PGW - PGG Wrightson

[Steve]

Good analysis to answer your own question! PS: Thanks for sharing...

[Snoopy]

Good analysis to answer your own question! PS: Thanks for sharing...

Thanks Steve. It is sometimes hard to keep track of these multifaceted companies in an objective way. Some people go to a PGW store and judge the total prospects of the company based on that experience. While that 'on the ground' research is relevant, it is important you do not judge a company's ability to manage a wholesale wool marketing co-operative, by the stock of gumboots on the shelves.

To go back to the PGW, NZS relationship:

(PGW holding)= 0.09568(NZS)

In practical terms a 10c rise in the price of NZS translates to a 1c rise in the value of PGW.

SNOOPY

[COLIN]

I have been watching PGW for a while now, and recently bought some PGWIZB (for leverage). Norgate knows where he is going - he's sorting out wool; he gets fat fees for managing Uruguay; he's no doubt got constructive thoughts on meat; and today's Fonterra announcement must also be a positive.
Another useful means of entry is via PGC, which is selling on a much lower PE; their main investment is of course MARAC, but they still hold a significant slice of PGW. (And MARAC is one of the three top finance companies - UDC and SCF being the other two - that will survive and prosper into the future. The PGC share price is being unduly held down by the prevailing pessimism towards the finance company sector, but it looks to me as if it is about to bounce off its bottom.)

[Snoopy]

I have been watching PGW for a while now, and recently bought some PGWIZB (for leverage). Norgate knows where he is going - he's sorting out wool; he gets fat fees for managing Uruguay; he's no doubt got constructive thoughts on meat; and today's Fonterra announcement must also be a positive.

Thanks for identifying that Warrant for me Colin. I see it is an ABN Amro 'rolling installment warrant' with a $1 call due on 28th March 1989. I presume that means for a small fee, as we get near excise date, you can 'roll it over' rather than stump up with the full dollar.

PGWIZB hit $1.43 on Friday, which is equivalent to a share price of $2.42, a premium of the PGW closing price ($2.31) of 5.2%. I also see you have to take the dividend cash buyback option, so you cannot retain your bonus shares.

Norgate has made his vote of confidence in these products but only to the extent of 4000 units. 4000 units is milk money to a guy like Norgate. I think Norgate is using the PGWIZB warrants to put some funds into his kid's family trust in a cost effective way. If he loses his bet and the share price is less than $2.35 on 28-03-2009, then the loss isn't great to someone like him. If he wins then he manages to legitimately pay less gift duty.

I have confidence in Norgate. But I'm not sure that 'the market' will mirror that confidence by the 28-03-2009 excise date. For that reason, plus the tax efficiency of the bonus shares I intend to stay in the head shares only. Good luck to you though Colin.

Another useful means of entry is via PGC, which is selling on a much lower PE; their main investment is of course MARAC, but they still hold a significant slice of PGW. (And MARAC is one of the three top finance companies - UDC and SCF being the other two - that will survive and prosper into the future. The PGC share price is being unduly held down by the prevailing pessimism towards the finance company sector, but it looks to me as if it is about to bounce off its bottom.)

Yes I agree. The reason I wouldn't buy PGC myself is that I have a significant chunk of funds tied up with Aussie banks. And I don't want to become (more) overexposed to the finance sector.

Hey Colin, what is the 'equation' for PGC shares in terms of PGW? By that I mean what does a 10c rise in PGW share price (say) do to the underlying value of PGC? If you don't know post the number of PGC shares on issue, the number of PGW shares on issue and the percentage holding that PGC has in PGW and I will work it out.

SNOOPY

[COLIN]

Thanks for identifying that Warrant for me Colin. I see it is an ABN Amro 'rolling installment warrant' with a $1 call due on 28th March 1989. I presume that means for a small fee, as we get near excise date, you can 'roll it over' rather than stump up with the full dollar.

PGWIZB hit $1.43 on Friday, which is equivalent to a share price of $2.42, a premium of the PGW closing price ($2.31) of 5.2%. I also see you have to take the dividend cash buyback option, so you cannot retain your bonus shares.

Norgate has made his vote of confidence in these products but only to the extent of 4000 units. 4000 units is milk money to a guy like Norgate. I think Norgate is using the PGWIZB warrants to put some funds into his kid's family trust in a cost effective way. If he loses his bet and the share price is less than $2.35 on 28-03-2009, then the loss isn't great to someone like him. If he wins then he manages to legitimately pay less gift duty.

I have confidence in Norgate. But I'm not sure that 'the market' will mirror that confidence by the 28-03-2009 excise date. For that reason, plus the tax efficiency of the bonus shares I intend to stay in the head shares only. Good luck to you though Colin.



Yes I agree. The reason I wouldn't buy PGC myself is that I have a significant chunk of funds tied up with Aussie banks. And I don't want to become (more) overexposed to the finance sector.

Hey Colin, what is the 'equation' for PGC shares in terms of PGW? By that I mean what does a 10c rise in PGW share price (say) do to the underlying value of PGC? If you don't know post the number of PGC shares on issue, the number of PGW shares on issue and the percentage holding that PGC has in PGW and I will work it out.

SNOOPY

Snoopy: Firstly, a small correction to your first para - date should be 28/3/2009 of course. (You have correctly stated this later).

PGC has 98m shares on issue, PGW 289m. PGC holds 22% of PGW. Thanks for your offer to do the calcs!

[Steve]

I have also considering PGC as opposed to PGW because PGC allows that little bit moew in the way of diversification.

[Snoopy]

PGC has 98m shares on issue, PGW 289m. PGC holds 22% of PGW. Thanks for your offer to do the calcs!

OK, PGW has more shares on issue than PGC. So if PGC owned *all* the shares in PGW then each PGC share would represent nearly 3 PGW shares (or 289m/98m= 2.95 to be exact). However, PGC does not own all the PGW shares. It only owns 22% of them. So the expression becomes:

PGC:A= 0.22(289m)/(98m)PGW = 0.65PGW

where 'PGC:A' represents the 'agricultural' component of PGC - in other words their shareholding in PGW. That means for every 10c rise in the price of PGW, we can expect the price of PGC to increase by 6.5c.

As another way of looking at things, if there are 289m PGW shares on issue, and the share price is $2.31, that gives PGW a market capitalisation of:

$2.31 x 289m= $668m

22% of that (the PGC holding) is:

0.22 x $668m= $147m

There are 98m PGC shares on issue, so the PGC:A component is:

$147m/98m = $1.50 per share

The PGC share price is $3.45. So the market valuation of the rest of PGC (principally Marac) is:

$3.45-$1.50= $1.95

Whether you think that is 'value' or not depends on the future earnings of Marac.

SNOOPY

[COLIN]

OK, PGW has more shares on issue than PGC. So if PGC owned *all* the shares in PGW then each PGC share would represent nearly 3 PGW shares (or 289m/98m= 2.95 to be exact). However, PGC does not own all the PGW shares. It only owns 22% of them. So the expression becomes:

PGC:A= 0.22(289m)/(98m)PGW = 0.65PGW

where 'PGC:A' represents the 'agricultural' component of PGC - in other words their shareholding in PGW. That means for every 10c rise in the price of PGW, we can expect the price of PGC to increase by 6.5c.

As another way of looking at things, if there are 289m PGW shares on issue, and the share price is $2.31, that gives PGW a market capitalisation of:

$2.31 x 289m= $668m

22% of that (the PGC holding) is:

0.22 x $668m= $147m

There are 98m PGC shares on issue, so the PGC:A component is:

$147m/98m = $1.50 per share

The PGC share price is $3.45. So the market valuation of the rest of PGC (principally Marac) is:

$3.45-$1.50= $1.95

Whether you think that is 'value' or not depends on the future earnings of Marac.

SNOOPY

Thanks, Snoopy. Knowing that you are a super analyst I accept your calculations and am greatly cheered by them. The market is applying an unduly harsh discount to PGC in relation to the value of its investment in MARAC.
For FY2007 PGC achieved a return of 15.8% (Net operating profit [equates to NPAT] of $26.5m) on its stated $168m investment in MARAC (PGC total net operating profit was $30.6m). The percentage contribution from PGW will no doubt be greater this year, but MARAC is weathering the current finance company storm in great style - latest half-year profit was up 11% over the previous comparable period, total receivables rose 14% during the six months, reinvestment rates remain within normal historical ranges, it has one of the rare (for the sector) Investment Grade credit ratings from Standard & Poors, has a $480m syndicated bank facility with NZ's five major banks, and a securitisation facility of around $300m. Apart from the ANZ-owned UDC and South Canterbury Finance, you won't find another NZ finance company as well-placed as MARAC.
Using your $1-95 attribution of per-share value, this places a market cap of (98m X $1-95) = $191m on MARAC, and a historical P/E ratio of 7.2 - not bad, even in today's conditions, given that they are still on a good profit growth path.
Would be tempted to buy a few more PGC, were it not for the fact that I have to garner cash for conversion of my NZO options.

[Snoopy]

I have been watching PGW for a while now, and recently bought some PGWIZB (for leverage).

Norgate knows where he is going - he gets fat fees for managing Uruguay

I wonder how many have taken the trouble to find out how much PGW really makes from Uruguay?

The PGW half year report 2007 is telling. On page 1 we find:

* NZFSU Performance Fee (based on a $1.50 share price) - $8m
* NZFSU share price appreciation (based on $1.50 share price) - $9m

We know all about the second bit. That is based around the NZS part farm ownership. And that has been covered by the equation I previously derived.

"To go back to the PGW, NZS relationship:

(PGW holding)= 0.09568(NZS)

In practical terms a 10c rise in the price of NZS translates to a 1c rise in the value of PGW."

I want to go back to the first bit. For that I need to go back to the original NZFSU prospectus. From page 17 of the original NZFSU prospectus:

"The Manager will be paid a Management fee of 1.5% per annum on the gross asset value of the company until 30th June 2008, thereafter reducing to 1.0% per annum. The gross asset value of the company will be calculated by the manager in accordance with generally accepted accounting standards (based on the market value of farm assets which are subject to revaluation each year)."

As at 30th June 2007, the annual reporting date for NZS, 26,523ha had been purchased and these agricultural assets are listed in the NZS balance sheet at $NZ72.4m. 1.5% of that figure amounts to:

(0.015)($72.4m)= $1.09m (1)

The NZFSU prospectus continues:

"In addition the manager will be paid a performance fee calculated as 20% of the amount by which share price growth and gross distributions exceeds 10% per annum compounded. An adjustment will be made to ensure that total performance fees paid to the manager over time are not enhanced by share price volatility. Share price growth is calculated as the percentage change in a 12 month period in the volume weighted average price of the shares for the quarter to 30th June."

That means we won't know what the final performance fee is until 30th June. However, let's use an $1.50 NZS share price figure (as assumed in the PGW half year report). The original shares were subscribed to at $1. A 10% premium on that price would be $1.10. So the bonus payment on a per share basis on the share price gain would be:

0.2[$1.50-$1.10]= 8cps (that's per NZS share held.)

In that original tranche, PGW took up 17.934m shares. So that means the bonus payment due will be:

$0.08 x 17.9= $NZ1.4m (2)

Adding up (1) and (2) I get a total performance fee of $NZ2.4m, which is well short of the $NZ8m that PGW claim they are going to get. I don't think I have made a mistake in those calcs, so what is going on? Perhaps the performance fee gain has been taken on the price of the original 50c warrants, which effectively rose in price to $1?

If that was done the fee can be recalculated as:

0.2[$1.00-$0.55]= 9cps

$0.09 x 17.9= $1.6m

Still not nearly enough. So where does the $8m forecast performance fee come from? Anyone?

SNOOPY

discl: hold PGW, NZS

[COLIN]

I wonder how many have taken the trouble to find out how much PGW really makes from Uruguay?

The PGW half year report 2007 is telling. On page 1 we find:

* NZFSU Performance Fee (based on a $1.50 share price) - $8m
* NZFSU share price appreciation (based on $1.50 share price) - $9m

We know all about the second bit. That is based around the NZS part farm ownership. And that has been covered by the equation I previously derived.

"To go back to the PGW, NZS relationship:

(PGW holding)= 0.09568(NZS)

In practical terms a 10c rise in the price of NZS translates to a 1c rise in the value of PGW."

I want to go back to the first bit. For that I need to go back to the original NZFSU prospectus. From page 17 of the original NZFSU prospectus:

"The Manager will be paid a Management fee of 1.5% per annum on the gross asset value of the company until 30th June 2008, thereafter reducing to 1.0% per annum. The gross asset value of the company will be calculated by the manager in accordance with generally accepted accounting standards (based on the market value of farm assets which are subject to revaluation each year)."

As at 30th June 2007, the annual reporting date for NZS, 26,523ha had been purchased and these agricultural assets are listed in the NZS balance sheet at $NZ72.4m. 1.5% of that figure amounts to:

(0.015)($72.4m)= $1.09m (1)

The NZFSU prospectus continues:

"In addition the manager will be paid a performance fee calculated as 20% of the amount by which share price growth and gross distributions exceeds 10% per annum compounded. An adjustment will be made to ensure that total performance fees paid to the manager over time are not enhanced by share price volatility. Share price growth is calculated as the percentage change in a 12 month period in the volume weighted average price of the shares for the quarter to 30th June."

That means we won't know what the final performance fee is until 30th June. However, let's use an $1.50 NZS share price figure (as assumed in the PGW half year report). The original shares were subscribed to at $1. A 10% premium on that price would be $1.10. So the bonus payment on a per share basis on the share price gain would be:

0.2[$1.50-$1.10]= 8cps (that's per NZS share held.)

In that original tranche, PGW took up 17.934m shares. So that means the bonus payment due will be:

$0.08 x 17.9= $NZ1.4m (2)

Adding up (1) and (2) I get a total performance fee of $NZ2.4m, which is well short of the $NZ8m that PGW claim they are going to get. I don't think I have made a mistake in those calcs, so what is going on? Perhaps the performance fee gain has been taken on the price of the original 50c warrants, which effectively rose in price to $1?

If that was done the fee can be recalculated as:

0.2[$1.00-$0.55]= 9cps

$0.09 x 17.9= $1.6m

Still not nearly enough. So where does the $8m forecast performance fee come from? Anyone?

SNOOPY

discl: hold PGW, NZS

Snoopy - I'm in a bit of a hurry (must tackle my tax returns today) and I don't have printed copies of PGW or NZS Accounts, but wouldn't the Performance Fee be calculated on ALL the NZS shares, i.e. not just those held by PGW?

Regards.