PGW - PGG Wrightson

[Valuegrowth]

"Thanks so much- That was really helpful"

Following the sale of the PGW seed division, PGW was in a position to make a large capital repayment to shareholders, and therefore optimise debt. One way to consider what might be an optimised debt structure for this company is to look at the FY2020 balance sheet. The FY2020 balance sheet was the first produced after the capital repayment. If FY2020 was indeed 'optimal', it therefore becomes interesting to compare the debt:equity ratio at that time with the debt to equity ratio in subsequent years.

	FY2020	FY2021	FY2022	FY2023
Total Liiabilities {A}	$302.751m	$279,496m	$337.268m	$327.267m
Total Assets {B}	$459.453m	$453.034m	$509.952m	$496.528m
Debt Ratio {A}/{B}	65.9%	61.7%	66.1%	65.9%
Short Term Bank Debt	$30.000m	$9.900m	$7.500m	$19.960m
plus Long Term Bank Debt	$20.000m	$0m	$30.000m	$50.000m
equals Total Term Bank Debt	$50.000m	$9.900m	$37.500m	$69.960m
GoLivestock Asset Balance	$48.111m	$45.869m	$66.109m	$74.023m
Sales Revenue {C)	$679.379m	$714.894m	$822.481m	$854.503m
Inventory {D}	$87.111m	$81.498m	$102.048m	$107.533m
Inventory Turnover {C}/{D}	7.8 times/yr	8.8 times/yr	8.1 times/yr	7.9times/yr

At first glance, some might say the debt ratio for PGW is quite high. However, we have to remember that PGW today has become more of a hybrid 'retailer' and 'rural animal bank' (via the GoLIvestock initiative). Finance companies in general, finance loans with a small amount of their own equity in the loan, and with by far the largest amount of their loan capital made up from borrowings. This tends to give finance companies an unfavorable debt ratio compared to pure retailers. It is this 'finance company effect' that is pushing up the debt ratio of PGW above what one might expect in pure retailers. It is interesting to note that should the GoLivestock loan portfolio be called in (this isn't going to happen, the suggestion is made to make a theoretical point), then there would be enough money to pay back all of their bank debt. By this measure then, company debt may be thought of as quite low.

Further information I have included on total bank debt shows that although this is rising, such a rise has not hit the debt ratio of the company. There is an argument to be made that PGW debt is only rising, because the GoLivestock live animal portfolio is rising in value in tandem.

Meanwhile PGW stock turn looks acceptable, with total product inventory turned over at a consistent rate of 8 times per year.

SNOOPY

[Snoopy]

I am concerned about their cash generation. Cash is king for any business. High cost of doing business is one factor for poor performance in many sectors. Rents, insurance, energy, and other raw materials stuff are sitting at historically high prices.

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

Time to tabulate this cashflow issue.

	FY2020	FY2021	FY2022	FY2023
Reported cash from operations	$34.227m	$57.671m	$23.660m	$25.509m
less Repayment of Principal Portion of Lease Liabilities	($17.586m)	($18.399m)	($18.873m)	($19.532m)
less Cashflow from investing activities	($11.020m)	($3.430m)	($7.747m)	($16.758m)
equals Cashflow from day to day operations	$5.621m	$35.842m	($2.960m)	($10.781m)
Debt Ratio (refer post 5480)	65.9%	61.7%	66.1%	65.9%
Short Term Bank Debt	$30.000m	$9.900m	$7.500m	$19.960m
plus Long Term Bank Debt	$20.000m	$0m	$30.000m	$50.000m
equals Total Term Bank Debt	$50.000m	$9.900m	$37.500m	$69.960m
GoLivestock Asset Balance	$48.111m	$45.869m	$66.109m	$74.023m

Selected Expenses
	FY2020	FY2021	FY2022	FY2023	Increment FY2022 to FY2023
Freight costs	Not disclosed	$9.814m	$12.438m	$14.925m	+20.0%
IT & Telecommunications costs	$11.641m	$12.981m	$13.372m	$15.435m	+15.4%
Rent (lease capital + interest charge)	$21.771m	$22.335m	$22.659m	$23.332m	+3.0%
Employee Expenses {B}	$113.964m	$119.828m	$132.874m	$137.561m	+3.5%
Travel Costs	$3.044m	$2.858m	$2.317m	$4.446m	+91.9%
Selected Expenses Total (excluding employee expenses)	N/A	$47.988m	$50.785m	$58.138m
Increased Expenses Total (Year to year )	N/A	N/A	+$2.797m	+$7.353m
Sales Revenue {A)	$679.379m	$714.894m	$822.481m	$854.503m
Sales Revenue / Employee Expenses {A}/{B}	6.0	6.0	6.2	6.2

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

In an attempt to reconcile where the near $8m deterioration on operational cashflow came from between FY2022 and FY2023, I have had a look at selected disclosed expenses that are most likely to be meaningful. Labour is the biggest dollar cost increase. But this appears to me 'money well spent' because for every extra dollar spent on wages, sales revenue went up in proportion. I don't mind if wage costs go up, when there is a proportionate increase in productivity. Rent going up accounts for an $0.6m increase in the cost base. Overall rent has increased well below the rate of inflation, so we can't claim 'greedy landlords' as an excuse for restricted profitability either.

'Worst offender' appears to have been freight costs, up 20%, that accounted for a $2.5m blow out in operating cashflow on their own. FY2023 was touted as the year of the 'business improvement program' to simplify PGWs IT systems. That doesn't square up with a 15.4% increase in IT and Telecommunications costs (AR2023 p7), accounting for $2m of the deterioration in operating cashflow. Maybe it was the 'telecommunications bit' that blew the budget?

Travel expenses up $2m completes the selected expenses picture. As well as higher overseas air fares in general, the CEO indicated at the AGM that PGW had taken the trouble to reconnect with overseas suppliers when previously Covid-19 restrictions had limited international meeting opportunities during the height of the pandemic.

Sum up these incremental totals and I get: $0.6m+$2.5m+$2m+$2m= $7.1m

Moving on to 'trade and receivables', (AR2023 p80), prepayments are down by $1.3m - a direct hit to cashflow. That takes the operational revenue cashflow shortfall to $8.4m. There are smaller numbers that I have not reported on that affect cashflow both positively and negatively. Nevertheless I believe the broad story of deteriorating operating cashflow is reflected in the selected operating expense items I have chosen to highlight.

There are at least four ways to fix an operational cashflow short fall:
1/ Bring more revenue in such that the increase in revenue offsets any incremental cost increases required,
2/ Restructure the business to reduce expenses to match the lower income revenue expected.
3/ Get more customers to pre-pay for their goods.
4/ Reduce capital investments

So there is my run down on the operational revenue issue. I have suggested what could be done to address the issue. But what should be done to address the issue? That's next.

SNOOPY

[Snoopy]

There are at least four ways to fix an operational cashflow short fall:
1/ Bring more revenue in such that the increase in revenue offsets any incremental cost increases required,
2/ Restructure the business model to reduce expenses to match the lower income revenue expected.
3/ Get more customers to pre-pay for their goods.
4/ Reduce capital investments

So there is my run down on the operational revenue issue. I have suggested what could be done to address the issue. But what should be done to address the issue? That's next.

With farmers showing the least confidence since the mid 1980s, it would be a brave Fred (or Freida?) to spend big on the farm if they aren't banking on making any money this year. What is PGWs best option to deal with this grey farming picture?

Option 1/ is out of farmer's control, so scratch it.
Option 3/? Ha ha ha ha ha ha! Who says I don't have a sense of humour?
Option 4/ Well, most of the big IT spend is done, and management could pause their upgrade on a couple of stores. They could reduce their intake of trainees for year. Yes! There is also the possibility of reducing stock in the stores, and turning inventory into cash. This will require very careful consideration. With PGW pushing the 'service ethic' button, the last thing a farmer would want to hear is that the whazmo in the PGW catalogue that they need next month will take three months to get on the water ex-China. However, I definitely think that this idea is worth perusing. Maybe reduce some 'optionality of choice' rather than removing product categories entirely? Reducing inventory by 5% would add :
0.05 x $854.503m = $43m to cashflow. So where does this leave Option 2?

Option 2: I think there is room for freight rates to come down a bit internationally. So perhaps there is room to move the mark up margin on some lines, without increasing the price? $1m to be gained here? Now PGW are reacquainted with all of their suppliers, perhaps they could knock their travel plans back a bit too - $1m more saved! $1m here and $1m there? Hmmmm I can't see this overall plan generating cash of significance!

Perhaps the answer might be 'none of the above' and just wind back the 'GoLivestock' scheme? Any money PGW can withdraw from that, can go straight back to repaying debt. This sounds like a much less risky option to me than potentially damaging the business model via 'cost cutting' on the retail side, just when they had invested all that hard earned energy building up the reputation of Retail!

SNOOPY

P.S. Share price down 4.5% today to $3.20. I think that is now very close to fair value on a business cycle basis (refer post 5443). But as we know, share prices can overshoot fair value, both on the upside and the downside. (Snoopy note: Looking to increase my holding, but the price must be right!)

[kiora]

Option 3 ?
I doubt that PGW pay for any freight. Suppliers are more likely to pay any freight cost for goods

Farming hitting a wall of confounding costs :Stress test for farmers

https://businessdesk.co.nz/article/f...db55-446239310

[Snoopy]

Option 3 ?
I doubt that PGW pay for any freight. Suppliers are more likely to pay any freight cost for goods

Farming hitting a wall of confounding costs :Stress test for farmers

https://businessdesk.co.nz/article/f...db55-446239310

Hi kiora,

1/ Freight is listed as an explicit item under 'Cost of sales' (Note 2) in the PGW annual report. That means PGW did pay for 'something' categorized as freight.

2/ Furthermore in his AGM address, CEO Stephen Guerin said this:
"International travel recommenced after COVID-19 travel restrictions with visits to our suppliers in America, Europe, Australia, and Singapore. These trips are crucial to the business to ensure that we are at the forefront of new research and products coming to the market. These visits also foster and reforge relationships with our suppliers and overseas partners and create favourable trading partnerships."

3/ Under 'Other expenses' (Note 3) travel costs ballooned significantly from $2.317m to $4.446m

Those are the facts we know. At this point it is a matter of how you choose to 'join the dots'.

My take on it was that for some items they stock, PGW deals with overseas suppliers directly and buys 'zigwams', sourcing directly from the factory overseas. In that instance I would expect PGW to hire their own container and pay to get product from the factory source, where-ever that may be in the world, to NZ. $4.446m in freight charges sounds a lot. But put it in the context of $854.503m of annual product sales revenue and I get:
$4.446m/$804.503m= 0.55%

That percentage freight charge sounds low to me, indicating that 'freight expense' only partially represents the total freight movements enacted by the company. So that fits in with the narrative of most products delivered 'freight free' from an NZ local service source, while there is a small sub-section of stock that is acquired directly from overseas suppliers, where PGW pay the freight.

Another possibility is that farmers arrange carriers to pick up their orders from the local PGW outlet and PGW have a fee-bate system where they effectively go halves with the farmer on freight costs. In that instance those 'freight costs' under Note 2 would be domestic. I do know some retail businesses that operate this way. But whether PGW does, I do not know.

I could be totally wrong about all of this. But that is how I 'joined the dots'.

SNOOPY

[Snoopy]

I am not too happy with my efforts so far calculating this. Despite my impassioned argument in 'attempt 2', I have decided the 'Bank Facilities Charge' is a real charge that has to be met by income. Whether that charge is imposed by the bank (which it is) or not is irrelevant. I still have to include it.

The other change I am making is to take off only the cost of the 'GoFinance' income from the top line. Not the whole of the 'GoFinance' income like I did before. I should do this because all of the other top line items have had their cost of sales removed when the EBITDA figure is given. But being a pure finance scheme earner, the cost of running that 'GoFinance' loan is the interest cost and in fact the only company cost on the capital that is needed to fund it. This gives me a bit of problem because PGW does not disclose this 'funded interest rate' cost. Fortunately I have already done my homework on this topic. Post 5441 gives an indicative cost of funds rate of 8.6% on an average debt balance of $64.552m.

In funding cost terms, this translates to a dollar amount of: 0.086 x $64.552m = $5.551m over the year. We now have the information needed to complete our bank covenant equation.

FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [Total Interest(less interest income in cash)+ Banking Facilities Charge+Lease Expenses]

= [$61.194m - $5.551m] / [($4.565m-$0.485m)+$0.956m+($3.800m+$19.532m)] = 1.96 which is less than our targeted 2.00 figure, albeit not by much. That in turn leads me to my overall conclusion as best expressed by Charlie Brown: "Arrrrrrrrrggh!"

Combine a stupid dog brain with not enough firm information and you don't get the answer. Anyone like to factor a guess on what I have done wrong this time? (Or will those errant corporate syndicate bankers, going after PGW, be at the Christchurch Airport park PGW HQ front door, baying for blood on Monday morning after all?)

I am vacillating as to whether to incorporate the set up cost for the banking facilities as part of the interest payment or not.

The interest payments have a dual role in this calculation. One as the interest payment that PGW must make to their banking syndicate (rather obviously), with the second role being the cost base for the 'GoLivestock' loans that I am required to remove from EBITDA as a cost of doing the finance side of the business (because all operational costs of doing business should be removed when EBITDA is calculated). Time to restore the 'GoLivestock Interest Cost' figure back to just the interest cost, not including the banking facility set up cost? Not now.

I call it the 'Go Livestock Interest Cost'. But actually it is a cost derived from the interest paid on the combined short and long term bank loans. You could argue that those loans belong to PGW in general, and are not specific costs that are to be matched up against 'GoLivestock' income. I would argue that it is best not to think like that, because the 'stock loaned against' numbers have gone up with the 'GoLivestock' loan book going up in value. That means it would be possible to pay off all company debt should the GoLivestock program be completely wound down (EOFY2023 perspective). History has shown that to work through retailing business cycles, having no company debt (disregarding all of the retailers lease agreements which are quite onerous enough in themselves) can be smart business practice. So I think it is reasonable to consider at the full year balances date, the retail and agency arms of PGW as 'debt free company divisions', with an add on finance division ('GoLivestock'), which does carry an appropriate level of debt.

Post 5476 gives an indicative cost of funds rate of 7.1% (this figure excludes the bank facility set up costs, and is 'interest only') on an average debt balance of $64.552m. In funding cost terms, this translates to a dollar amount of: 0.071 x $64.552m = $4.583m over the year. We now have the information needed to complete our bank covenant equation.

FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [Total Interest(less interest income in cash)+ Banking Facilities Charge+(Lease Expenses)]

= [$61.194m - $4.583m] / [($4.565m-$0.485m)+$0.956m+($3.800m+$19.532m)] = 2.0 which is just equal to the targeted 2.0 figure.

All good then. But with a covenant like this going 'so close to the wire', you do wonder what would happen if the EBITDA falls as forecast over FY2024.

SNOOPY

[Agrarinvestor]

Dear Shareholder,

I am the German Idiot that have aquired 60000 Agria Shares a decade ago. They were delisted many years ago. Still owning these shares.
Can someone give me short update if AGRIA is still a shareholder of PGW?
I you have any usefulls hints for me, please provide them.

kindly greetings from Germany

Agrarinvestor

[iceman]

Dear Shareholder,

I am the German Idiot that have aquired 60000 Agria Shares a decade ago. They were delisted many years ago. Still owning these shares.
Can someone give me short update if AGRIA is still a shareholder of PGW?
I you have any usefulls hints for me, please provide them.

kindly greetings from Germany

Agrarinvestor

I hope this helps: https://app.companiesoffice.govt.nz/.../shareholdings

[Agrarinvestor]

Many thanks Iceman.

If anyone has an idea how to convince Agria to buy back my shares it would be most welcome.
Thinking about asking Management of PGW for helpm or perhaps it is as a last not prefered chance to ask New Zealand Press for help.
I think Chinese Investors are investing everywhere and can rely on fairnss in NZ or Europe

regard

Agrarinvestor

[winner69]

PGW retail arm doing OK but competitors losing money


In their respective financial years to the end of June, Farmlands recorded a loss of nearly $680,000, while Ruralco's net loss after tax came in at $2.1 million.

https://businessdesk.co.nz/article/f...nflation-bites