PGW - PGG Wrightson

[audiav]

Afternoon all,

Please note the announcement made by PGW this afternoon.
NZSA proposed resolutions for special meeting - NZX, New Zealand’s Exchange

NZSA is interested in ensuring a fair outcome for shareholders in PGW. Due to the size of the Agria shareholding, however, your vote as a shareholder - no matter how small - really matters.

You'll see that we are proposing some resolutions of our own, including due consideration of a minority inverests voting regime.

Feel free to get in touch with any questions or comments.
Oliver

Hi Oliver, I usually give NZSA proxy vote for each holding when I get notified of a meeting. Will this happen with this meeting? ie can I just wait for an electronic notification and assign NZSA as proxy? (Apologies for lazy question)

[ronaldson]

Afternoon all,

Please note the announcement made by PGW this afternoon.
NZSA proposed resolutions for special meeting - NZX, New Zealand’s Exchange

NZSA is interested in ensuring a fair outcome for shareholders in PGW. Due to the size of the Agria shareholding, however, your vote as a shareholder - no matter how small - really matters.

You'll see that we are proposing some resolutions of our own, including due consideration of a minority inverests voting regime.

Feel free to get in touch with any questions or comments.
Oliver

Oliver - I am not a holder but read the PGW announcement and supporting materials. I fully support NZSA's actions and rationale, together with the related change suggested on a broader basis to better protect minority shareholdings in all NZX listed entities. Well overdue in my opinion.

[iceman]

Afternoon all,

Please note the announcement made by PGW this afternoon.
NZSA proposed resolutions for special meeting - NZX, New Zealand’s Exchange

NZSA is interested in ensuring a fair outcome for shareholders in PGW. Due to the size of the Agria shareholding, however, your vote as a shareholder - no matter how small - really matters.

You'll see that we are proposing some resolutions of our own, including due consideration of a minority inverests voting regime.

Feel free to get in touch with any questions or comments.
Oliver

Well done Oliver.

[Oliver Mander]

Hi audiav...not a lazy question in the slightest!
Yes, you are of course welcome to do that. I sent the link to our standard Computershare form only because right now, there is notice of meeting (nor proxy form) available.

Oliver

[Snoopy]

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!

Management were a little concerned at the half year reporting date on the propensity of company debt to blow out, as interest rates remain high. So concerned that they canned the interim dividend, with no promise of a final dividend either. Have things really got that bad? Time to take a closer look.

My first task is to look at how the Go Livestock 'don't call it a finance division Trev' loans, err I mean 'advances' are going.

Looking at HYR2024, this 'Go Livestock' unit has 'advances' on the books of $40.578m+$0.158m = $40.736m (not accounting for any provisioning which is not separately declared) as at the 31-12-2023 balance date.

Yet $40.736m is an understatement of the loan, ahem I mean 'advance book', on an annual basis. Livestock advances are essentially seasonal. To get a representative 'advances' balance over the half year, it is best to take an average of the two book ended 'advances' balance data points across HY2024 that we have: 30-06-2023 ($74.023m) and 31-12-2023 ($40.736m):

The averaged Go Livestock balance over HY2024: ($74.023m+$40.736m)/2 = $57.380m

We should note -in passing- that the interest earned on these 'Go Livestock' 'advances' over HY2024 was $4.003m (HYR2024 p20). Based on that averaged 'advances' balance, this represents an annualised gross return to PGW shareholders of:

2x$4.003m/$57.380m = 14.0%

I guess I should have checked with the PGW company usurer before I published that figure, but I do believe it is correct. Blimey, I am starting to feel sorry for our livestock farmers now, but that is a very nice little income stream for we shareholders. YET -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 was checked:
"(We) considered beef and sheep meat commodity price movements up to and after balance date to assess whether these changes, which are indicative of changes in the value of livestock security held for Go Receivables, are an indicator of any further credit risk of Go Receivables."

Just as well the auditors weren't sniffing around at the half year date and weren't there to notice the (from HYR2024 p4)
"softer commodity pricing particularly in sheep and lamb markets where prices were back 28 per cent year-on-year."

isn't it? Thank goodness those auditors never read threads on this forum!

SNOOPY

[Snoopy]

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.

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	EOHY2024
Cash On Hand	($13.307m)
add Short Term Bank Loans	$65.000m
add Long Term Bank Loans	$45.190m
add Net Defined Benefit Liability (Pension Plan deficit)	$2.132m
add Employee Entitlements (1)	$19.944m
Total Bank and Worriesome Liabiliities	$119.259m
less Animal assets (semi-annualised average)	($57.380m)
Total Net Debt	$61.879m

Notes

1/ Not separately declared at the half year. In the absence of up to date information, I have rolled over the full year figure.

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

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? In this case, as long as the weight of the lambs on farm has increased by 39% since being bought at auction for fattening, that is the weight increase needed to compensate for a 'fall per kilo' in the money received of 28%. Could a farmer add that much weight (39%) to a lamb in just a few months? I would love to know.

At first glance that 'blow out' in net debt of: $61.879m - $25.279m = $36.6m over just six months looks alarming. But it is part of a pattern of buying in stock (both 'for the shelf' and literal live animal stock) over the first half of the year and selling it off in the second. So I doubt that the EOFY2024 balance date blowout in debt (if any) will be $36.6m. Yet for wider context, even $25.279m of EOFY2023 net debt is a lot more net debt than the $10.119m that was on the books at EOFY2022, when the outlook for PGW was brighter.

SNOOPY

[Snoopy]

The next task is to work out what the profit margin is on these GoLivestock loans. To work that out, we need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over FY2023 were $5.521m (AR2023 p74). Once again we will use our three time stamp data points to average the funds borrowed across the year.

Reference Date	30/06/2022	31/12/2022	30/06/2023
Cash & Cash Equivalents	($4.676m)	($2.484m)	($4.643m)
Short Term Debt	$7.500m	$48.000m	$19.960m
Long Term Debt	$30.000m	$50.000m	$50.000m
Total Net Debt	$32.824m	$95.516m	$65.317m

=> Average Debt over Year = ($32.824m+$95.516m+$65.317m) / 3 = $64.552m

So the interest rate charged by the banks on the funds loaned was: $5.521m / $64.552m = 8.6%. We know from part 1 of this analysis that the return on funds loaned by PGW was 10.8%. The difference between the borrowed and lent loan rates, multiplied by the average GoLivestock loan balance, is the NPBT earned by PGW from these GoLivestock loans:

(0.108-0.086)x $64.552m = $1.420m.

Of course it is likely that PGW earns a commission on the buying and selling of this animal stock via its own sale-yards as well. But such a commission would likely have been earned whether the animal stock was financed by PGW or not. It is the financing risk we are interested in here. It is only the $1.420m that is directly connected to that.

The $1.420m of profit earned on the funding aspect of the GoLivestock loans is taxable. The associated after tax profit figure was: 0.72 x $1.420m = $1.023m.

Now from the 'Consolidated Statement of Profit and Loss'', the declared profit for FY2023 was $17.518m. We can think of this $17.518m as money available to pay down debt, if the banks demanded that debt be fully repaid (in general this is a hypothetical situation).

The next task is to work out what the profit margin is on these GoLivestock loans. To work that out, we need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over HY2024 were: $3.367m + $0.485m = $3.855m (HYR2024 p25). we will use our two time stamp data points to average the funds borrowed across the half year.

Reference Date	30/06/2023	31/12/2023
Cash & Cash Equivalents	($4.643m)	($13.307m)
Working Capital Debt	$19.960m	$65.000m
Long Term Debt	$50.000m	$45.190m
Total Net Debt	$65.317m	$96.883m

=> Average Debt over Six months = ($65.317m + $96.883m) / 2 = $81.100m

So the annualised interest rate charged by the banks on the funds loaned was: 2x $3.855m / $81.100m = 9.5%. We know from part 1 of this analysis that the return on funds loaned by PGW was estimated at 14.0%. The difference between the borrowed and lent loan rates, multiplied by the average GoLivestock loan balance, is the annualised NPBT earned by PGW from these GoLivestock loans:

(0.140-0.095)x $57.380m = $2.582m.

Of course it is likely that PGW earns a commission on the buying and selling of this animal stock via its own sale-yards as well. But such a commission would likely have been earned whether the animal stock was financed by PGW or not. It is the financing risk we are interested in here. It is only the annualised $2.582m that is directly connected to that.

The $2.582m of annualised profit earned on the funding aspect of the GoLivestock loans, or $1.291m of half year profit, is taxable. The associated after tax half profit figure was: 0.72 x $1.291m = $0.930m.

Now from the 'Consolidated Statement of Profit and Loss'', the declared profit for HY2024 was $11.949m.
The 'Consolidated Statement of Profit and Loss'', statements for FY2023 and HY2023 allow us to calculate the declared profit for the declared profit for 2HY2024:
$17.518m - $21.158m = ($3.640m), which was a loss

This means the declared consolidated net profit after tax for the twelve months ended 31-12-2023 was just: $11.949m - $3.640m = $8.309m

We can think of this $8.309m as money available to pay down debt, if the banks demanded that debt be fully repaid (in general this is a hypothetical situation).

SNOOPY

[Snoopy]

We now have enough information to do our two alternative MDRT (Minimum Debt Repayment Time) calculations. Note the 'old way' assumes all of that livestock loan debt is just company debt (not realistic IMV).

MDRT (old way) = (Total Worrisome Debt) / (Declared NPAT) = $86.327m/$17.518m = 4.93 years

MDRT (new way) = (Total Worrisome Debt - Seasonally Adjusted 'GoLivestock' Debt) / (Declared NPAT - GoLivestock NPAT)
= ($86.327m - $61.048m) / ($17.518m - $1.023m) = 1.53 years

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

My rule of thumb for the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

That means my revised modelling has seen PGW drop from what I had classed as a 'medium debt' company back to a 'low debt' company. And because PGW works in a turbulent sector like agriculture, this is good to see.

Looking out into FY2024, I can see that MDRT figure deteriorating. But at this point I would not be concerned about that. It is something that I would expect as more rural commodities head toward their cyclical market lows.

We now have enough information to do our two alternative MDRT (Minimum Debt Repayment Time) calculations. Note the 'old way' assumes all of that livestock loan debt is just company debt (not realistic IMV).

MDRT (old way) = (Total Worrisome Debt) / (Declared NPAT) = $119.259m/$8.309m = 14.4 years

MDRT (new way) = (Total Worrisome Debt - Seasonally Adjusted 'GoLivestock' Debt) / (Declared NPAT - GoLivestock NPAT)
= ($119.259m - $57.380m) / ($8.309m - 2x$0.930m) = 9.60 years

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

My rule of thumb for the MDRT answer in years is:

years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern

My revised modelling has seen PGW drop from what I had classed as a 'cause for concern debt' company back to a 'high debt' company. Nevertheless whichever interpretation of MDRT you choose, the result is not particularly reassuring, The MDRT figure for FY2023.5 has deteriorated as I expected. But I do find the extent of the deterioration startling. But such a trend is something that I would expect, as more rural commodities head toward their cyclical market lows.
Are the banks keeping a closer eye on this situation than PGW management are letting on? If so, it means the cancellation of the dividend is quite understandable.

SNOOPY

[Snoopy]

MDRT (new way) = (Total Worrisome Debt - Seasonally Adjusted 'GoLivestock' Debt) / (Declared NPAT - GoLivestock NPAT)
= ($119.259m - $57.380m) / ($8.309m - 2x$0.930m) = 9.60 years

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

My rule of thumb for the MDRT answer in years is:

5< years <10: Company has high debt

Before someone 'pulls me up' I have to admit to being a bit lazy (see part of quoted post highlighted in bold). What I have done is calculated the annual GoLivestock NPAT for the mixed year incorporating 2HY2023 and HY2024 by simply doubling the profit from HY2024. Given the difference in GoLivestock profit margins that I have calculated for FY2023 and HY2024, this is likely to have overstated the profits made by GoLivestock over the period. As a consequence of that, it means the profits for the remainder of the business are slightly understated. That is turn means the MDRT figure that I have calculated is likely to be slightly worse than the actual figure. However, before someone gives me a 'bad rep' for being lazy, may I present my defence.

The whole business of claiming that I can calculate an interest rate being paid, by simply looking at:

a/ the loan balance at the start AND
b/ loan balance at the end

-of a particular period- is fraught. The problem is you can't really know what the average outstanding loan balance is by looking at two snapshot data points. You really have to know what all the loan balance movements are during the period under examination as well. And such information is not published. An extreme example would be if the GoLivestock loan balance was completely repaid on 01-07-2023 (the day after balance date) and then suddenly renewed on 30-12-2023 (the day before half year balance date). In that situation the average loan balance outstanding per day would be close to zero, despite the GoLivestock loan balance being correctly listed as $74.023m (EOFY2023 figure) and $40.736m (EOHY2014 figure) in the respective full year and half year annual reports. What I am saying here is that the whole process of estimating an average outstanding loan balance by just looking at the start and end points is fraught. So to get caught up in the minutiae of calculation detail when you know the whole process is likely significantly error ridden by matter of 'information available' is actually wasting precious analysis time. In this case, particularly when my result slightly overstates (not understates) the real MDRT risk, I think my analysis process being 'near enough' is 'good enough'.

SNOOPY

[Snoopy]

Three years on and with the trading position of PGW going into more difficult times, a reassessment of the Senior Debt Coverage Ratio (SDCR) is in order. We will look at the 30th June balance date first. The cash balance (offsetting debt) together with the long term company debt and short term company debt come straight from the balance sheet. The operating EBITDA figure is from the Consolidated Statement of Profit and Loss.

Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
=( -$4.643m + $19.960m + $50.000m ) / $61.194m = 1.07 < 3.00 (very good)

So all looking very good then, EXCEPT, these figures are not what they seem. 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 above quoted information is from AR2023, relating to FY2023.

MDRT is one thing. But real bankers take more notice of other debt measures like SDCR: Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
Here we look at the indicator information on the 31st December 2023, otherwise known as the half year 2024 balance date, that relates directly to SDCR.

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

a/ The cash balance (offsetting debt) together with the long term company debt and short term company debt come straight from the balance sheet:

Net Senior Debt @EOHY2024 = 'Cash on Hand' + 'Short Term Bank Debt' + 'Long Term Bank Debt' = ($13.307m) + $65.000m + $45.190m = $96.833m

b/ The operating EBITDA figures below are taken (or calculated) from the respective 'Consolidated Statement(s) of Profit and Loss'. We need to adjust for the IFRS16 treatment of rent, which was changed from an operating expense to a separate finance expense and depreciation expense. Both of these changes artificially increase the EBITDA figure as reported in line with current accounting standards. (For reference purposes only, I have also produced the equivalent figures from the previous 'composite year').

Composite Year 2HY2022+ HY2023	FY2022	HY2022	=> 2HY2022 {A}	HY2023 {B}	{A}+{B}
EBITDA	$67.153m	$47.428m	$19.725m	$47.844m	$67.569m
less Interest Paid on Lease Liabilities	$3.786m	$1.896m	$1.890m	$1.908m	$3.798m
less Depreciation of Property Lease assets	$18.873m	$9.291m	$9.582m	$9.566m	$19.148m
equals pre-IFRS16 equivalent EBITDA	$44.494m	$36.241m	$8.253m	$36.370m	$44.623m

Composite Year 2HY2023+ HY2024	FY2023	HY2023	=> 2HY2023 {A}	HY2024 {B}	{A}+{B}
EBITDA	$61.194m	$47.844m	$13.350m	$39.962m	$53.312m
less Interest Paid on Lease Liabilities	$3.800m	$1.908m	$1.892m	$1.920m	$3.812m
less Depreciation of Property Lease assets	$19.532m	$9.566m	$9.996m	$10.256m	$20.252m
equals pre-IFRS16 equivalent EBITDA	$37.862m	$36.370m	$1.462m	$27.786m	$29.248m

c/ Next we need to adjust the EBITDA figure further downwards by removing the 'GoLivestock' income stream from overall EBITDA The EBITDA figure quoted includes income from the 'GoLivestock' financing operation, the liabilities of which are represented by livestock assets valued at $40.376m @EOHY2024. I have used the asset value of the the live animals on the PGW balance sheet as representative of the 'GoLivestrock' debt taken on, which has been passed across to farmers as 'GoLivestock' customers, the temporary guardians of these PGW owned animals. I have subtracted this 'finance debt' ($40.376m) from the overall debt picture (see calculation below), as it distorts the underlying operational debt position of the company..

It follows then, that if I am not including 'GoLivestock' debt in this exercise, I must also exclude any associated denominator income stream (interest revenue from the farmer) associated with that 'GoLivestock' debt. So what is the interest revenue associated with 'GoLivestock'? I am estimating this to be 2X$4.003m=$8.006m (refer posts 5555 and 5559). ThIs $8.006m I have removed from the EBITDA figure.


Senior Debt Coverage Ratio" (SDCR) ="Net Senior Debt"/EBITDA
=( $96.833m - $40.736m ) / ($29.248m - $8.006m) = 2.64 < 3.00 (pass test)

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


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. The headline EBITDA for the full year FY2024 is already expected to decrease to $50m. So you wouldn't want debt to go up as your forecast income goes down. I am now wondering if dropping the dividend was seen as a necessary response to the current business climate, rather than being an expression of the board just being prudent?

SNOOPY