PGW - PGG Wrightson

[winner69]

What’s up Snoopy ….PGW share price in free fall ….down nearly 20% last week or so.

At $3.41 almost back to the good old days when everybody got excited if it hit 3 bucks ……and long way off recent high when it got close to 6 bucks

[mike2020]

I can tell you now, look at the div trajectory and think seriously about the current rural situation. Most dairy farmers will make a loss this year and have bought the cost of production down already, how?

[winner69]

I can tell you now, look at the div trajectory and think seriously about the current rural situation. Most dairy farmers will make a loss this year and have bought the cost of production down already, how?

Share price really started tumbling soon after weather guys talked El Niño on way

[Snoopy]

What’s up Snoopy ….PGW share price in free fall ….down nearly 20% last week or so.

At $3.41 almost back to the good old days when everybody got excited if it hit 3 bucks ……and long way off recent high when it got close to 6 bucks

Don't worry Winner. The good thing about PGW is that they cover all aspects and categories of rural supplies. And they specialise on 'the essentials'. Not the nice to haves. I heard on the news this morning we are looking good for a "bumper* season of summerfruit. That is like a bumper year with plenty of cherries on top. Fruitfed is the jewel in the PGW crown. The don't call those growers 'haughtyculturalists' for nothing!

I also think the hesitancy of the banks towards their rural customers will provide a further tailwind for PGW's popular 'Go Livestock' line of finance offerings.

SNOOPY

[mike2020]

Lets all be honest with ourselves, we will all still get excited when it hits $3

[Rawz]

Just had a look at the PnL and wow didn’t realize PGW operates in such a low margin space.

[winner69]

Don't worry Winner. The good thing about PGW is that they cover all aspects and categories of rural supplies. And they specialise on 'the essentials'. Not the nice to haves. I heard on the news this morning we are looking good for a "bumper* season of summerfruit. That is like a bumper year with plenty of cherries on top. Fruitfed is the jewel in the PGW crown. The don't call those growers 'haughytculturalists' for nothing!

I also think the hesitancy of the banks towards their rural customers will provide a further tailwind for PGW's popular 'Go Livestock' line of finance offerings.

SNOOPY

What are the sales and profit of this fruitfed division …numbers seem lost in the Retail and Water segment

[winner69]

Just had a look at the PnL and wow didn’t realize PGW operates in such a low margin space.

Margins always been like that rawz …..the way they operate …..so I suppose you wont be too interested at a p/b of 1.5 …esp if growth aspirations under pressure

[Snoopy]

I feel it might be overstating the credit risk for financing companies. What is that you say? PGW is a rural services trading company is it not? Did they not sell off their finance arm to Heartland group a number of years ago? Well, yes they did, until they brought the finance business back by stealth under the new 'GoLivestock' (GoBeef and GoLamb) banner. Moving forward to FY2022, this new finance business is going from strength to strength with $66.109m of 'GoLivestock' loans on the books at the 30-06-2022 balance date.

$66.109m is an overstatement of the loan book on an annual basis. Livestock loans are seasonal. To get a representative loan balance over the year it is best to take an average of the three loan balance date points across FY2022 that we have: 30-06-2021 ($45.869m) , 31-12-2021 ($35.805m) and 30-06-2022 ($66.109m):

Averaged GoLivestock loan balance over FY2022: ($45.869m+$35.905m+$66.109m)/3 = $49.294m

We should note -in passing- that the interest earned on these 'GoLivestock' loans over FY2022 was $4.254m. Based on that averaged loan balance, this represents a gross return to PGW shareholders of:

$4.254m/$49.294m = 8.6%

That is a very nice little income stream for we shareholders. BUT -and here is my very important learning point- it is not the income on that loan that is taking the risk out of these loan transactions. It is the value of the livestock, that PGW still own, that is the security on this debt.

I always get a little tetchy about companies that have had a 'golden run' and seemingly load themselves up with debt. What happens when the market conditions turn?
I feel it is worth having a closer look at PGW as weather events and commodity prices create a bit of 'on the ground' havoc. My first task is to look at how the GoLivestock 'don't call it a finance division Trev' loans, err I mean 'advances' are going.

Looking at AR2023, this 'GoLivestock' unit has 'advances' on the books of $71.829m+$2.570m = $74.399m (not accounting for the provision of $376k, ref AR2023 p81) as at the 30-06-2023 balance date.

Yet $74.399m is an overstatement of the loan, ahem advance book on an annual basis. Livestock advances are essentially seasonal (although I am curious to know where that $2,570m of non-seasonal GoLivestock balance has come from) . To get a representative 'advances' balance over the year, it is best to take an average of the three 'advances' balance data points across FY2023 that we have: 30-06-2022 ($66.019m) , 31-12-2022 ($43.011m) and 30-06-2023 ($74.023m):

The triangulated averaged GoLivestock balance over FY2023: ($66.109m+$43.011m+$74.023m)/3 = $61.048m

We should note -in passing- that the interest earned on these 'GoLivestock' 'advances' over FY2023 was $6.573m. Based on that averaged 'advances' balance, this represents a gross return to PGW shareholders of:

$6.573m/$61.048m = 10.8%

That is a very nice little income stream for we shareholders. BUT -and here is my very important learning point- it is not the income on that loan (darn it there is that word I wasn't allowed to use) that is taking the risk out of these loan transactions. It is the value of the livestock, that PGW still own, that is the security on this debt. And according to the auditors (AR2023 p104), the security on that livestock loan portfolio looks A.O.K.. (albeit with $375k of provisions taken out).

So a fairly strong asset position and strong income position may be found under PGW's GoLivestock umbrella over FY2023. Just don't call it a finance division Trev!

SNOOPY

[Snoopy]

Have a look at the 'Consolidated Statement of Financial Position' (AR2022 p50). There is a current asset there of 'Go livestock receivables'. $65.504m. This is not some bill that PGW needs to send their debt collectors around to hassle farmers over repaying. This book entry represents live animals 'down on the farm' that at some point will be rounded up and on-sold. The farmers that are looking after these animals are merely the guardians of these beasts that we shareholders own:

"the group retains legal title to the livestock until its sale" (from AR2022 p62)

These receivables are not loans taken out on cars that are depreciating by the day. They are not loans on holidays where the experience has been had and we are relying on the loan holder to keep sweating at their day job to repay it. These 'GoLivestock Receivables' are instead appreciating assets, carefully tended animals, entrusted to the care of farmers vetted by PGW itself. These are farmers that PGW know and have had successful business relationships with for several years.

There are some industry specific risks to consider. As an animal gains weight it generally becomes more valuable. But in a drought, where the animal sustaining capability of the land is reduced, there may be a sudden need to reduce the number of animals on farm. All of a sudden the freezing works are overwhelmed with stock and the price offered to the farmer 'per head' plummets (notwithstanding the animal weight). Add to that the 'storm risk' and the 'disease risk', which may account for some mortality among the stock being raised. But in general, even if a farmer is forced off their land (worst case), the farm itself still exists, bought by a new less leveraged farmer owner. So animals keep being bred, and keep needing to be fattened up. The 'fattening up' bit is what the 'GoLivestock' part of the PGW business supports. And the time frame for this aspect of farming is normally a few months, not years.

Debt Position PGW	EOFY2022
Cash On Hand	($4.676m)
add Short Term Bank Loans	$7.500m
add Long Term Bank Loans	$30.000m
add Net Defined Benefit Liability (Pension Plan deficit)	$2.126m
add Employee Entitlements	$24.643m
Total Bank and Worriesome Liabiliities	$59.413m
less Animal assets (annualised average)	($49.294m)
Total Net Debt	$10.119m

One tweak I might need to make on the above table is to put a 'fudge discount factor' on the value of PGW's animal assets. The above table is treating animals as 'cash in the bank' which might be a little optimistic. Then again that animal value is the value of the animal as bought at auction - not when it has been fed up six months down the track. So maybe I don't need any fudge factoring? I would welcome others comments on whether my overall picture of PGW debt is now more realistic. For me, accounting for the PGW animal assets in this way, puts the overall PGW debt picture in a new light. $10.119m of net debt sounds a lot better than $59.413m!

We have established that the 'Go Livestock' receivables should not be considered as part of PGW company debt. So how does the underlying debt position of PGW stack up to scrutiny?

Debt Position PGW	EOFY2023
Cash On Hand	($4.643m)
add Short Term Bank Loans	$19.960m
add Long Term Bank Loans	$50.000m
add Net Defined Benefit Liability (Pension Plan deficit)	$1.076m
add Employee Entitlements	$19.944m
Total Bank and Worriesome Liabiliities	$86.327m
less Animal assets (annualised average)	($61.048m)
Total Net Debt	$25.279m

One tweak I might need to make on the above table is to put a 'fudge discount factor' on the value of PGW's animal assets. The above table is treating animals as 'cash in the bank' which might be a little optimistic. Then again that animal value is the value of the animal as bought at auction - not when it has been fed up six months down the track. So maybe I don't need any fudge factoring? I would welcome others comments on whether my overall picture of PGW debt is now more realistic. For me, accounting for the PGW animal assets in this way, puts the overall PGW debt picture in a more realistic light. $25.279m of net debt sounds a lot better than $86.327m! Nevertheless that $25.279m is a lot more net debt than the $10.119m that was on the books only a year ago, when the outlook for PGW was brighter.

SNOOPY