PAZ Pharma Zen

[justakiwi]

If you had just received bad news related to your own health, or that if a close family member, do you not think it would instantly become your priority? Do you really think you would be in the right space to carry out a role like this, in that situation? It doesn’t even have to be a health issue. It could be a marriage breakup or any number of other scenarios. “Effective immediately” implies an emergency type situation to me, nothing else.

Its a red flag - tend to agree with you on that one blackcap - If it were really for a personal reason and decision was with regret I dont think the term effective immediate would have been used

[nizzy]

Yes balance sheet is stretched but a good result in a tough year. Staffing issues won't be resolved easily, this is a challenge across much of the developed world, demographics of an aging population.
Most worrying to me is the lack of open communication to shareholders we've been seeing in the last year and second, I'm always wary of companies that focus so much on the engineering side - lots of photos showing off their new stainless steel and physical buildings but relatively little talk about the market and customers -what they do, are they growing or not, who their consumers are etc.

[Sideshow Bob]

The problem is that with the lack of communication, then it leaves a vacuum and leads to speculation (as evidenced by a few posts here and elsewhere). It has been frustrating the lateness of the report but while delays happen, it does no harm to update the USX with a timeline.

The companies focus has been inwards on plant and processes and not outwards at the market - and also they are an ingredient B2B business, so a little more difficult to talk about customers/markets. That is where the branded business comes, and ability to move up the value chain.

Having an initial read, I was pleasantly surprised with the result and a number of things in the report. The impact of Covid has been ongoing with their factory development, and disappointing the slow progress.

Some of the points I took out of it:

- New Dryers and energy hub only became operational in December - ie the last month of their FY. So the benefits of this has not flowed into the FY22 result.
- Demand is 'extremely strong' and 'beyond supply'. That bodes very well when they can execute.
- Cash is extremely tight, and living off the overdraft. But proceeds from sale of plant will come in after end of FY.
- Staffing is a huge handbrake (like everywhere). However in recent times I've anecdotally heard from a number of places that their labour issues while not resolved have eased in recent times.
- Change in revenue policy - which makes sense. Already $400k in the jar for next year.
- No update on their branded initiatives.
- If I had a serious holding, I'd be heading to the AGM.

I noted that while some on the offer, none have traded since the result. But how do you value them??

So to me, reasonable result, but progress on their plan is delayed. I still see plenty of potential, and that new capacity is needed but still badly need to get some 'runs on the board'.

Back in the bottom drawer they go.

[Bluebell]

Thanks to Percy for posting the link to last years AGM presentation,

https://usx.co.nz/uploads/paperclip/...pdf?1653863354

The company identified the need to invest in automation to reduce manual handling, reliance on labor and reduce wage costs. The company is still citing challenges with labor. Either very little automation has been put in or the issues around labor are so chronic that its negated any gains from automation. The recent report only seemed to mention capacity increase - nothing on automation gains so picking little has been implemented.

[blackcap]

I am just reviewing the Annual Accounts for PAZ and am quite concerned at their debt levels.

I also note that finance costs (Note 3c) states that net finance costs are $520,679. But a further dig reveals this gem: "Interest costs that are directly attributable to the acquisition of property, plant and
equipment have been capitalised at an average interest rate of 4.2% (2021: 3.3%)".

I guess the auditors allow this but this looks like creative accounting to me. (Can some bean counter explain the rationale of this?)

Capitalised interest is $721,826, so the total interest bill comes to a rather large $1,201,752 which does take the gloss off the result somwhat.

I understand operational cash flows are strong but I feel the company could be in trouble if interest rates continue to climb, sales diminish somewhat.

Happy to be proven wrong.

On the debt side:
Bank Overdraft $5,132,170 ($920,048)
Current Borrowings $3,174,014 ($2,298,960)
Non-Current Borrowings $21,145,790 ($17,283,122)

That's total debt of $29,451,974

[blackcap]

If I may, I will just qualify my previous post by saying its not all doom and gloom.

Sales were up nicely, gross margin was up and an operating profit is achieved. If they can scale this up then there is huge potential....

Add to that, there is a sale of an asset listed in current assets and that will reduce debt by $8,543,276. So the debt not as acute but still very high.

[Bluebell]

Thanks Blackcap for unravelling the (creative accounting) report. They are not that straightforward to interpret. So thats quite some debt, money that's been spent on equipment and facility that is yet to brought into operation and generating cash Going to take sometime to trade out of that!!

[Sideshow Bob]

I see it has finally traded over the last few days - the first time since the Annual Report release. A flurry of smaller trades at 35c, and still more on the offer at this level.

AGM on the 19th - who is going??

[blackcap]

Thanks Blackcap for unravelling the (creative accounting) report. They are not that straightforward to interpret. So thats quite some debt, money that's been spent on equipment and facility that is yet to brought into operation and generating cash Going to take sometime to trade out of that!!

I had a chat to the CFO at PAZ and he clarified the Capitalised interest piece. Apparently it is a requirement under NZ IAS 23, where it says: An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.

What that has done is artificially inflate profit by $700k and.

To the credit of the company, the CFO did concede this and also he himself was a bit miffed at the standard and to how it applies. It really makes no sense. It also means, further down the track is will come off the P and L at some stage.

I also talked to him about the high levels of debt. He said it was a strategy decision, and debt was obviously required to complete what they wanted to complete. High risk possibly but high reward if it succeeds.

[RTM]

Thanks for sharing…appreciated.

I had a chat to the CFO at PAZ and he clarified the Capitalised interest piece. Apparently it is a requirement under NZ IAS 23, where it says: An entity shall capitalise borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset.

What that has done is artificially inflate profit by $700k and.

To the credit of the company, the CFO did concede this and also he himself was a bit miffed at the standard and to how it applies. It really makes no sense. It also means, further down the track is will come off the P and L at some stage.

I also talked to him about the high levels of debt. He said it was a strategy decision, and debt was obviously required to complete what they wanted to complete. High risk possibly but high reward if it succeeds.