PGW - PGG Wrightson

[Snoopy]

When debt and earnings are lumpy, as they are at PGW, sometimes it is useful to look at covenants over more than one period. I have used my annual report and half year report collection to compile semi-annual earning periods over the last two and one half years, as below:

Half year EBITDA over time	HY2024	2HY2023	1HY2023	2HY2022	1HY2022
EBITDA (quoted) (1)	$39.962m	$13.350m	$47.844m	$19.725m	$47.428m
less Lease liability Interest payment	$1.920m	$1.892m (2a)	$1.908m	$1.890m (2b)	$1.908m
less Lease liability principal payment	$10.256m	$9.966m (3a)	$9.566m	$9.582m (3b)	$9.291m
less GoLivestock Income	$4.003m	$3.837m (4a)	$2.736m	$2.460m (4b)	$1.794m
equals EBITDA (with bank covenant calculation adjustments)	$23.783m	-$2.345m	$33.634m	$5.793m	$33.805m

Notes

1/ EBITDA half year calculations may be found in post 5560

2/ Calculations for Lease liability interest payments for the second half year.
2a/ $3.800m-$1.908m=$1.892m.
2b/ $3.786m-$1.896m=$1.890m

3/ Calculations for Lease liability supplementary depreciation charge for the second half year.
3a/ $19.532m-$9.566m=$9.996m.
3b/ $18.873m-$9.291m=$9.582m

4/ Calculations for GoLivestock income for the second half year.
4a/ $6.573m-$2.736m=$3.837m.
4b/ $4.254m-$1.794m=$2.460m

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

I can use the above table to look at how the SDCR stacks up over the 12month period made up of 2HY2022 and 1HY2023 as an example.
Note that the 'Senior Debt' as at HY2023 was: -$2.484m (cash) + $48.000m (current bank debt) + $50.000m (non-current bank debt) = $95.516m. (Reference HYR2023 'Interim Consolidated Statement of Financial Position'). From this total I remove the 'animal assets' (I use as a proxy for the GoLIvestock debt, the value of the assets funded by that debt) as represented on the balance sheet ($43.001m). I do this because if all the animals on the balance sheet were sold at one time, then this portion of the company debt would disappear. This means that the debt on the balance sheet associated with these animals is not underlying PGW company debt, as, in theory, it can be repaid at any time.

For compound year HY2023+2HY2022: Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
= ($95.516m - $43.001m) / ($33.634m+$5.793m) = 1.33 < 3.00

For FY2023 (HY2023+2HY2023): Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
= ((-$4.643m + $19.960m + $50.000m) - $74.303m) / ($33.634m-$2.345m) = -0.287 < 3.00

I think it is interesting to compare the first calculation above with the same calculation performed on the equivalent period one year later:

For compound year HY2024+2HY2023: Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA
= ($96.833m - $40.736m) / ($23.783m - $2.345m) = 2.62 < 3.00

Using this method, we can see that the SDCR ratio, taken three times across twelve months, was highly seasonal. On the actual end of financial year date (30th June 2023 ) it was a negative number. Any negative number indicates that should PGW choose to unwind all of their livestock lending, all of their company borrowings could be repaid in full, making the company 'debt free'. Of course if PGW did elect to do this, it would also mean winding up their 'GoLivestock' lending program. Since this is a growing profitable part of the PGW business, the chances are they would not want to wind up 'GoLivestock'. But such a conjecture does give another perspective on the true underlying debt position of the PGW company nevertheless. Move forwards by six months and the SDCR ratio jumps dramatically to a figure double that of the previous seasonal high twelve months prior. This looks awkward. If that SDCR ratio leaps again in December 2024, our SDCR debt covenant might be busted. This is clearly a situation the board will need to keep careful watch over going forwards. But there is no reason to panic - yet.

SNOOPY

[Davexl]

$2.10 / $2.11. Tempting to average down, even in a downtrend. How much lower can it go with Agria meeting / vote uncertainty ?
Too many questions...

[kiora]

Never touched it but sad
Too many questions alright DL

Chart looks sick,sick as !

Something big brewing ?

[Davexl]

Never touched it but sad
Too many questions alright DL

Chart looks sick,sick as !

Something big brewing ?

With Agria needing dividends potentially bleeding PGW dry over time as Snoopy points out, and Elders contemplating an amazing opportunity to diversify further (and possibly be a white knight against Agria) we all live in interesting times.
The time of maximum uncertainty could be fast approaching (after waiting for US inflation announcement).

[Snoopy]

Never touched it but sad
Too many questions alright DL

Chart looks sick,sick as !

Something big brewing ?

Check out the size of the trades. The largest trade through today at a steady price ($2.11 in this case) was 10,046 shares between 11:36am and 11:46am. Those shares were spread over 5 trades. So on average, that comes out to just over 2,000 shares or $4,220 per trade. The largest single parcel trade was at 11:52am: 3,886 shares valued at $8,160. There is not big money being traded here. Most of the trades look like they are fractional parcel trades from bots. I don't think you can read anything much into today's trading action.

I bought the rest of my incremental holding at $2.30 a couple of days ago. That represents a 30% discount on the 9.0% gross yield I was after across the business cycle. I am very happy with that. As it turns out, if I had waited until today, then I could have bought some of those shares 20c cheaper. But I am not worried about picking bottoms. I am more concerned about FOMO. I reckon this share could rise to $3 again from here in the short term as fast as the price collapsed - in just one day. I would have been really annoyed with myself if I had left such a PGW share purchase discount on the table (see post 5540) without acting.

SNOOPY

[Snoopy]

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.

Attempt 4 is quoted above. My previous three attempts before that, and the direct link to attempt 4, may be found here:

Attempt 1: https://www.sharetrader.co.nz/showth...=1#post1027106
Attempt 2: https://www.sharetrader.co.nz/showth...=1#post1027408
Attempt 3: https://www.sharetrader.co.nz/showth...=1#post1027483
Attempt 4: https://www.sharetrader.co.nz/showth...=1#post1027803

Different assumptions I have tried and dropped. To be clear on the calculation inputs that I have finally settled on (which may be right or may be wrong, but at least you the reader will have a definite reference post for where my numbers have come from), I have pulled together what I have done, putting all the inputs into this post.

To reprise, FCCR is the other 'monetary covenant hurdle' that bankers like to talk about, but PGW does not.

FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [(Total Net Interest Paid+ Banking Facilities Charge)+(Lease Expenses)]

To reprise the ingredients for this calculation:
a/ The EBITDA figure used to be required to be adjusted to add back the depreciation on property leases and the interest repayment charge on property leases (the equivalent of the old pre-IFRS16 'rent', which under IFRS16, became two split 'finance expense(s)'). Since IFRS16 has been adopted, these costs are automatically added back into the EBITDA total. So there is no longer a need to manually add them back into the equation. The EBITDA figure, as printed in the annual report, is the figure to use.

b/ The 'GoLivestock Interest Cost' figure is the net interest earnings cost base, and does not include the banking facility set up cost (notwithstanding the total finance cost is actually derived from the interest paid on the combined short and long term bank loans). The reason it has to be removed is because PGW is, in effect, a hybrid retail and finance company. The financial structure of a 'finance company' is different to that of a 'retailing company', because the debt levels of the former are secured against the assets owned by finance company borrowers. Thus we need to decouple the finance assets and liabilities from the company operating statistics, to get a true picture of the borrowings of the underlying retail business.

c/ Total net interest paid including the banking facility arrangement set up charges. See AR2023 Note 6 "Net Finance and Interest Costs."

d/ Lease expenses. See AR2023, consolidated statement of cashflows.

From post 5476: Average All Company Debt over Year = ($32.824m+$95.516m+$65.317m) / 3 = $64.552m
=> Underlying 'interest only' charge rate is $4.565m / $64.552m = 7.1%
Average 'GoLivestock' loan balance over year = ($66.109m+$43.001m+$74.303m) / 3 = $61.138m
=> Underlying 'interest cost' for GoLivestock loans is 0.071 x $61.138m = $4.341m

FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [(Total Net Interest Paid+ Banking Facilities Charge)+(Lease Expenses)]

= [$61.194m - $4.341m] / [($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

[Snoopy]

The 'GoLivestock Interest Cost' figure is the net interest earnings cost base, and does not include the banking facility set up cost (notwithstanding the total finance cost is actually derived from the interest paid on the combined short and long term bank loans). The reason it has to be removed is because PGW is, in effect, a hybrid retail and finance company. The financial structure of a 'finance company' is different to that of a 'retailing company', because the debt levels of the former are secured against the assets owned by finance company borrowers. Thus we need to decouple the finance assets and liabilities from the company operating statistics, to get a true picture of the borrowings of the underlying retail business.

Total net interest paid including the banking facility arrangement set up charges. See HYR2023 Note 1 and AR2023 Note 6 "Net Finance and Interest Costs."
For 2HY2023: ($4.565m-$0.485m+$0.956m) - ($1.974m-$0.201m+$0.470m+$0.020m) = ($2.591m-$0.284m+$0.486m+$0.020m) = $2.813m

Lease expenses. See HY2023 and AR2023, consolidated statement of cashflows.
For 2HY2023: ($3.800m+$19.532m)-($1.908+$9.566m)= $1.892m+$9.966m = $11.858m

Average All Company Debt over 2HY2023 = ($95.516m+$65.317m) / 2 = $80.417m
=> Underlying 'interest only' charge rate is $2.591m / $80.417m = 3.22% over 6 months or 6.44% annualised
Average 'GoLivestock' loan balance over 2HY2023 = ($43.001m+$74.303m) / 2 = $58.652m
=> Underlying 'interest cost' for GoLivestock loans is: 0.5 x 0.0644 x $58.652m = $1.877m

SNOOPY

[nztx]

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.

Agree with you there too

[Toddy]

As long as there are no unintended consequences. I. E the tail ends up wagging the dog scaring away international capital investment into our small and mid cap companies.

The NZX is really struggling for capital in this environment.

[Snoopy]

What has happened to this indicator at the half year update time? The following calculation is annualised by looking at two half year periods: 2HY2023 and HY2024. Supporting calculations may be found in posts 5561, 5567 for 2HY2023 and in HYR2024 (half year ended 31st December 2023) for HY2024.

FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [(Total Net Interest Paid+ Banking Facilities Charge)+(Lease Expenses)]

The ingredients for this calculation are as follows:

a/ The EBITDA figure used to be required to be adjusted to add back the depreciation on property leases and the interest repayment charge on property leases (the equivalent of the old pre-IFRS16 'rent', which under IFRS16, became two separate 'finance expense(s)'). Since IFRS16 has been adopted, these costs are automatically added back into the EBITDA total. So there is no longer a need to manually add them back into the equation. The EBITDA figure, as printed in the annual report, is the figure to use.

b/ The 'GoLivestock Interest Cost' figure is the net interest earnings cost base, but this figure does not include the banking facility set up cost (notwithstanding the total finance cost is actually derived from the interest paid on the combined short and long term bank loans). The reason it has to be removed from the quoted EBITDA total, is because PGW is, -in effect-, a hybrid retail and finance company. The financial structure of a 'finance company' is different to that of a 'retailing company', because the debt levels of the former are secured against the assets owned by finance company borrowers. Thus for a finance company, the risk associated with debt is different. That is why we need to decouple the finance assets and liabilities from the PGW operating statistics, to get a true picture of the borrowings of the underlying retail and agency business.

c/ For 'Total net interest paid' including the banking facility arrangement set up charges, see HYR2024 Note 1 AR2023 Note 6 "Net Finance and Interest Costs."

d/ For 'Lease expenses', see HYR2024 and AR2023, and the respective 'Consolidated statement(s) of cashflows' (or post 5561).

Average All Company Debt over HY2024 = ($65.317m+$96.833m) / 2 = $81.075m
=> Underlying 'interest only' charge rate is $3.367m / $81.075m = 4.2% or 8.3% annualised
Average 'GoLivestock' loan balance over HY2024 = ($40.736m+$74.303m) / 2 = $57.519m
=> Underlying 'interest cost' for GoLivestock loans is 0.5 x 0.083 x $57.519m = $2.387m

FCCR= [(EBITDA - 'GoLivestock Interest Cost'] / [(Total Net Interest Paid+ Banking Facilities Charge)+(Lease Expenses)]

= [($39.962m+$13.350m)-($2.387m+$1.877m)]
/ [($3.367m+$2.591m)+($0.485m+$0.486m))+(($1.920m+$1. 892m)+($10.256m+$9.966m))]

= [($53.312m)-($4.264m)]
/ [($5.958m)+($0.971m)+(($3.812m)+($20.222m)] = 1.58, which is below the targeted 2.00 figure.


Now, I am not sure if this covenant applies at the half year balance date, which is the time snapshot I have taken. PGW has always been a seasonal business, with more inventory on the balance sheet at the half year balance date on 31st December. By the time the full year balance date rolls around around, typically a quarter of that 'summer inventory balance' has been converted to cash, and hopefully profit. If this were all true, then I would have expected the 'Retail and Water' segment of PGW to have higher EBITDA in the second half. Strangely EBITDA for 'Retail & Water' seems to have fallen into a pattern of being lower in the second half, the opposite of what I would have expected. Are PGW in the habit of quitting shop stock 'at a loss' in the second half, to restore their cash position at the end of the year? Surely PGW are not that poor at matching their inventory to customer demand? But what other explanation could there be?

SNOOPY