (Edit: On re-examination of the KM report, those figures in the table do not seem to include a premium for control.)

Taking all the above into account, it doesn't look like the sale of Agria's cornerstone PGW stake is likely IMO!

SNOOPY