PGW - PGG Wrightson

[Getty]

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.

All in All, its just another Brick in the Wall.

[Snoopy]

From AR2019 p7, we now have an indication of how the 'corporate structure review' will affect earnings going forwards.

"We expect to see the benefit of reduced costs flowing through progressively with savings in excess of $2.5m expected in FY2020"

With the seed business gone, expectations are reset. As an exercise I have gone through the last few years results and removed 'Seed & Grain' EBITDA from the Operating EBITDA. This time, I have added back in the recently announced 'corporate savings'.

Here is the multi-year earnings picture that results:

	Combined EBITDA	less Seed & Grain EBITDA	add Corporate Savings	equals PGWRR EBITDA
FY2014	$58.747m	$33.965m	$2.500m	$27.282m
FY2015	$69.631m	$40.506m	$2.500m	$31.675m
FY2016	$70.181m	$41.862m	$2.500m	$30.819m
FY2017	$64.499m	$37.045m	$2.500m	$39.974m
FY2018	$70.174m	$35.607m	$2.500m	$37.067m
FY2019			$2.500m	$26.925m
Average				$32.290m

1/ This period covers the 'modern' era where Mark Dewdney's 'One PGW' philosophy started to permeate the group.
2/ I have used only 'Operating EBITDA'. That metric Leaves out all 'Equity Accounted Investee Profit', and consequently removes the profit contribution from 'Agimol', representing the 50% interest in 'Agricentro' in Uruguay, an equity investment that was subsequently fully taken in house (FY2019) and latterly sold (EOFY2019). Equity accounted New Zealand based investments retained, being a 50% interest in 'Canterbury Saleyards' and a now 33% interest in 'Agri Optics New Zealand', I do not consider have contributed materially to EBITDA.

When you have a tough year, it pays to orient it within the wider business cycle.

	Combined EBITDA	less Seed & Grain EBITDA	add Corporate Savings	equals PGWRR EBITDA
FY2014	$58.747m	$33.965m	$2.500m	$27.282m
FY2015	$69.631m	$40.506m	$2.500m	$31.675m
FY2016	$70.181m	$41.862m	$2.500m	$30.819m
FY2017	$64.499m	$37.045m	$2.500m	$39.974m
FY2018	$70.174m	$35.607m	$2.500m	$37.067m
FY2019			$2.500m	$26.925m
FY2020				$23.446m
Average				$31.027m

1/ This period covers the 'modern' era from when ex-CEO Mark Dewdney's 'One PGW' philosophy started to permeate the group.
2/ I have used only 'Operating EBITDA'. That metric Leaves out all 'Equity Accounted Investee Profit', and consequently removes the profit contribution from 'Agimol', representing the 50% interest in 'Agricentro' in Uruguay, an equity investment that was subsequently fully taken in house (FY2019) and latterly sold (EOFY2019). Equity accounted New Zealand based investments retained, being a 50% interest in 'Canterbury Saleyards' and a now 33% interest in 'Agri Optics New Zealand', I do not consider have contributed materially to EBITDA.
3/ From FY2019, the New Zealand accounts are presented with the remaining NZ business trading as a compartmentalized entity.
4/ For consistency I have used the pre IFRS16 method of calculating EBITDA.

SNOOPY

[Snoopy]

When you have a tough year, it pays to orient it within the wider business cycle.

Below is the normalised earnings picture 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	$9.303m	$1.906m	$3.426m	$8.811m	$0.200m	$9.011m	75.484m	11.9c

Here is the equivalent whole earnings cycle picture:

	EBITDA	less D&A	less Net Interest	less Income Tax	equals NPAT	less Defined Benefit Adjustment	equals Adjusted NPAT {A}	No. Shares on Issue {B}	eps {A}/{B}
Business Cycle	$31.027m	$9.303m	$1.906m	$5.549m (4)	$14.269m	$1.500m (5)	$12.769m	75.484m	16.9c

(4) Income tax = 0.28 x ($31.027m - $9.303m -$1.906m) = $5.549m
(5) Defined Benefit Scheme is in IFRS deficit of $9.838m at EOFY2020. An adjustment of $1500 will clear this deficit within seven years. Management have said that such adjustments will not be necessary, but I prefer to align with the IFRS standard setters who would suggest that adjustments must come.

I use 9.5% as my acceptable gross yield. Some might argue that is high. But I think it is fair, given that much of PGW's profit comes from low margin commodities subject to weather event demand. Some years ago PGW paid no dividend at all for several years in a row, and they have just skipped their final dividend for this year. This kind of risk is reflected in my selection of a 9.5% acceptable yield, about half as much again more than a tier one utility company.

Capitalisation of averaged business cycle earnings at the rate of 9.5% gross, yields the following 'fair value' share price:

16.9c / (0.095 x 0.72) = $2.47

This evening PGW closed at $2.71 on the market. This price is higher than a pure earnings based valuation could justify in my view, particularly at the trough of the business cycle. With the outlook for FY2021 uncertain, this suggests to me that the share is carrying a 'takeover premium'. This is quite believable with BAIC from China having built a blocking stake earlier this year which they have already added to. However, I do not believe in investing hoping that a takeover offer will come. Right now, I am sitting on a stake that owes me rather less than $2.47 per share which I am comfortable to hold. I don't intend to add to my stake unless the price drops back below my new $2.47 price target.

SNOOPY

[Snoopy]

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 Lo]ans	$3.920m	$3.920m
add Long Term Bank Loans	$31.742m	$31.742m
add Net Defined Benefit Liability (Pension Plan deficit)	$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.

When I make forecasts, like the post quoted above, I like to check back to see whether what I predicted actually eventuated,

	FY2019 (iter. 1) (indicative forecast for FY2020)	FY2020 (as reported)
Cash On Hand	($1.160m)	($16.868m)
Short Term Bank Loans	$3.920m	$40.000m
add Long Term Bank Loans	$31.742m	$20.000m
add Net Defined Benefit Liability (Pension Plan deficit)	$5.883m	$9.838m
add Employee Entitlements	$16.821m	$13.960m
Total Bank and Worriesome Liabiliities {A}	$57.206m	$66.930m
NPAT + Impairment & Fair Value adj. {B}	$7.187m (i)	$7.940m (i)
Minimum Debt Repayment Time {A}/{B} (in years)	7.96	8.43

Notes

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

(i) Calculation of NPAT adjusting for 'Impairment & Fair Value' chnages (representing available cashflow for each year) is as follows:

FY2019: $4.000m+$3.187m = $7.187m
FY2020: $7.133m+$0.807m = $7.940m

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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

My original FY2020f 'forecast post' was from 1st November 2019, well before the effects of the drought and Covid-19 were apparent. Nevertheless, not unexpectedly, the overall debt position of PGW has deteriorated over the year. And this is after updating my procedure to net off cash balances, which were substantial at EOFY2020. Reduction in interest rates have improved the ability of the company to service its debts. With interest rates set to go even lower I do not anticipate difficulty in debt servicing in the medium term.

Yet in terms of the ability to repay all debt, I would argue PGW is in its worst position since the GFC when it was bailed out by Alan Lai and Agria. Banks are being told to look upon their loans to business more kindly, so who knows how the bankers are reacting to PGW's position. But I can't see any adjective more suitable for describing PGW's debt position as 'high'.

To some extent this end of financial year debt position is artificially favourable, because it comes off a relatively buoyant first half, before the drought hammered the second half year into a loss. The long term weather outlook is more dry weather in the east of the country over the coming summer. That means up until December 2020, we might be looking with a calendar year with no net positive income for PGW. In the 19th July document outlining the proposed capital structure following the capital repayment, the forecast core debt level was to be between $25m and $50m (page 9). Taking the cash position in to account, that means we now have debt headroom of just:

$50m - ($40m + $20m - $16.868m) = $6.868m

This is not much. I would be fairly confident in predicting that as well as no final dividend for FY2020, there will be no interim dividend for FY2021 either. In my November 2019 review I said

"This is not a bond substitute."

No dividend for at least a year is a manifestation of that comment.

SNOOPY

discl: Shareholder, because I do believe the rural supplies sector will bounce back, eventually

[Snoopy]

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'

A reality check update for my November 2019 forecast projections for FY2020:

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

= [$23.446m + $19.617m] / [$0.849m + $19.617m] = 2.1 > 2.0

The fixed cost coverage ratio just passes but with little to spare. The evidence that PGW is 'mortgaged to the max' continues.

SNOOPY

[Snoopy]

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?

A reality check update for my November 2019 forecast projections for FY2020:

Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
=( -$16.868m + $30.000m + $20,000m ) / $23.446m = 1.41 < 3.00 (good)

That is the balance date figure. The seasonal bank finance increment was restricted to $33.127m this year:

Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
=( -$16.868m + $30.000m + $20.000m + $33.127m(1) ) / $23.446m = 2.83 < 3.00 (good)

Notes

1/ See post 4995 for derivation of this increment figure.

--------------------

So the seasonal borrowing increment was restricted below the maximum I had forecast to ensure that the compliance with the SDCR banking covenant was maintained.

SNOOPY

[winner69]

Hey balance — what does this mean

http://nzx-prod-s7fsd7f98s.s3-websit...307/330167.pdf

Just changing the letters around ir something

[Roberto the Brickie]

Thanks for the data analysis Snoopy, it is really useful to people who are looking at these complex financial statements that seem to keep accountants employed, while making it difficult for the majority of the readers (assuming people bother reading the results of their investments).
Your Senior Debt Coverage Ratio is a little confusing to me as you have included my worrisome $17 million of cash of hand as a deduction. I appear to be the only person thinking this large cash balance is a problem and some people have even suggested it is normal. Looking at the previous 4 years of financial statements, PGW has never had such a large cash balance at either 30 June or 31 December so I keep assuming this is a result of poor cash management. Some commentators on here have said that is normal and are not as concerned as myself. If this is normal should it be taken as a deduction of your total senior debt?

[Norwest]

Hey balance — what does this mean

http://nzx-prod-s7fsd7f98s.s3-websit...307/330167.pdf

Just changing the letters around ir something

It's a brand new company so I'm assuming they are just structuring how they have their holdings. The interesting part is that they are continuing to purchase PGW shares, with an additional 609,898 being purchased since the last notice.

[Balance]

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

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

It's a brand new company so I'm assuming they are just structuring how they have their holdings. The interesting part is that they are continuing to purchase PGW shares, with an additional 609,898 being purchased since the last notice.

Well spotted, Norwest.

My comments above stand.

DYOR.