PGW - PGG Wrightson

[Roberto the Brickie]

I spoke to a friend in the Commercial Real Estate business who said that PGW were looking to sublease part of their new head office. They have not been able to find a subtenant and have instead moved staff from other offices into this site. Therefore I suspect that the accountants at PGW would have taken an impairment on the part of the new head office they were looking to subtenant in the 2019 financial statements. Not having fulfilled this plan and having staff move in would reverse the impairment provision It would be useful to the readers of financial statements if each site they impaired was shown in full. I would also prefer the accounting team were focusing on cash management $17 million cash at balance date rather than finding ways to manipulate profits through fancy impairment provisioning.

[winner69]

I spoke to a friend in the Commercial Real Estate business who said that PGW were looking to sublease part of their new head office. They have not been able to find a subtenant and have instead moved staff from other offices into this site. Therefore I suspect that the accountants at PGW would have taken an impairment on the part of the new head office they were looking to subtenant in the 2019 financial statements. Not having fulfilled this plan and having staff move in would reverse the impairment provision It would be useful to the readers of financial statements if each site they impaired was shown in full. I would also prefer the accounting team were focusing on cash management $17 million cash at balance date rather than finding ways to manipulate profits through fancy impairment provisioning.

That $18m is really bugging you eh Roberto

Probably only a snap shot at a point in time .....working capital of a seasonal nature

You concerned about the $45m in GO livestock receivables?

[Balance]

That $18m is really bugging you eh Roberto

Probably only a snap shot at a point in time .....working capital of a seasonal nature

You concerned about the $45m in GO livestock receivables?

As my ex-boss kept reminding us when we were evaluating investment banking proposals - don’t lose focus on the big picture!

What’s the big picture here?

BAIC, China, Agria - they will determine what happens next with PGW.

[Roberto the Brickie]

Yes I have to say Winner that the $17 million is really bugging me. PGW said they had renegotiated their banking arrangements after the sale of the Seeds business. Hopefully they would have organised a call facility for short term borrowing and set tranches for the longer term borrowings. So whoever is responsible for the daily cash management at PGW did not plan to have a spare $17 million in cash at a reporting date while having short term borrowings of $30 million. I know commentators here have said this should not be a problem and is either seasonal or poor timing of a tranche. I can partially accept this, but for it occur on a day that they airing their underpants to the world to see, in my mind smacks of incompetence.
Not as concerned about the $45 million in GO money as this would be spread across many farmers and the risk of them all defaulting is not that great. If they do all default then wider New Zealand has got some rather serious problems.

[Snoopy]

Yes I have to say Winner that the $17 million is really bugging me. PGW said they had renegotiated their banking arrangements after the sale of the Seeds business. Hopefully they would have organised a call facility for short term borrowing and set tranches for the longer term borrowings. So whoever is responsible for the daily cash management at PGW did not plan to have a spare $17 million in cash at a reporting date while having short term borrowings of $30 million. I know commentators here have said this should not be a problem and is either seasonal or poor timing of a tranche. I can partially accept this, but for it occur on a day that they airing their underpants to the world to see, in my mind smacks of incompetence.

PGW may have an offset arrangement where 'cash on the books' is offset against the 'short term loans' when calculating interest rates. That would address your concerns Roberto. But whether they have or not, we now have enough information (with some limitations) to calculate the interest rate paid over FY2020. So let's do that.

The problem with estimating an 'interest rate equivalent paid' for the PGW debt is that company debt is quite seasonal. Shareholders were presented with a picture of this in Figure 6.1 on page 34 of the "PGG Wrightson Independent Report, (outlining the case for divesting the seed division, and dated October 2018). Disclosure to this level of detail is not available in the annual report. But we can make a 'triangulated approximation' to the variability of the debt via three data points that are in the annual and half year reports:

1/&2/ End of year net debt position of the current year and the previous year AND
3/ The half year net debt position in between.

In this instance I have inserted a fourth reference date data point of 14th August 2019.

	EOFY2020	EOHY2020	14 Aug 2019	EOFY2019
Cash	$16.868m	$0.684m	$0m	$210.491m
less Short Term Debt	$30.000m	$40.000m	$6,189m	$2.680m
less Long Term Debt	$20.000m	$20.000m	$20.000m	$0m
equals Total Net Debt	$33.132m	$59.316m	$26.189m	$(207.811)m
Half Year Increment from EOFY		+$NMm
Half Year Increment from 24th Aug		+$33.127m

The 14th August date was the date of the capital repayment of $234m to shareholders. The figures in the 14th August column are my estimates. Those estimates have been derived from the EOFY2019 figures by subtracting that $234m from those previous totals.

From this table we can now imagine three funding periods. The first up until 24th August of 45 days where no interest is paid, because there was no debt until the capital repayment was done. A second period of 139 days from 24th August to 30th December where debt ramps up in order to finance the growing season. Finally a third period of 181 days running down to 30th June 2020 where the debt taken on to fund the seasonal business is repaid.

The weighted average debt estimated over the whole year of all these three periods added together may be calculated as follows:

45/365 x $0m + 139/365 x ($26.189m+$59.316m)/2 +181/365 x($59.316m-$33.132m)/2 = $0m + $16.281m + $22.922m = $39.203m

From note 5 of the FY2020 annual accounts the interest paid and the facility fees to maintain those loans add up to $1.606m.

We can now work out the equivalent interest rate paid by PGW over FY2020.

$1.606m / $39.203nm = 4.1%

On 15th October 2019, in my post 4369 I wrote

CEO Stephen Guerin has negotiated the new banking facilities so that there is an incremental seasonal funding amounts to $70m. Considering the business has now been roughly 'half sized', this seems a lot, although I guess it is prudent to allow for less than ideal weather circumstances. The reduction in interest rate paid also announced must be meaningful for Stephen Guerin to crow about it. A 10% reduction might be more in line with what is happening in the markets as a matter of course. I am picking Stephen has got a 20% reduction. That would take PGW net interest rates down to: 0.8 x 7% = 5.6% for FY2020.

I am very happy that Steve Guerin and the management team has apparently negotiated an interest rate deal at a rather more competitive rate that I had thought likely. Well done!

SNOOPY

[sb9]

Bought more last week - thanks Snoopy! 

Looks like Chair Mr Finlay did the same as you...

[Balance]

Looks like Chair Mr Finlay did the same as you...

http://nzx-prod-s7fsd7f98s.s3-websit...582/329172.pdf

IMO, stock is underwritten by BAIC at $2.75 so $2.60 is good buying.

[Snoopy]

Parts 2 to 8 of this series have outlined the capital that has disappeared in 'extraordinary circumstances' since the sale of the seed division was contemplated. All of these events were left out of the Korda Mentha analysis, probably because they were not easy to cost out with accuracy. But now events have unfolded, the 'extra capital bill' has come in.

	FY2018 to FY2019
Part 2: Cash to Fix Pension Plan Deficit (All Other Income)	$20.677m
Part 3: Corporate Restructuring	$3.020m
Part 4: Holiday Back Pay Reassessment	$5.757m
Part 5: Impaired Lease Losses	$1.880m
Part 6: Reduction in Customer Deposits	$2.547m
Part 7: Unusual Property Plant and Equipment Impairment	$3.330m
Part 8: Unusual Increase in Bad Debts (Other Income $0.450)	$0.993m
Total	$38.204m

Here at last in one place is a tally of capital that shareholders have lost since the whole seed sale deal was mooted.

Observe that the total capital lost ( $38m) exceeds the base bank debt of circa $30m at balance date for PGW today. If none of these losses had occurred, then PGW could be debt free now (at EOFY balance date anyway, we know that working capital of up to $70m is needed during the year). The circa $30m actual core debt, which may yet balloon out to $50, represents a perpetual interest bill to shareholders, at an interest rate of 5% (say) of:

$30m x 0.05 = $1.5m per year

This 'perpetual bill' is something that the Korda Mentha report didn't tell any shareholders about!

My previous summary post had the objective of showing the cumulative damage that activity, outside the continuing practices of the core business has done to the balance sheet. There was an opportunity to fix any debt issues with the sale of the seed division. However, what emerged out of that sale, the entity that I call 'PGW Rural Rump', still carries significant debt. Management are obviously not unhappy about this because they chose this capital structure. Rather than rehash the tale of where the lost capital went, I think it is more important to look at the 'non-core' capital changes since the last balance date. It is these charges that will help us to see how far PGWRR has deviated from its post restructure capital position, which we have to assume management considered 'ideal'.

Parts 2 to 8 of this series have outlined the capital that has disappeared in 'extraordinary circumstances' since the sale of the seed division was contemplated, and the capital that has disappeared over the current year. It is the latter that I wish to concentrate on in this table, as the numbers in the table here are what is moving PGWRR away from its 'ideal' post seed division separation position. The exception to this is the pension plan deficit that has accumulated over many years, and is a total 'worry figure' the IFRS standards people consider has not gone away.

	Over FY2020
Part 2: Incremental Capital Pension Plan Deficit (All Other Income)	$3.955m
Part 3: Unpaid balance of government wage subsidy	$0.958m
Part 4: End of Lease Make Right Provision	($2.680m)
Part 5: Net Impaired Water Force Lease Losses	$0.850m
Part 6: Gain in Customer Deposits	($0.432m)
Part 7: Net Rationalisation of Stockyard Property Plant and Equipment	($0.253m)
Part 8: Increase in Bad Debt Provision above Bad Debt Expense	$0.196m
Total	$2.202m

Notes

Item 3/ The balance of the wage subsidy not paid out is supporting PGW's balance sheet. Once this has been paid out to staff, PGW will need to borrow this amount to keep funding the assets on the books. Next year there is unlikely to be a wage subsidy, as PGW stands on its own in a post Covid-19 environment (fingers crossed!). So next year this amount will have to be added to the company borrowings.

Item 4/ This 'make right' amount is capital needed to fix up incidental damage to a leased property at the end of a lease period. The make right expense is amortized over the length of the lease. But actually the money does not have to be paid out until PGW 'moves out' and the make right work is done. Therefore I see 'make right' capital as off balance sheet capital that could be utilized in a cashflow emergency. An asset PGW has when the books say it is not there.

Item 5/ Netting calculation: $1.40m - $2.25m = -$0.85m

Item 6/ Netting calculation: $1.474m - $1.042m = $0.432m

Item 7/ Netting calculation: $0.66m - $0.41 = $0.25m

Item 8/ Netting calculation: -$0. 147m - $0.343m = -$0.196m

In my opinion PGW has a new net $2.202m worth of 'hidden debt' that it needs to clean up.

SNOOPY

[Snoopy]

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

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 (1)	$9.362m (2)	$3.826m (3)	$4.350m (4)	$11.187m	$0.200m (5)	$10.987m	75.484m	14.6c

(1) 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: $24.425m + $2.5m + $1.8m = $28.725m

(2) AR2019 p31

(3) Interest is calculated on the new capital structure of PGWRR. As at May 19th 2019 the total bank net debt post capital return was estimated to be: $3.920m + $31.742m = $35.662m. I have taken this figure as indicative of the 'low season debt' for FY2019. PGW have stated that they plan to borrow up to an additional $70m in working capital during the year. I will therefore estimate the 'high season debt' as: $35.662m +$70.000m = $105.662m. The average incremental debt I am modelling for the year is therefore:

$105.662m / $35.662m = 2.96 = +196%

Using a linear triangulated debt over time distribution model to adjust for the average debt increase over the entire year, the average increase in incremental debt is only half this: +98%. Throw in my indicative borrowing rate for the year of 5.6% (my post 4640) and I estimate the interest bill for the year would have been:

0.056x [$31.742m+$3.920m-$1.160m] x 1.98= $3.826m

(4) Income tax is calculated at a rate of 28%: 0.28( $28.725m - $9.362m - $3.826m ) = $4.350m

(5) AR2019 p55




PGW 'Rural Rump' for FY2020

	EBITDA	less D&A	less Net Interest	less Income Tax	equals NPAT	add Property devaluation	equals Adjusted NPAT {A}	No. Shares on Issue {B}	eps {A}/{B}
FY2020	$23.446m (1)	$9.303m(2)	$1.906m (3)	$3.426m (4)	$8.811m	$0.200m (5)	$9.011m	75.484m	11.9c

(1) AR2020 "Impact of NZIFRS Leases"

(2) Depreciation & Amortisation: ($5.113m + $0.181m -$60m) + ($4.086m - $0.017m) = $9.303m

(3) Interest is calculated on the new capital structure of PGWRR.

a/ As at June 30th 2020 the total bank net debt was: $30.000m + $20.000m -$16.868m = $33.132m.
b/ As at December 31st 2019 the total bank net debt was: $40.000m + $20.000m - $0.682m = $59.318m.
c/ As at June 30th 2019 the total bank net debt was modelled as: $3.920m + $31.742m - $1.160m= $34.502m.

The average low season debt I am therefore modelling as: ($33.132m+$34.502m)/2 = $33.817m

The average incremental debt I am modelling for the year is therefore:

$59.318m / $33.817m = 1.75 = +75%

Using a linear triangulated debt over time distribution model to adjust for the average debt increase over the entire year, the average increase in incremental debt is only half this: +37.5%. Throw in my indicative borrowing rate for the year of 4.1% (my post 4995) and I estimate the interest bill for the year would have been:

0.041x [$33.817m] x 1.375 = $1.906m

(4) Income tax is calculated at a rate of 28%: 0.28( $23.446m - $9.303m - $1.906m ) = $3.426m

(5) AR2020 Note 16A

More comparative company performance statistics are revealed below:

	PGW Rural Rump (FY2019)	PGW Rural Rump (FY2020)
Share Price 30th September {A}	$2.55	$2.75 (*)
eps {B}	14.6c	11.9c
PE Ratio {A}/B}	17.7	23.1
Normalised Profit {C}	$10.987m	$9.011m
Shareholder Equity {D}	$165.902m	$156.702m
ROE {C}/{D}	6.62%	5.75%
Revenue {E}	$809.295m	$788.036m
Net Profit Margin {C}/{E}	1.36%	1.14%
Gross Earnings Yield {B}/ 0.72x{A}	8.0%	6.0%

(*) Estimated

SNOOPY

[nztx]

Yes I have to say Winner that the $17 million is really bugging me. PGW said they had renegotiated their banking arrangements after the sale of the Seeds business. Hopefully they would have organised a call facility for short term borrowing and set tranches for the longer term borrowings. So whoever is responsible for the daily cash management at PGW did not plan to have a spare $17 million in cash at a reporting date while having short term borrowings of $30 million. I know commentators here have said this should not be a problem and is either seasonal or poor timing of a tranche. I can partially accept this, but for it occur on a day that they airing their underpants to the world to see, in my mind smacks of incompetence.
Not as concerned about the $45 million in GO money as this would be spread across many farmers and the risk of them all defaulting is not that great. If they do all default then wider New Zealand has got some rather serious problems.

The $17 Mil might just be 1 or 2 days cashflow surplus though
They may have little way of forecasting inflow / outflow for a day ahead - particularly in stockfirm business
& need to carry a certain buffer in current accounts to cater for this