PGW - PGG Wrightson

[Snoopy]

Another ten years on update

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'

The above quote is a 'forecasted value' for FY2020. This was before the implementation of IFRS16, which changed the definition of EBITDA (lease expenses are now included in EBITDA). Nevertheless it will be necessary to take off the income resulting from the GoLivestock loans ($6.573m, ref AR2023 p71). I shall now attempt an up to date version of this covenant calculation.

FCCR= [(EBITDA+Lease Expenses)(1)] / [Total Interest(less interest income in cash)+Lease Expenses]

(1) Under IFRS16, the definition of EBITDA has been rewritten to include lease expenses. So there is no need to add them back as a 'supplementary entry' as before.

= [$61.194m - $6.573m] / [$5.521m + ($3.800m+$19.532m]] = 1.89 < 2.0 (! Oh oh)

It looks like PGW has failed this covenant test. But did I do it right?

SNOOPY

[Sideshow Bob]

https://www.nzx.com/announcements/420425

Operating EBITDA forecast for year to 30 June 2024 to be around $52 million

PGG Wrightson Limited (PGW) Acting Chair, U Kean Seng, commented today that “There is a significant degree of volatility in the global economy and international markets currently. The effects of New Zealand’s monetary policy are also being felt with inflation levels beginning to trend lower but with elevated interest rates raising borrowing costs.

While some parts of the rural sector are recovering from last summer’s cyclones there is also concern about the potential for drought conditions in the coming months due to El Niño weather patterns. Demand in key export markets has declined and China’s economic recovery remains subdued. These factors combine to hamper confidence and reinforce cautiousness as farmers and growers anticipate the impacts on the profitability of their business operations.

Although the sector faces a challenging year, this is nevertheless balanced by strong medium to longer-term fundamentals. We expect to see improvement as the economies of our key export markets recover. The global population and demand for protein is projected to show continued growth and the fundamentals for the agri-sector remain sound.

The Ministry for Primary Industries is projecting steady growth for New Zealand’s primary exports with annual revenue expected to reach $62 billion by 2027. As a market leader in the agricultural sector, PGW is in a strong position operationally to support our clients grow their businesses as they respond to this uptick in demand.
On balance, we remain cautious about the financial year ahead given the mixed signals in the macroeconomic environment. Trading for the first quarter was back on last year and was influenced by these factors and a subdued real estate market.

PGW is forecasting an Operating EBITDA2 result for the year to 30 June 2024 of around $52 million. As noted earlier, while the medium to long-term sector fundamentals remain strong, our short-term Operating EBITDA is expected to be back from last year’s strong Operating EBITDA result of $61.2 million based upon our current assessment of a more challenging operating environment. However, it is early in our financial year, and we will be in a better position to assess the full year forecast again after the spring trading period.”

[winner69]

Operating EBITDA in F22 was $67m ….in F23 $61 ….and down further to $52m in F24

Is a volatile world eh ….times are tough but a 15% decline in profit isn’t that good

Look forward to Snoops comments

[Snoopy]

I have to admit HY2021 is looking better than I expected. However that 'at least' 8c forecast interim dividend will not be finally confirmed until after the half year results are in next year. So let's hope everything holds up and wool comes back into the black. Storm clouds on the horizon for the livestock division in 2HY2020 though. The drought this year saw much slaughtering of stock was brought forward. So fewer beasts to go under the hammer this financial year.

The Chairman admitted to giving a visiting delegation from the Chinese BAIC Limited a whistle stop tour of PGW's business in N.Z. earlier this year. But he was quite adamant that the investment was purely strategic when he asked BAIC representatives their plans. No evidence that BAIC have been buying above $2.75 yet. Until proven otherwise, I am assuming any post AGM share price flurry is due to NZ based yield chasers (now the dividend is forecast to return), not BAIC.

I won't be buying any more shares myself above $2.75. I don't think the business picture painted going forwards at the AGM justifies a further re-rating in the share price going forwards.

Above comments are from the 2020 AGM, the last one subject to 'beagle snout scrutiny'. BAIC is now gone from the share registry, at a good profit of course, replaced by Elders.

Operating EBITDA in F22 was $67m ….in F23 $61 ….and down further to $52m in F24

Is a volatile world eh ….times are tough but a 15% decline in profit isn’t that good

Look forward to Snoops comments.

I sent the pup with the biggest snout out to the AGM at the Sudima Airport Hotel this morning. Apart from the EBITDA downgrade for FY2024 (actually not really a downgrade as I don't think there has been a hint of a forecast for FY2024 before, but it will be less than FY2023 - that much is clear) the report back was that this was one of the 'tightest lipped' AGMs of any company ever.

I am not saying the presentations were not thorough, quite the reverse. CEO Steve Guerin gave a particularly comprehensive run down of the trials and tribulations of each division. But having just read the annual report again prior to the meeting, Steve's verbal report sounded like a Dictaphone repeat of what was just read. No up to the minute insights added. It was left to Deputy Chair Sarah Brown to deliver the less than glowing quarterly update, against a background of the worst farmer confidence surveys since the 1980s. Yikes, I think that was when Roger Douglas was in the beehive carving out a new financial direction, including the end of farm subsidies, with big David. It must surely be tough times indeed on our farms today if our farmers confidence has regressed to those levels. Rather than one of those AGMs where incisive illuminations were made, this AGM was notable instead for events that did not happen, not being spoken about. My snout on the ground reports:

A/ There have not been any high level talks with Elders about any further plans they might have for their 11.96%b PGW stake at reporting date (now a 12.3% stake as at 18th August). Of course being in the same industry, albeit on opposite sides of the ditch, PGW folk cannot help but run into Elders folk at supplier gatherings. But no more should be read into it than that.
B/ Largest shareholder Guanglin Lai was enjoying his first AGM for a while and enjoying his time in sunny Christchurch, while looking forward to coming back next year (IOW he is not planning to sell out).
C/ Shareholder question on banking covenant compliance danced around by CFO Peter Scott, but no numerical answers given. Follow up question at the after match function suggested that PGW was on good terms with their banking syndicate, and they did not want to give their competitors an edge by publishing too much information that could lead to reverse engineering of interest margins and overall profit margins.
D/ Other questions answered along the lines of 'We follow company protocols, blah blah blah.' IOW an object lesson on how to answer a question without giving any specifics.

In summary, this was an AGM where investors looking for answers did not get them. Although looking at things another way, the non-answers were answers, for those prepared to look through the facade of excuses for the answers not given. The outlook is best summarised as 'nothing new to get excited about', apart from 'we will battle through the current rural malaise'. However, the sausage rolls at the after match function were excellent (eat your heart out Chris Hipkins).

SNOOPY

[Snoopy]

Operating EBITDA in F22 was $67m ….in F23 $61 ….and down further to $52m in F24

Is a volatile world eh ….times are tough but a 15% decline in profit isn’t that good

Look forward to Snoops comments

Interesting to plug this new EBITDA guidance into the 'Consolidated Statement of Profit and Loss for FY2023' and the associated cost structures.

Consolidated Statement of Profit and Loss

	FY2024 Forecast	FY2023 Actual
Operating EBITDA	$52.000m	$61.194m
less Depreciation and Amortisation Expense	$28.063m	$28.063m
equals EBIT	$23.937m	$33.509m
less Net Interest and Finance Costs	$9.573m	$9.573m
equals Profit Before Income tax	$14.364m	$23.936m
less Income Tax Expense	$4.022m	$6.418m
equals Profit Net of Income Tax	$10.342m	$17.518m

Now: $10.342m/75.484m= 13.7cps

As it happens 10.0cps has already been paid out during FY2023 as the final dividend for FY2022. So to keep that balance sheet intact, the final dividend paid during FY2024 (actually the interim dividend for FY2024) should be no more that 4cps. And 4cps is only a little down on the interim dividend paid in that same time space but a year earlier of 12cps. Hey, just a minute........

SNOOPY

[Sideshow Bob]

You'd also have to expect that the 'Net Interest & Finance Costs' are more likely to be higher this year.

Pleased to hear that the sausage rolls were excellent Snoopy. That may be your feed from PGW this year.....??

[winner69]

Jeez Snoops …a 15% decline in ebitda leads to a 40% decline in npat

That’s a disaster ..we’ll almost

If you are close with your $10.3m npat that’s an eps of 14 cents

So PGW on a PE of about 24 at the moment

Just as well the market doesn’t work on PE ratios eh

[winner69]

Maybe punters waiting for the ‘reassessed’ guidance they will give in a few months …….but you wouldn’t want it to be more dismal eh

[winner69]

Snoops …thanks for your meeting report and the sums you’ve done since

Well done

[Snoopy]

You'd also have to expect that the 'Net Interest & Finance Costs' are more likely to be higher this year.

I thought about that, then considered that PGW could probably downsize their inventory a bit to go towards debt reduction. So hopefully no increase in that interest rate bill. Remember PGW have had the foresight to appoint a 'Scott' as CFO. Scott by name equals Scottish by nature?

Jeez Snoops …a 15% decline in ebitda leads to a 40% decline in npat

That’s a disaster ..we’ll almost

I suggest you plot the projected profit fall on a log scale graph Winner. It looks much less dramatic if you do that.

SNOOPY