PGW - PGG Wrightson

[Snoopy]

The above quoted post is based on the FY2019 dividend viewpoint. As per the previous post (5355), I have now reverted to past earnings to give us the best forecast of a 'capitalised dividend valuation' from here going forwards.

The five year earnings per share average for FY2018 to FY2022 inclusive is: (19.7c+10.3c+9.9c+23.6c+32.6c) / 5 = 19.2c

The capitalised dividend required rate of return I have selected is 8.5%. I believe that this is appropriate for a retailer with a relatively weak moat that services a set of customers at the mercy of the weather gods. This means my 'fair value' centre of business cycle valuation is now:

19.2c / (0.72 x 0.085) = $3.14

At $3.14, PGW would be on a normalised historical PE of 314/32.6 = 9.5. That sounds about right for a no growth high yielding share. However PGW closed on the market today at $4.49. That implies of PE of: 449/32.6 = 13.8. Yes I know the share price has traded a whole dollar higher than this within the last twelve months. But $4.49 does seem a lot of money to pay for an agricultural share riding into the high of a business cycle wave.

My 'rule of thumb' is to both add and subtract 20% from the centre of business cycle valuation, to get an idea of where the share price should sit as the business cycle fluctuates.

Upper Cycle Value: $3.14 x 1.2 = [$3.77
Lower Cycle Value: $3.14 x 0.8 = $2.51

discl: Still holding, and thinking about what to do.

Done some suns …PGW worth $2.90 to $3.20 at moment

I have a wider 'valuation band' than you Winner. But it looks like we are pretty much in agreement on where the value of PGW should sit. Of course where it 'should sit' and where the market sees it sitting are not always the same thing. I admit I put a 'sell down' order in advance of the profit announcement though to my broker at, given where PGW trades today, was an embarrassingly high price. At this stage I will hold and enjoy the dividend and think about enjoying some of those reconstruction order profits. Not sure about forward orders for irrigation systems in the Hawkes Bay though......

SNOOPY

[winner69]

Fonterra has cut its forecast farmgate milk price will cut farmers income by $900m they say

Will that hurt PGW prospects this year

[Snoopy]

Huge changes since the last time I looked at PGG Wrightson, The world class global seeds business has been sold to DLF Seeds A/S of Denmark.

PGG Wrightson Seeds are no longer owned by PGG Wrightson, the business unit being sold on 1st May 2019. But having opposed the demerger, I can't help asking myself the 'what if' question.

Buyer DLF Seeds A/S of Denmark are a privately owned co-operative and so there is no public annual reporting. They do issue regular newsletters though, and here are some of the comments about New Zealand since the takeover.

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https://www.dlf.com/about-dlf/news-a...=News&PID=1905

Strong half-year result in DLF 25-02-2022

"The Danish seed harvest was above normal in 2021, whereas other seed producing countries in Europe did not reach their normal yields. The New Zealand seed harvest is impacted by rain and looks to be lower than standard. This is also the case in South America where the crop has suffered greatly from dry conditions"

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https://www.dlf.com/customer-support...5market-update

Global pressures keep grass and clover prices high 10-05-2022

"Global issues are affecting production costs for grass and clover seeds."
"More recently, the New Zealand harvest experienced a huge failure, especially in perennial ryegrass and white clover.

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https://www.dlf.com/customer-support...e-driving-seat

Inflation and production costs are in the driving seat 18-10-2022

"A tough economic situation coupled with increased costs for energy, wages, fertilisers, packaging and logistics are pushing up prices for grass and clover seed. In addition, good production prices for other ag-commodities, such as wheat and rapeseed, are making it harder to contract the planned multiplication acreage for grass and clover seed at a competitive price."

"In the southern hemisphere, the January to March harvest was below average, especially in New Zealand where perennial ryegrass and white clover yields were low."

"We’re finding it difficult and expensive to contract new seed production fields for this species. For similar reasons, the usual third-party production from New Zealand also appears to be quite challenging."

"Clovers are short in general. White clover harvested well in Denmark, but increased demand for European mixtures coupled with a continuing shortage in supplies from New Zealand have lifted prices to an all-time high."

"In this era of economic pressures – increasing cost prices and inflation driven by energy and food prices – it’s vital to work with secure and reliable production partners. Since agricultural commodity prices are competing at farm level with grass and clover production, it’s becoming harder to maintain the balance between farmer production prices and an acreage that will cover future demand. Climate change doesn’t help. Dry springs, summer droughts and periods of heavy rainfall make future demand more unpredictable."

"Contracting of new production for the 2024 harvest remains difficult. We expect to see a drop in European acreage for the harvest years 2023 and 2024 caused by production costs and the lure of alternative crops. That means we see firm or further firming prices ahead of us."

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https://www.dlf.com/about-dlf/news-a...bar-in-oceania

New forage grass raises the bar in Oceania 27-02-2023

"Our latest tetraploid perennial ryegrass, Vast, distinguished itself with a high yield in the last part of the season. This variety is ready for launch in spring 2023 and is the first extremely late-heading perennial ryegrass on the market in Oceania. Vast has genetics from the Southwest and Northern Europe as well as New Zealand and stands out due to its fine and dense plant density, strong winter production, good disease tolerance and extremely low aftermath seed head production. These characteristics mean that it continues to produce quality forage even when the quality of most other ryegrasses is declining. This adds significant value for farmers, as late grass production helps to slow the decline in post-peak milk production in dairy systems, and the timing of Vast’s forage production is also ideal for flushing and mating ewes and for beef and lamb finishing."

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It looks like after a tough year in 2022 (ryegrass and clover prices are good, but if you don't have the production you can't get those prices) all that R&D that we PGG Wrightson shareholders paid for in the past might be rising to fruition? A "Vast" improvement coming through?

SNOOPY

[winner69]

Snoops - DLF Seeds file Anual Accounts with NZ Companies Office if interested

Go back many years so if you keen you might be able to work out how sales have grown since they acquired PGW Seeds

https://app.companiesoffice.govt.nz/...F80BA56D212AB5

June 21 accounts - June 22 to be filed soon?

[winner69]

DLF NZ sales were about $15m in June 15 year - June 21 year they were $427m

What was PGW seeds doing?

[Snoopy]

DLF NZ sales were about $15m in June 15 year - June 21 year they were $427m

What was PGW seeds doing?

Prior to the takeover, DLF NZ had their own much smaller seeds operation, which is what the $15m in sales will be related to. As to what PGW seeds were doing, it gets a little complicated.....

If we look at AR2019, the last year that PGW seeds was under PGW control, then the seeds business, listed as a 'discontinued operation' turned over $434m. But that was for the period 1st July 2018 to 30th April 2019, not for a full twelve months (the seed business changed hands on 1st May 2019).

If we instead go back to the 'independent appraisal report' issued by Korda Mentha in October 2018, then p39 of that document shows projected seed division revenue of $536m for the full FY2019 year. Annualising the actual figure for FY2019 over 12 months not 10, gives a projected annual revenue of $434m x 12/10 = $521m. But annualizing is probably not the best method to use when you know that seed division revenues over the year are not uniform but lumpy.

The next complicating factor comes when you look at DLF's Australian website: https://www.dlfseeds.com.au/

"DLF Seeds represents the coming together of PGG Wrightson Seeds, AusWest and Stephen Pasture Seeds."
"These three respected Australian forage seed brands joined forces to ......."

So after pinching Crowded House and Russell Crowe, those Aussies have pinched PGG Wrightson as their own as well! The significance of this, in the context of this discussion, is that it looks like DLF have carved out the Australian arm of PGW Seeds and reinstalled that under their own Australian division management. Australia was always a 'poor cousin' in the PGW seed portfolio. The Korda Mentha report on p30 forecasts, over FY2019, the geographical split between EBITDA in the three markets the seed division operated in to be:

PGW Seed Division	Forecast EBITDA 2019	Percentage	Apportioned Revenue (1)
New Zealand	$33.1m	77.5%	$415m
Australia	$4.8m	11.2%	$60m
Uruguay	$4.8m	11.2%	$60m
Total	$42.7m	100%	$536m

Notes

1/ This column is my own apportioning, where I have allocated the revenue between each geographic region relative to EBITDA earned in that market. This revenue splitting exercise assumes equal profitability, in EBITDA terms, across each geographic region. In practice that assumption is likely inaccurate.

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I believe that NZ was a lot more profitable than those other two markets. That would in turn mean that NZ would have required less revenue to earn their proportion of EBITDA earnings. So that $415m revenue figure that I put down for NZ seed turnover in FY2019 is probably an 'upper bound' estimate of what the NZ seed revenue really was.

Just an an exercise in face value though, adding the already existing 'beachhead' DLF seeds operation to my $415m PGW NZ seed revenue estimate I get total revenue for DLF Seeds New Zealand over 2019 to be:

$415m + $15m = $430m

If two years later, combined revenue was $427m, it doesn't like too many growth synergies with the global DLF seeds business have been exploited.

SNOOPY

[winner69]

Brad Olsen says ‘ New Zealand's exports weren't performing as well they were at the end of 2022, with meat and dairy exports falling "quite heavily" from the previous quarter. “

Does less exports and farmers claiming poverty impact Wrightsons performance

https://www.newshub.co.nz/home/money...+28+March+2023

[Snoopy]

Brad Olsen says ‘ New Zealand's exports weren't performing as well they were at the end of 2022, with meat and dairy exports falling "quite heavily" from the previous quarter. “

Does less exports and farmers claiming poverty impact Wrightsons performance

https://www.newshub.co.nz/home/money...+28+March+2023

Animals tend to cost the same to keep no matter what the price you receive for the end product. Since PGW are a supplier of animal inputs, I guess it doesn't matter too much what price the farmer receives for their milk or meat. You still have to fence the paddock, buy the milking equipment and buy the supplementary feed.

There would be a downstream growth effects no doubt. Less sales in the rural real estate arm. Less money at the price sold end, means less money to develop the business. But in the end, farmers have to spend as a cost of staying in business. You can't kill your herd off while you wait for prices to improve. As far as PGW is concerned maybe a bit down but definitely not out. I would say the amount of rain we get would be a bigger mover of profit than falling prices for commodities overseas. That's how I see things anyway.

SNOOPY

[mike2020]

Snoopy, I feel you are being optimistic. Rural real estate is well down. Any drop in income always goes back to your expenditure budget so farmers will spend less. Any drop in the price of sheep and beef will be reflected in commissions earned. The companies own expenses will rise, those agents do like their santa fe's up to date for the weekends towing, wage rises etc. The last result was a little underwhelming, I expect more of the same. That said at some point it will be a buying op and there is always the chance of a TO out of the "left field". Looking at the buy side I think I'm not alone in my thinking.

[Snoopy]

Snoopy, I feel you are being optimistic. Rural real estate is well down. Any drop in income always goes back to your expenditure budget so farmers will spend less. Any drop in the price of sheep and beef will be reflected in commissions earned. The companies own expenses will rise, those agents do like their santa fe's up to date for the weekends towing, wage rises etc. The last result was a little underwhelming, I expect more of the same. That said at some point it will be a buying op and there is always the chance of a TO out of the "left field". Looking at the buy side I think I'm not alone in my thinking.

Hi mike2020,

I am not saying you are wrong. I guess what I am saying is that there is a certain amount of essential farm spending that never goes away. Farmer's might postpone upgrading their ute. But they still need to look after their animals, fruit trees and crop fields. It will be interesting to see how the GoLivestock animal financing goes in any downturn. This is the scheme where PGW owns the livestock and rents it out to farmers to do what they do best - raise animals - but at no capital cost to the farmer. So a farmer can still use his/her skill and knowledge to bring an animal product to market, without putting up the capital to do so. That is a formula that sounds like it might work in a 'down' market.

Contrast that to the fortunes of other human based customer retailers and the consumer, who might well be able to get through the coming winter using last years coat.

As for your other comment on market depth, how the market perceives a business and the underlying mechanics of running a business on a day to day basis are entirely different things. In terms of a value perspective I agree with you. Now is not the time to be buying PGW shares.

SNOOPY