PGW - PGG Wrightson

[winner69]

That possible npat if $10m for F24 is pretty dreadful

Not much more than when they were in the depths of despair in 2020

Just as well share price doesn’t follow profits in PGW’s case

[Snoopy]

SHAREHOLDER, NUMBER OF SHARES HELD

	Holder	as at 1st August 2022	as at 1st August 2023
1/	Agria (Singapore) Pte Limited	33,463,399	33,463,399
2/	BCA New Continent Agri Hldg. Limited (BCA)	8,993,305
2/	Elders Limited		9,026,128
3/	HSBC Nominees (New Zealand) Limited	1,489,589	1,345.634
4/	New Zealand Depository Nominee Limited	936,608	1,111,351
5/	FNZ Custodians Limited	973,536	952,601
6/	Custodial Services Limited	508,379	662,491
7/	Forsyth Barr Custodians Limited	689,547	662,437
7/	Accident Compensation Corporation	579,446
8/	Nicolaas Johannes Kaptein	500,962	500,962
9/	JBWERE (NZ) Nominees Limited	470,443	442,909
10/	Citibank Nominees (New Zealand) Limited	493,956	407,550
11/	Elizabeth Beatty Benjamin & Michael Murray Benjamin (Michael Benjamin Family a/c)	300,000	300,000
12/	H&G Limited	295,000	295,000
13/	Ian David McIlraith	230,000	230,000
14/	GMH 38 Investments Limited	200,000	229,217
15/	Robert Vincent Cottrell & Lesley Maureen Cottrell	202,898	202,898
16/	Leveraged Equities Finance Limited	204,217	192,417
17/	Totara Grove Investments Limited	280,000	180,000
18/	David Mitchell Odlin	214,400	178,700
19/	Colin Hugh Notley & Jan Marie Notley	175,000	175,000

Bullet Points

a/ The exit of the Chinese government from the share registry and the arrival of Elders has been well documented during the year. The ACC departure somewhat less so.
b/ Former substantial shareholders H&G, a vehicle controlled by the Cushing family, maintain their interest in a small way (well small for them, 295,000 shares is still quite a lot!)
c/ GMH 38 Investments looks like a private investment vehicle based in Auckland with one 'Graeme John Hitch' being the 75% shareholder.
d/ Totara Grove is a private investment vehicle of Colin Robert Beaven, who owns 100% of the shares.
e/ Leveraged Equities is a fully owned subsidiary of the Forsyth Barr Group.

My final observation is that the 'top twenty' shareholder list in AR2023 is really only a 'top 19', because the shareholder numbering system jumped from 5 straight to 7' But apart from the 20th largest shareholder missing out on their moment of fame, I don't think the omission will do much damage. It may look like the same happened in AR2022 as well if you look at my table. But if you look carefully you will see that the list from AR2022 contains two number 7s, which is a quirk of the way I decided to present the table.

SNOOPY

[Snoopy]

I remain a bit concerned about ability of PGW to generate cash in tough times. So I have raided my collection of past reports to conduct my own figurative 'searching down the back of the sofa' exercise. My rationale for creating the table below is as follows:

a/ There will always be bills to pay and accounts to collect. My view is that it is useful to look at the difference between those two totals . That way we can discern that if 'refusing to pay bills' is being used as a tool to artificially reduce debt. If the 'net receivables' is positive at any balance date (first part of the table), then it is possible that this is going on. Adding on any 'net receivables' provides a truer company debt picture.
b/ I think of inventory as an asset, which is, subject to the desires of management - to convert it into cash. As a 'PGW store owner', this would ideally happen in the oncoming season after balance date. In this sense, I think of inventory as 'always on the cusp of being converted to cash'.
c/ I am valuing this inventory 'at cost' in the table, because in tough times, it may be necessary to sell it at cost (when you have to make an assumption on profit margins, make it conservative).
d/ I am not considering cash generation from 'services' where there is no company owned inventory to sell. As an example, in tough times real estate may be difficult to sell, so we cannot guarantee profits from this division.

I am not exactly sure what CFO Peter Scott, following questioning at the AGM meant where he mentioned that the banks were looking at "Clean down of our working capital (short term debt) on an annual basis." as an area to report on. But I think the general idea of keeping tabs on the lending from year to year and how the profits ebb and flow around that loan balance are similar to the kind of picture I was attempting to illustrate in the table below.

Reference Date	31/12/2021	30/06/2022	31/12/2022	30/06/2023
Reference Period Named	HY2022	FY2022	HY2023	FY2023
Trade and Other receivables	($296.772m)	($170.336m)	($321.851m)	($154.656m)
less Accounts payable & accruals	$269.311m	$189.290m	$273.959m	$164.107m

Cash balance generating position

equals Net Receivables................!	($27.461m)	$18.884m	($47.892m)	$9.451m
add Inventory	($111.939m)	($102,048m)	($129.717m)	($107.533m)
add Cash & Cash Equivalents	($1.113m)	($4.676m)	($2.484m)	($4.643m)
add Short Term Debt	$18.000m	$7.500m	$48.000m	$19.960m
add Long Term Debt	$30,000m	$30.000m	$50.000m	$50.000m
equals Total Net Debt	($92.513m)	($50.340m)	($82.093m)	($32.765m)

Discussion

The table above is four snapshots in time of an edited down version the PGW balance sheet. That means the table doesn't say anything about earnings directly. But it is earnings that have indirectly resulted in those balance sheet movements over time. When you have a service business that is facing macro-environment headwinds, preparing for a severe downturn is relatively easy - sack a few staff. However, such a strategy would likely backfire in an specialised inventory heavy retail business, because products don't select themselves, order themselves and walk themselves out to the customer's ute. I regard another way of looking at 'tabulated inventory' as an 'emergency cash fund'.

At any time inventory can be converted to cash. After the passage of enough time, hopefully all of it will be converted to cash. Furthermore, as long as the inventory is sold at a profit, the company will pick up some incremental shareholder funds as well. But of particular interest today is what happens in tough times. A useful thing about customers of rural suppliers is that in order to keep their animals and/or crops in top, saleable, condition -no matter what is going on in the wider economy-, some money will have to be spent. And if - worst case - the farmer is so poor they cannot even do that, then PGW clips the ticket anyway as the 'must be sold' stock go through their sale-yards. Then the new animal owner becomes the PGW retail customer! This table could be interpreted as working on a 'worst case' scenario, showing what would happen where the inventory must be quit at cost. Of course such a scenario - quitting all your inventory stock at cost, because the banks demand you instantly must pay off all of your debt - is very unlikely to occur in practice. So the real value in such a table is to examine the relative size of the 'liquidity rescue lifeboat (the inventory) to see how well prepared the PGW company is for, if not a full sinking, a repairable gash in the side of the hull.

The last line for all four of the timestamp periods, which can be thought of as the size of the emergency lifeboat, is negative for all periods examined. But a negative debt is an asset, which is a good thing. Yet looked at in the light of the previous paragraph, and based around the normal trading conditions of 2HY2023 our 'lifeboat' has halved in size (by $50.340m - $32.765m = $17.575m). The next question is, how significant is that $17.575m?

SNOOPY

[percy]

I remain a bit concerned about ability of PGW to generate cash in tough times. So I have raided my collection of past reports to conduct my own figurative 'searching down the back of the sofa' exercise.

Reference Date	31/12/2021	30/06/2022	31/12/2022	30/06/2023
Trade and Other receivables	($296.772m)	($170.336m)	($321.851m)	($154.656m)
less Accounts payable & accruals	$269.311m	$189.290m	$273.959m	$164.107m
equals Net Receivables	($27,461m)	$18.884m	($47.892m)	$9.451m
Inventory	($111.939m)	($102,048m)	($129.717m)	($107,533m)
Cash & Cash Equivalents	($1.113m)	($4.676m)	($2.484m)	($4.643m)
Short Term Debt	$18.000m	$7.500m	$48.000m	$19.960m
Long Term Debt	$30,000m	$30.000m	$50.000m	$50.000m
Total Net Debt	$m	$32.824m	$95.516m	$65.317m

Inventory and debt builds up for their peak selling period,Spring.
Reduces for end of year 30th June,and as at 30/6/23 it was under 25% of their market cap.

[winner69]

Hey snoops …all OK as most of extra debt incurred in F23 went to pay the divie

No harm in borrowing to keep shareholders happy eh

[winner69]

Snoopy has a point when he says ‘I remain a bit concerned about ability of PGW to generate cash in tough times. ‘

Like 12 months to June 23 PGW had negative cash flows ….and it looks like F24 is likely to be tougher.

F23 Cash Flow -

Reported cash from operations $25.5m
Less rents paid $19.5m
Gives real cash from operations of $6.0m

Spend on capex $16.8m

Gives Free Cash Flow negative $10.8m ….the old cash burn trick

But they still paid divies of $21.7 …….funded by borrowing more

The F23 cash burn was more than previous year ……so last 2 years PGW haven’t generated any cash after selling the best part of a billion of stuff.

No wonder Snoopy a bit worried …..esp as head honcho raved on things a bit tough …and volatile

[Snoopy]

Inventory and debt builds up for their peak selling period,Spring.
Reduces for end of year 30th June,and as at 30/6/23 it was under 25% of their market cap.

Yes I hear you Percy. You spend up big for the coming season building up inventory to sell, and as a result your debt goes up. It doesn't matter if your debt goes up as long as you have enough offsetting glossy inventory on the shelves and lots of eager beaver farmers ready to 'spring into action' (see what I did there) to buy it. That is how rural supplies traders are meant to operate.

We are using 30th June (the company balance date) as a proxy for when the spring stock is ready to fly out the doors and the the 31st December half year date as a proxy for when most of those big sales are done.

You could express this same idea in the form of an equation. Something like:
(Inventory) + (Profit Margin) - (Dividends Paid Out) = (Dosh Available to buy Inventory for next season)

But I am looking at that really bad year where no money is made by the retailer and no dividend is paid out. So our equation reduces to:
(Inventory) = (Dosh Available to buy Inventory for next season)

Outside of this equation, I want you to think of PGW as a 'black box' with debt going up and down for whatever reason. The question I am thinking about is what is the underlying ability of those relatively liquid assets (the inventory) to wipe out that total debt balance, however it came to be?

Rather than thinking about that specific gloomy prospect, lets go back to the normal year. You sell the goods, your inventory goes down and now you can repay the bank, so your debt goes down too. So you would expect your net debt position to be more favourable at the end of the selling season, (at our 31st December sold down by proxy date) - right? That is what the table (post 5063, not the work in progress thing you repled to) is showing. Higher 'negative net debt' (sorry about the double negative) or more net assets (probably a better way to think of it) at the 31st December reporting date. But the table is also showing us that the 'net income generating asset position' is deteriorating, by $10m at the half year date and nearly $20m at the full year date (year on year). I don't think that can be good.

SNOOPY

P.S. Not sure what point you were making by referring to 'market cap' in the context of the 'money flow', (or 'potential money flow'), I was talking about.

[Snoopy]

Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA < 3.00

The "Senior Debt"/EBITDA hurdle was set up in pre IFRS 16 days. IFRS 16 mandates the transfer of rent from what was an operating expense to a finance expense, an operation that inflates the EBITDA figure accordingly. That means if we make the adjustment to a comparable pre IFRS 16 figure, by removing the 'interest paid on lease liabilities' and 'repayment of principal portion of of lease liabilities' (both figures may be found in the cashflow statement), then the comparable EBITDA figure reduces to this:

$61.194m - ( $3.800m + $19.532m ) = $37.862m

This is not the end of the adjustment exercise, unfortunately. This is because the the EBITDA figure quoted includes income from the 'GoLivestock' financing operation, the liabilities of which I have not included in the debt picture. It follows then that if I am not including 'GoLivestock' debt in this exercise, I must also exclude any income associated with that debt. So what is the interest revenue associated with 'GoLivestock'? $6.573m (AR2023 p71). That has to come off the EBITDA figure as well.

$37.862m - $6.573m = $31.289m

That means the adjusted Senior Debt Coverage Ratio calculation becomes:

=( -$4.643m + $19.960m + $50.000m ) / $31.289m = 2.09 < 3.00 (good, but no longer very good)

Looking out into FY2024, investors might want to consider what might happen if EBITDA reduces further in FY2024, while debt remains at today's levels. But that couldn't happen, could it?

The last line for all four of the timestamp periods, which can be thought of as the size of the emergency lifeboat, is negative for all periods examined. But a negative debt is an asset, which is a good thing. Yet looked at in the light of the previous paragraph, and based around the normal trading conditions of 2HY2023 our 'lifeboat' has halved in size (by $50.340m - $32.765m = $17.575m). The next question is, how significant is that $17.575m?

Let's do a forecasting exercise based on the projected EBITDA for FY2024, superimposed over the debt structure of FY2023.

EBITDA for bank covenant purposes = $52.000m - ( $3.800m + $19.532m ) -$6.573m = $22.095m

Now senior debt cannot exceed 3x this value or: 3 x $22.095m = $66.285m
But balance date debt @30th June 2023 was: -$4.683m + $19.960m + $50.000m = $69.955m (too much to be set off against the new downsized EBITDA forecast)

We still have a good sized inventory lifeboat on board at balance date, with a capacity of $32.765m dollars. Cutting inventory by one tenth of that value, which equates to a $3.2765m/$107.533m = 3.05% of the total inventory value looks do-able. But it is now clear that satisfying these banking covenants, in particular relating to the Senior Debt Ratio, will not be the same 'walk in the park' in FY2024, as it was in FY2023.

SNOOPY

[Snoopy]

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. 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?

To get a better idea what we are talking about with FCCR, from 'Investopedia':
What Is the Fixed-Charge Coverage Ratio?

"The fixed-charge coverage ratio (FCCR) measures a firm's ability to cover its fixed charges, such as debt payments, interest expense, and equipment lease expense. It shows how well a company's earnings can cover its fixed expenses. Banks will often look at this ratio when evaluating whether to lend money to a business."

Investopedia then goes on to show us a slightly different formula for calculating FCCR than the one used to evaluate the FCCR number for PGW in the past. That is annoying, so I will revert back to the PGW definition of FCCR used in the past, and use the 'guiding principle' expressed in the Investopedia opening paragraph (as quoted above) to keep myself straight on why we are doing this calculation in the first place.

Since PGW were not censured by their banking syndicate for their FY2023 result (publicly anyway), this is an indication that my calculation, as quoted above, may not be right.

The total interest figure of $5.521m (Note 6 AR2023) is made up of 'bank interest on loans and overdrafts' of $4.565m and a 'bank facility fee' of $0.956m. Now the bank facility fee is a fixed charge imposed by the banking syndicate. It is not part of the normal monthly operating free flow of cash in and out of the business. So it would be a little bizarre if the bank asked for an FCCR covenant test to be done, but then imposed a hefty one off charge to ensure that their customer, PGW, failed the bank's own 'FCCR test'! I don't see the benefit in a banking syndicate firing 'foot shots' into their own client base.

If I leave the bank facility fee out of the FCCR covenant equation, (while still subtracting GoIncome Interest Revenue of $6.573m from the top line, AR2023 p71) it changes to to this:

FCCR= [(EBITDA - 'GoLivestock Interest Income'] / [Total Interest(less interest income in cash)+Lease Expenses]
= [$61.194m - $6.573m] / [$4.465m + ($3.800m+$19.532m)] = 2.0 (That just scrapes in over our 'target margin of 2 or more'). Phew!

SNOOPY

[Snoopy]

There is something about the 'GoLivestock' funding model that makes me feel uncomfortable. It all made perfect sense until I zoomed right out and took the big picture view. 'GoLivestock' is sold on the basis that farmers can free up capital for other uses. But if it was such a good idea, why wouldn't the banks be queuing up to put their own capital into funding livestock? Part of the answer could be that with the closing down of much of the banking network, especially in rural towns, banks simply do not know their customers any more. If a farmer is reduced to a number on a wider spreadsheet, how can a bank judge a risk of a rural loan? OTOH PGW do have a rural network that stretches out into the heartland in a way no other kind of organisation can. PGW understand their customers, know their ability at fattening stock from their sale-yard records, and consequently have a very good idea of who they should 'rent' those PGW owned animals out to, to fatten them up for market under a 'GoLivestock' plan.

Then I got to thinking. What if 'GoLivestock', and schemes of their ilk, did not exist? That would mean there would be far fewer farmers able to afford to pay the prices that animals sell for in the sale-yards today. Pre-fattening animal prices would be much lower. But that wouldn't bother the farmer, because the farmer's ability to rear that animal would not change. In fact the percentage gain in price from purchase would likely increase once that animal was fattened up, if the initial capital buy in price was lower. That is because the ultimate sale price is set by end line market demand. And market demand cares not a hoot about how these animals were financed in the early stages of their growth. Looked at this way 'GoLivestock' resembles a ponzi scheme where farmers are bidding against each other, spending capital they don't have (but which certain lenders are happy to clip the ticket to advance to them) to raise the base pre-fattening price of all animals. If there is a sudden 'farmer awakening' that the 'opening capital' invested into animals does not have to be so high, then the owner of those animals might take a significant capital hit. And the owner of those animals, under the 'GoLivestock' scheme, is PGW itself!

I am sure that no-one thinks much about this stuff when farming is ticking along nicely, and price rises and falls are small perturbations about a mean. But what about the case of a more substantial market shock? What would happen if a whole series of farmers went broke, and PGW was left $70m of livestock on the balance sheet (their animal stock level at EOFY2023) that they could only sell for half that amount? Have the more than able finance team at PGW really thought about the 'shock downside' of their financial strategy? Or is this all just alarmist nonsense by me, fuelled by market malaise trickling down into my computer?

SNOOPY