PGW - PGG Wrightson

[Snoopy]

It looks to me as though management have tried to get as many cobwebs out of the drawers as possible, like the 'Shock Capital Loss Cumulation', where all these sins could be covered by the mega profit of selling the seeds division: The idea being to 'wipe the slate clean' for a simplified FY2020. And because of the huge profit from the sale of the seeds division that subsumed any 'wipe the slate clean' losses, PGW should have set themselves up well for future years.

Time to look forwards to the current year to see if there is any ongoing substance to this 'debt issue'. The first step is to forecast a 'net profit after tax' assuming that the EBITDA figure of $30m for FY2020 becomes reality.

	PGG Wrightson Rural Rump FY2020f
EBITDA	$30.000m
less DA	$9.632m
less I	$3.826m
equals EBT	$16.542m
x 0.72 equals NPAT {A}	$11.910m
No. shares on issue {B}	75.484m
eps {A}/{B}	15.7c

We have no clear idea of what the bank loan position, balance of money owing to employees or deficit of the pension plan will be on 30th June 2020. So I am using the indicative figures for PGW today after the capital return as estimates.

	FY2019 (iter. 1)	FY2020f
Short Term Bank Loans	$3.920m	$3.920m
add Long Term Bank Loans	$31.742m	$31.742m
add Net Defined Benefit Liability (Pension Plan deficit)	$5.883m	$5.883m
add Employee Entitlements	$16.821m	$16.821m
Total Bank and Worriesome Liabiliities {A}	$58.366m	$58.366m
NPAT + Impairment & Fair Value adj. {B}	$7.187m (i)	$11.910m
Minimum Debt Repayment Time {A}/{B} (in years)	8.12	4.90

Notes

Iteration i (Assuming Profits from Seed Sales paid through to Shareholders)

(i) Calculation of NPAT and 'Impairment & Fair Value Adjustments' (representing available cashflow for FY2019) is as follows:

FY2019: $4.000m+$3.187m = $7.187m

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My rule of thumb for the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

So a figure of 4.9 is not a bad result, but neither is it good. It is better than the recent peak figure of the pre-split PGW from FY2018 (7.87), but worse than the four preceding years before that FY2017 (3.97), FY2016 (4.54), FY2015 (4.85) and FY2014 (3.28). I would describe PGWs current position as being 'one shock away from trouble'. Yes the potential gross dividend yield today may look attractive:

15.5c / ($2.46 x 0.72) = 8.8%

(Note: a 15.5c annual dividend represents a projected dividend payout ratio of 99%)

But this is not a bond substitute.

I would advise investors not to 'bet the farm' on PGW. But as part of a balanced income portfolio, where as an investor you are aware of what a farming downturn might do to this investment, I think a shareholding in PGW has its place.

SNOOPY

discl: shareholder

[Snoopy]

Unaudited liabilities for the PGGW group as at 31st December 2009, after the proceeds of the Agria placement and subsequent rights issue was $993.8m. "Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA

Senior Debt is bank Debt (held with ANZ National, BNZ and Westpac)=$197.9m+$75m(Working Capital)=$272.9m. Junior Debt is a $25m facility with South Canterbury Finance. Each year for >30days the Working Capital facility must reduce to zero.

SDCR<4.0 by 30-06-2010, SDCR<3.5 by 30-09-2010, SDCR< 3.00 by 31-12-2010 onwards.

Ten years on, how are we looking for FY2020? Using my 'forecast data' from post 4701

Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
=( $3.920m + $31.742m ) / $30m = 1.18 < 3.00 (good)

That is the balance date figure. Things don't look quite so good with $70m of seasonal bank finance thrown in:

Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
=( $3.920m + $31.742m + $70m ) / $30m = 3.52 > 3.00 (bad)

This suggests to me that on current EBITDA forecasts, PGW is now 'geared to the max'. But perhaps banks are OK with seasonal breaches of their covenants?

SNOOPY

[Snoopy]

This info is taken from the 'simplified disclosure prospectus' on made for the 2009 rights issue, page 45, additional numbers from p66 and page 68. There is an additional banking covenant called the "Fixed Cost Coverage Ratio" (FCCR).

FCCR>1.85 by 30-06-2010, FCCR>2.0 by 30-09-2010, FCCR>2.0 by 31-12-2010 onwards.

FCCR= [EBITDA+Lease Expenses] / [Total Interest(less interest income in cash)+Lease Expenses]

=[$18m+$29.8m]/[$37.34+$29.8m]= 0.71 (if EBITDA= $18m)
=[$45m+$29.8m]/[$37.34+$29.8m]= 1.11 (if EBITDA= $45m)

I havn't quite figured out why lease expenses are in there (can anyone help here?). But it does look like PGW are in trouble by this measuring stick as well.

Another ten years on update

FCCR= [EBITDA+Lease Expenses] / [Total Interest(less interest income in cash)+Lease Expenses]

= [$30m + $21.904m] / [$3.826m + $21.904m] = 2.0 > 2.0

The fixed cost coverage ratio just passes but with nothing to spare. More evidence that PGW is 'mortgaged to the max'

SNOOPY

[Snoopy]

I do not share Snoopy's concerns about PGW's financial position.

Fair enough. The wider the diversity of opinions, the less likely we are to 'miss something'

If anything, I think that PGW is now over-capitalized.

My numbers post the capital repayment and dividend payout :

Net debt $33m

Equity $158m

Committed bank facilities - core $50m and seasonal working capital debt $75m - provide plenty of flexibility.

EBITDA forecast of $30m - interest over will be over 10 times.

"EBITDA forecast of $30m - interest over will be over 10 times" implies a net interest bill of less than $3m. I am assuming an interest bill of higher than that: $3.826m. My post 4640 shows how I derived that figure. But I have made very assumptions in calculating that interest bill that could be wrong.

Yet the real question behind this is, what if the statistic "EBITDA/ I" is unsuitable for assessing the debt position of the company?

SNOOPY

[Snoopy]

Yet the real question behind this is, what if the statistic "EBITDA/ I" is unsuitable for assessing the debt position of the company?

This question arose nine years ago and for those that had forgotten (like me) I reproduce my questions of the time as they were answered by 'frostyboy'.

EBITDA/(Net Interest Cost) is interest cover, a ratio that makes sense.

For the life of me I still can't fathom why Lease Expenses are brought into the argument, Perhaps

(EBITDA)/( Net Interest Cost + Lease Expenses)

makes sense. But why put lease expenses in the numerator as well? A google search reveals very little information on FCCR. Has this ratio just been made up by NZ banks?

They are being more accurate in their meaning of ‘interest’ cost and you are being more conservative.

Perhaps. But EBITDA is money in, and interest and lease costs is money out. It makes sense to compare the money going in against the money going out. It does not make sense to take EBITDA (money going in) and add to that lease costs (money going out) before you compare that total with the total money going out. What is so special about these lease costs? That is the bit I don't get.

Lease costs are included in EBIT it is categorised as a operating cost when really it is a financing cost. I think that is the same with the statement of cash-flow.

In summary, the 'Fixed Cost Coverage Ratio' (FCCR):

FCCR= [EBITDA+Lease Expenses] / [Total Interest(less interest income in cash)+Lease Expenses]

is in.

EBITDA / I

is out.

SNOOPY

[winner69]

It’s all very complicated and confusing isn’t it Snoopy

I wouldn’t lose any more sleep over it though.

No doubt in future they will report ‘Lease Finance Expense’ and ‘Finance Cost’ (interest) separately so no worries.

[percy]

Just keep in mind eps will most probably be over 20% higher than Snoopy's figure.In fact maybe closer to 25% higher,which will more than cover the over 9% gross yield.[100% fully imputed].
Interim divie "not less than 8cps".

ps.I have just checked Market Screener,who have 2020 eps at 20 cents [25% above Snoopy's figure] rising to 22 cents in 2021,and the divie rising from 16 cps in 2020 to 18 cps in 2021 [a 12.5% increase].

[Snoopy]

Just keep in mind eps will most probably be over 20% higher than Snoopy's figure.In fact maybe closer to 25% higher,which will more than cover the over 9% gross yield.[100% fully imputed].
Interim divie "not less than 8cps".

My modelled earnings was 15.7cps and at $2.46 that equates to an earnings yield of 8.9% (gross). So I am not really disagreeing with you on covering the potential 9% yield. I also agree that earnings could end up being 20% higher in a few years. But they could end up being lower too. I am thinking in particular of the big banks tightening up on rural finance due to the Adrian Orr doctrine of requiring the banks to hold more capital. If brought in, that could lead to a very lean period in farmer spending.

ps.I have just checked Market Screener,who have 2020 eps at 20 cents [25% above Snoopy's figure] rising to 22 cents in 2021,and the divie rising from 16 cps in 2020 to 18 cps in 2021 [a 12.5% increase].

I see Market Screener has averaged the analysis of the one analyst that has studied this company. That analyst has rated the company as an 'underperform' with a target share price of $2.32. Not a very positive review then, even with those supposed 'growing earnings'.

It would be a fairly lazy analysis just to take a one year earnings projection figure and add 10% to project the following year. If only predicting farm outputs was that easy! Although it is interesting to see that our analyst is not predicting a 100% dividend payout ratio. That means they consider some earnings will need to be retained to develop the business going forwards. Or perhaps for another bail out of the superannuation scheme?

SNOOPY

[Snoopy]

It’s all very complicated and confusing isn’t it Snoopy

Here is my understanding of it:

EBITDA accounts for all costs except for:

1/ Net interest paid.
2/ Income tax paid.
3/ Depreciation not accounted for.
4/ Amortization not accounted for.

However, some banks regard 'lease expenses' (already deducted from EBITDA) as part of the finance costs. And finance costs should be part of the interest paid. So:

1/ We have to add the lease costs back into EBITDA to get a true measure of earnings before any finance costs are deducted.
2/ We have to add lease costs onto the rest of the interest due, to get a true measure of how much effective interest the company is paying

Not complicated at all.

No doubt in future they will report ‘Lease Finance Expense’ and ‘Finance Cost’ (interest) separately so no worries.

Not sure what you are getting at here. The 'Rental and Lease Finance Expense Costs' are part of the 'Other Operating Expenses' detailed in Note 3 in AR2019. The 'Finance Cost' is separately listed in the 'Profit & Loss Statement' under 'Net interest and finance costs' as a stand alone item. IOW they are already reported separately.

SNOOPY

[percy]

Just keep in mind eps will most probably be over 20% higher than Snoopy's figure.In fact maybe closer to 25% higher,which will more than cover the over 9% gross yield.[100% fully imputed].
Interim divie "not less than 8cps".

ps.I have just checked Market Screener,who have 2020 eps at 20 cents [25% above Snoopy's figure] rising to 22 cents in 2021,and the divie rising from 16 cps in 2020 to 18 cps in 2021 [a 12.5% increase].

Increasing eps.
Increasing fully imputed divie [over 9% gross yield].
Excellent directors/management. I like Cushing and Findlay..
Very strong balance sheet.
The above means I agree with the market, that buying PGW under $2.50 is good buying.