PGW - PGG Wrightson

[Balance]

So these hard working gents are now costing us circa $10M?
If anybody can supply me their names and addresses, I will visit them, thank them for their service, and shall we say, pension them off.
All in the interests of fiscal responsibility of course.

Dr JPG.

Profits before people.

Is it really such a huge problem as it is made up to be?

http://nzx-prod-s7fsd7f98s.s3-websit...149/328574.pdf

Go to Note 18 - Defined Benefit Liability

Points to note :

1. Liability was $21.7m in 2016, it is now $9.8m

2. The Group expects to pay $0.85 million in contributions to defined benefit plans in 2021 (2020: expected $1.01 million and paid $0.69 million). Member contributions are expected to be $0.59 million in 2021 (2020: expected $0.65 million and paid $0.83 million).

2 above has to be viewed in the context of a group with EBITDA of over $45m.

[Balance]

Equity ratio.?
Tricky.
34.1% or 44.81%..?
Big difference.
Excluding the impact of NZFRS 16 leases [ as clearly pointed out on page 6 of the annual report] it is a very healthy 44.81%
ie Total assets $354,071 and total equity $158,650
Yet under NZFRS 16 leases. 34.1%
Total assets $459,453 and total equity $156,702.
Something we will have to get used to.

PGW is a rural servicing company & a broker - so a high level of working capital will and has always be a big part of its financial position.

Have a good look at Elders in Oz and you will see the same picture :

https://www.asx.com.au/asxpdf/202005...36rh1ts7qb.pdf

$615m equity vs total assets of $1.625m = 37.8%

Anyone hearing equity inadequacy alarm bells ringing with the institutional appetite for Elders shares?

[Snow Leopard]

I am more concerned with the cash management practices at PGW than the pension scheme....

The pension scheme is not particularly a worry, every year we get a short-term re-evaluation of a long-term commitment.
The easiest and also most-sensible thing to do is to factor in the possible yearly drain into your valuation of the company and then just get on with it.

As for the cash position I will suggest that the $30M [nice round number that ] is a interest only loan for a fixed amount with a fixed repayment date.
It may not be, but would that settle your concerns.

May your cash flow always be bountiful.

[Snoopy]

The pension scheme is not particularly a worry, every year we get a short-term re-evaluation of a long-term commitment.

Quite right. But look at what the short term revaluations have been. From the 'Statement of Consolidated Income' for each respective year:

Year	Re-measurements of Defined Benefit Liability {A}	Total Comprehensive Income {B}	Defined Benefit Liability Proportion of NPAT {A}/{B}
FY2016	($10.666)	$35.820m	-30%
FY2017	$3.121m	$44.646m	+7.0%
FY2018	$2.746m	$27.080m	+10%
FY2019	($6.101m)	$124.948m	-4.9%
FY2020	($3.942m)	$5.002m	-79%

From a minor adjustment to profit (debatable), last years adjustment was almost equivalent to the whole profit!

The easiest and also most-sensible thing to do is to factor in the possible yearly drain into your valuation of the company and then just get on with it.

New Rule of Thumb: Take Expected Profit from normal operations and halve it! Not really an adjustment you can dismiss.

SNOOPY

[Snoopy]

Snoopy has been writing doom & gloom about PGW for over a year.

I would be selling the hell out of the stock if I write the same doom and gloom!

Yet he claims to still be a shareholder in PGW?

DYOR.

Balance has been widely promoting a potential formal offer for PGW at $3 to $3.30 per share.

BAIC and Agria could reach a deal any day. As mentioned before, Agria is delivering control to BAIC with its 44% so expect at least $3.

I warned readers at the time I believed this to be unrealistically optimistic. Since that time the share price of PGW has fallen by 20%. That was a pretty good get out of jail call I made to traders who listened. Balance may yet get the last laugh. A takeover offer may come. But I am picking if it does happen it will be pitched at $2.75 and no more.

Observations like this from Balance....

https://www.nzherald.co.nz/the-count...ectid=12342319

Real estate side looks like doing well post the lockdown.

.....were well wide of the mark. Post result it became clear that PGW Real Estate staff were only surviving on government subsides. The complete opposite of 'doing well'.

I am a long term holder in PGW, since the beginning in fact, and I held Wrightsons before that. I see a good future for PGW, but not an outrageously good future. Since the capital return I have purchased PGW shares in four tranches at: $2.46, $2.45, $2.38 and $2.12. These purchases were made at points where I considered the share 'good value'. I have not changed my view on these 'price purchase points', despite the emergence of Covid-19 and the cutting of the dividend, (the potential for the loss of the dividend being part of my pre-purchase valuation process).

I am a happy holder of the shares I have bought, but will not be seeking to increase my holdings at $2.60, a price level I consider elevated, rather than obviously overvalued. I don't believe in investing in a share just because you are convinced a takeover is likely to happen. The problem with that logic is that you can convince yourself that almost any share price looks like a bargain. From an operational perspective at PGW, there are very uncertain times ahead.

SNOOPY

[Snoopy]

This one caught out more than one company, but the cost of putting it right for PGW was nevertheless severe! At least this faux pas was not hidden from shareholders. It was up front in the profit and loss statement. From AR2018, Note 20 explains:

-----

Holidays Act 2003 - Remediation Costs

During the period the Group recognised an $8.06 million provision for remediation costs of historical liabilities under the Holidays Act 2003. The Group has engaged the services of an external advisor and a law firm to assist in determining the level of the provision. Work on determining the final liability is not yet complete. The provision is included within Employee entitlements above, and represents the Management’s best estimate of the remediation costs.

----

Note 20 goes on to list employee entitlements rising from $31.163m at EOFY2018 from $22.946m at EOFY2017, a rise in value of $8.217m, most likely almost entirely due to the Holiday's Act debacle.

Then one year later, from note 18 in AR2019, we learn:

-----

The Group has now completed the remediation work and has made remediation payments to current staff and those terminated staff for which the Group has been able to make contact with. Following these payments the remaining provision has been released apart from an amount of $1.20 million which continues to be held in respect of terminated employees for which the Group is yet to make contact with.

------

From the 'Statement of Profit and Loss' for FY2019, the amount written back was $2.303m. So the original provisioning was conservatively generous and the final capital used to sort out this sorry affair was:

$8.060m - $2.303m = $5.757m

Nevertheless that was a not inconsiderable capital ejection that otherwise might have been available to shore up the capital position of the company.

At EOFY2019, $16.821m was the amount listed under 'Employee Entitlements' under 'Trade and Other Payables' at EOFY2019. This represents 'Employee Entitlements' from the NZ based rural retail and livestock operation only, the 'Employee Entitlements' from the seed division having been hived off. If we take the FY2018 'Employee Entitlements' for the whole operation, including seeds, and subtract the holiday act entitlements accounted for at the time -and today's remaining total- we get:

$31.163m - $16.821m - $8.060m = $6.282m

This figure gives some indication of the 'Employee Entitlements' that might have been transferred to the 'Seed Division' after its sale.

Time for another episode in the much anticipated, controversial, yet wildly popular 'Shortage of Capital' series. This time the 'Trade & Other Payables' note throws up a brand new debt: the 'Make Right' provision for leased properties of $2.680m.

Like others I am still trying to come 'fully to grips' with the new standard for treating leased assets. $2.690m is to be "amortized over the life of the right-of-use assets". This $2.690m provision seems to be listed simply as part of the unspecified 'long term provision' in the balance sheet. 'Making good a property' is something that would normally happen at lease end. So it seems odd that the accounting treatment is to gradually write this figure off. I would have thought it would make more sense to keep this debt on the balance sheet as a 'lump sum', as a reminder that on lease end, this 'lump sum' must be spent. It is clear to me that this 'lump sum' must remain in a PGW bank account until it needs to be spent, regardless of what accounting conventions demand. This means it must end up as 'off balance sheet capital', ready to spend on termination of the lease. It is a confirmed 'future expense' that gradually becomes invisible to shareholders as it is amortized. When the lease is terminated, and the premises is vacated, then the accounts for that year will show next to nothing of the 'put back' refurbishment expenses. That doesn't seem right to me. But the upside of this policy is that PGW will have up to $2.690m of 'off balance sheet capital' to call on in an emergency. And that will have a positive, albeit transient, effect on any 'Shortage of capital' going forwards.

The above is my interpretation of what is going on. I hope if I am wrong one of the accounting gurus on this is forum will correct me!

SNOOPY

[Snoopy]

Equity ratio.?
Tricky.
34.1% or 44.81%..?
Big difference.
Excluding the impact of NZFRS 16 leases [ as clearly pointed out on page 6 of the annual report] it is a very healthy 44.81%

	Total Assets	Total Equity	Equity ratio
Pre NZFRS 16	$158,650m	$354,071	44.81%
Post NZFRS 16	$156,702m	$459,423	34.1%

Something we will have to get used to.

A horrifying result of post NZ-IFRS16 corruption!

But seriously, something strange is going on here. I had thought when NZ-IFRS16 was adopted two things were going to happen:

1/ A new asset was going to appear on the balance sheet: "A right of use of Leased Asset' entry. This would then be offset by a new liability incorporated within
2/ 'Lease Liabilities'

Then as the company continued to operate over the years, leases would be paid each year (thus reducing lease liabilities) and at the same time the 'Right of Use Asset' would be reduced in step. Thus 'Right of Use Assets' and 'Lease Liabilities' would shrink in tandem, causing minimal net change in equity or liability ratios. This seems to be confirmed in Note 15 of the accounts:

Right of Use Assets: $104.625m
Lease Liabilities: $106.904m

I was struggling to understand how a change in balance sheet presentation of the same cashflows could cause the equity ratio of PGW to shrink by ten points! The flaw in my thinking was that causing minimal net change in asset or liability values does not mean that there will be minimal net change in equity or liability ratios.

As illustrated on page 4 of the stand alone accounts for FY2020:

	Old Total Assets	Incremental Assets	New Total Assets
Pre NZFRS 16	$354.071m
Post NZFRS 16		$105.382m	$459.453m

	Old Total Liabilities	Incremental Liabilities	New Total Liabilities
Pre NZFRS 16	$195.421m
Post NZFRS 16		$107.330m	$302.751m

The company equity is the difference between the assets and liabilities at any time. And if the assets and liabilities go up by roughly the same amount then the difference between those two numbers remains roughly the same. Thus with NZ IFRS16, we have the numerator of the equity ratio - the company shareholder equity- staying about the same BUT the denominator of the equity ratio - the company assets - going up significantly. It stands to reason therefore that in post NZ IFRS16 circumstances, with equity the same and assets up, the equity ratio must go down, even though nothing substantially about the company has changed. Weird but true!.

SNOOPY

[percy]

A horrifying result of post NZFRS16 corruption!

But seriously, something strange is going on here. I thought when NZFRS16 was adopted two things were going to happen:

1/ A new asset was going to appear on the balance sheet: "A right of use of Leased Asset' entry. This would then be offset by a new liability incorporated within
2/ 'Lease Liabilities'

Then as the company continued to operate over the years leases would be paid each year (thus reducing lease liabilities) and at the same time the 'Right of Use Asset' would be reduced in step. Thus 'Right of Use Assets' and 'Lease Liabilities' would shrink in tandem, causing minimal net change in equity or liability ratios. I am struggling to understand why a change in balance sheet presentation of the same costs can cause the equity ratio of PGW to shrink by ten points!

SNOOPY

I think I/we have often not thought enough about leases and their liability .
A retailer like Michael Hill/SCY etc who does not own any property, and has long leases, have/had a huge liability off balance sheet.
So it means they are now out in the open.
How I/we account for them,as in the case of PGW I am not sure.
Just have to compare Apples with Apples,yet keeping in mind those leases are a huge liability for some companies.
In the case of SCY, it looks as though the rump of lease liabilities were left with SCY .From memory about $6mil ,which meant some landlords will be paid leaving nothing for shareholders.Yet nta was stated at over 70cps.

[nztx]

A horrifying result of post NZ-IFRS16 corruption!

But seriously, something strange is going on here. I thought when NZ-IFRS16 was adopted two things were going to happen:

1/ A new asset was going to appear on the balance sheet: "A right of use of Leased Asset' entry. This would then be offset by a new liability incorporated within
2/ 'Lease Liabilities'

Then as the company continued to operate over the years leases would be paid each year (thus reducing lease liabilities) and at the same time the 'Right of Use Asset' would be reduced in step. Thus 'Right of Use Assets' and 'Lease Liabilities' would shrink in tandem, causing minimal net change in equity or liability ratios. This seems to be confirmed in Note 15 of the accounts:

Right of Use Assets: $104.625m
Lease Liabilities: $106.904m

I am struggling to understand why a change in balance sheet presentation of the same costs can cause the equity ratio of PGW to shrink by ten points!

The answer of course is that if before the NZ IFRS16 standard change, the assets and liabilities of PGW had been in balance, then the equity ratio would not have changed with the adoption of NZ IFRS16! But assets and liabilities were not in balance at PGW. So, as illustrated on page 4 of the stand alone accounts for FY2020:



SNOOPY

Check out the TLL Transport Logistics thread

Something similar has happened with the new Bean Counter's fanciful Lease Assets Add-ons on both sides there with relatively little change to SHF between most recent periods reported.

As was expected the % Equity Ratio has been shot to hell there too, with hefty Capital Equipment Leases I guess thrown into the mix

[Balance]

Check out the TLL Transport Logistics thread

Something similar has happened with the new Bean Counter's fanciful Lease Assets Add-ons on both sides there with relatively little change to SHF between most recent periods reported.

As was expected the % Equity Ratio has been shot to hell there too, with hefty Capital Equipment Leases I guess thrown into the mix

Here's another : The Warehouse

http://nzx-prod-s7fsd7f98s.s3-websit...034/318878.pdf

Equity ratio pre NZFRS 16 48.9%

Equity ratio post NZFRS 16 22.5%

Implications are worth thinking carefully about.