PGW - PGG Wrightson

[Toddy]

Very low volumes today. So hard to say what a fair price is.

[mike2020]

Very low volumes today. So hard to say what a fair price is.

No divs and when restarted change of div policy, who will actually be able to guess?

[Norwest]

Very low volumes today. So hard to say what a fair price is.

Not true. Today was the highest volume traded year to date and only 5 days had higher volume over the trailing 12 months. The volume was large by PGW standards today!

PGW is intrinsically low volume, which makes it hard for anyone with even a mid sized position to exit or enter at a price they want without affecting the market itself.

[Snoopy]

Very low volumes today. So hard to say what a fair price is.

No divs and when restarted change of div policy, who will actually be able to guess?

Well I put my order in a month ago, based on the last five years of earnings averaged out. So no guessing was required. The yield I was happy with determined the price I was willing to pay. You can't really say what the future dividend policy will be as I expect half the board to be removed shortly. Perhaps 'big Steve G' will be forced to walk the plank as well. If so this will be a pity, as my comparison with Elders (post 5493) shows, operationally PGW has performed well in difficult market circumstances.

But even if the dividend is reduced, this will be because PGW sees a better return in reinvesting some retained earnings back into the business. This I believe would be a good thing for shareholders, if the board deems this is the wisest use of the cash generated.

SNOOPY

[winner69]

Share price down another 9% to $2.63 ….about half what it was 2 years ago ..ouch

Guy from Hamilton Hinden Green said it appeared investors were losing confidence in the company as it faces tougher times ahead…….he obviously didn5 sound out Snoopy ….whose eager to buy even more at this price.

[nztx]

Could it all be a plan for Aria to fly in & clean up when the dust settles at a lower level ?

[Snoopy]

Share price down another 9% to $2.63 ….about half what it was 2 years ago ..ouch

Guy from Hamilton Hinden Green said it appeared investors were losing confidence in the company as it faces tougher times ahead…….he obviously didn5 sound out Snoopy ….whose eager to buy even more at this price.

It is a cyclical Winner. Rural cyclicals always face tougher times ahead, then they recover. Always best to buy at the bottom of the rural cycle. But this cycle looks tougher than the last. Aussie farmers have killed NZ lamb prices. Milk price recovering but still well down on a year ago. Fruit yields lower. Selling farmland a struggle. And where's the beef?

https://www.youtube.com/watch?v=Ug75diEyiA0

Those US burger joint servings not as generous as they once were. But I have sussed my increasing stake in PGW. Shares always go down after I buy in. So buy a small addition. Wait for the share price to sink, then buy the number of shares you really want. Heh heh heh heh. I have this Mr Market guy figured out!

SNOOPY

[mike2020]

Snoopy I love pgw as much as any man can.that said I had set in my mind 2.80 as a buy but now I have shaved that a little under today's price. The only risk it is probably vulnerable to a take over. Either way long term you will be fine.

[Toddy]

Looks cheap at $2.33

[Snoopy]

I have decided the best capitalised valuation technique to use for PGW from a FY2023.5 perspective is a hybrid technique using normalised earnings (2HY2019.5, FY2020 and FY2021) and actual dividends paid (FY2022, FY2023 and HY2023.5). I am effectively using normalised (post restructuring) earnings as a proxy for dividends, because recent history has shown that PGW pay out all of their operational earnings as dividends.

Year	Dividends Paid 'per share'	Sub Total	PGW Rural Servicing Normalised Earnings 'per share'
FY2019	12.5cps + 7.5cps	20.0cps	9.2cps+1.1cps (1)
FY2020	7.5cps + 9.0cps	16.5cps	9.9cps
FY2021	0.0cps + 12.0cps	12.0cps	23.6cps
FY2022	16.0cps + 14.0cps	30.0cps	32.6cps
FY2023	16.0cps + 12.0cps	28.0cps	23.0cps
FY2024	10.0cps + ?cps	10.0cps	?cps
Total FY2022 to FY2023.5 inclusive		68.0cps
Total FY2019.5 to FY2021 inclusive			34.6cps

Notes

1/ Total FY2019 earnings of 5.8cps were not distributed equally throughout the year. I have apportioned the 5.8cps of earnings over FY2019 by considering the NPAT for the 'Agency' and 'Retail & Water' for FY2019 and HY2019 (see Segmented Profit Section of each report) as follows.

	Agency {A}	Retail & Water {B}	{A}+{B}
FY2019	$9.600m	$11.645m	$21.245m
less HY2019	$2.249m	$16.728m	$18.977m
equals 2HY2019	$7.351m	($5.083m)	$2.268m

This means the total portion of 'Agency' and 'Retail & Water' profits earned in 2HY2019 was: $2.268m/$21.245m= 10.68%
0.1068 x 10.3c = 1.1cps

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The total return I am capitalising over a period of five years is: 68.0c+34.6c= 102.6c. This works out to be 105.5c/5=20.5cps on average every year. Due to interest rates rising and forecast to be higher for longer, I am raising my required capitalised rate of return to 9.0% gross. I had considered raising that rate even further to 9.5%. However, due to the strong operational performance over the last couple of years reflected in PGW gaining market share and having a relatively stable and well thought of workforce, I thought the company had earned half a percentage point 'required return credit' when I set the required yield rate. Now what does a 9.0% required gross yield on 21.1c of annual payments imply for the share price?

20.5c/ (0.72x0.09) = $3.16

PGW closed at Friday 20th October at $3.42. Given the market share gains made by PGW over the last couple of years, perhaps such a growth premium of $3.42-$3.16= 26cps is justified (remember capitalised dividend valuation assumes zero growth) ? Yet despite the heady price falls from the $5.50+ share price peaks of a couple of years ago, I do not believe this share is 'cheap' at $3.42. I calculate the current year normalised historical PE ratio to be 342/24.1= 14.2. However, if the share price were to continue down toward, and maybe just under, that $3 mark? Then I think PGW would hit that share price point of 'good business cycle buying'.

SNOOPY

discl: holding

I have decided the best capitalised valuation technique to use for PGW from a FY2024 perspective is a hybrid technique using normalised earnings (FY2020 and FY2021) and actual dividends paid (FY2022, FY2023 and FY2024). I am effectively using normalised (post restructuring) earnings as a proxy for dividends, because recent history has shown that PGW pay out all of their operational earnings as dividends. Higher historical dividends paid out above earnings are not valid forecasting data points for PGW with its current balance sheet.

Year	Dividends Paid 'per share'	Sub Total	PGW Rural Servicing Normalised Earnings 'per share'
FY2020	7.5cps + 9.0cps	16.5cps	9.9cps
FY2021	0.0cps + 12.0cps	12.0cps	23.6cps
FY2022	16.0cps + 14.0cps	30.0cps	30.4cps
FY2023	16.0cps + 12.0cps	28.0cps	24.1cps
FY2024	10.0cps + 0.0cps	10.0cps	?cps
Total FY2022 to FY2024 inclusive		68.0cps
Total FY2020 to FY2021 inclusive			33.5cps

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

The total dividend return I am capitalising over a period of five years is: 68.0c+33.5c= 101.5c. This works out to be 101.5c/5=20.3cps on average every year. My required capitalised rate of return for PGW is 9.0% gross. This is the highest return I require for any of my sharemarket investments. The reason for this is the rural sectors' underlying swings between good and bad seasons muddying the multi year income picture. I had considered raising that required return rate even further to 9.5%. However, due to the strong operational performance of PGW over the last couple of years, compared to say Elders in Australia, reflected in PGW gaining market share and having a relatively stable and well thought of workforce, I thought PGW had earned that 'half a percentage point' 'required return credit' when I set the required yield rate.

Now what does a 9.0% required gross yield on 20.3c of annual payments imply for the share price?

20.3c/ (0.72x0.09) = $3.13

PGW closed on Tuesday 5th March at $2.31, a massive 26.2% discount to fair value of my 'market cycle capitalised dividend valuation'. We don't yet know what the profit figure will be for FY2024, because the financial year does not end until 30th June 2024. What I am prepared to say is that NPAT will be much reduced and, on a PER basis, that 'today Mr Market valuation of PGW' at $2.31 may even look expensive. Investors used to the 'rural cycle' will look through this and realise that the markets are 'forward looking'. Eventually that forward view will be looking at better times. Not as good as when the returns for milk, beef, lamb and horticulture all hit that magic sweet spot together over FY2021 and FY2022. But better than today where the rural market gloom has not been this bad since Roger Douglas ripped the rug of government support from the farming community thirty five years ago. The real discount to fair value is probably less than the 26.2% that I calculate. But for those willing to take a forward view a little further forward than Mr Market, I believe that PGW at around $2.30 represents a once in five year accumulation opportunity. In fact, I am calling PGW a 'BUY' (rather than an accumulate) at these prices.

SNOOPY

discl: holding and accumulating