PGW - PGG Wrightson

[mike2020]

I would not want you to tell this to a stock agent Snoopy, they would take it badly. I knew a lot of PGW agents and counted them as friends, that is how good they are at client relationships, they do know every farmer well. Busy guys who communicate well both with clients and each other. They intend to keep you happy both in buying and selling because they make money each time and retain loyalty, there is competition out there and they fight hard to keep clients.
That said they all get a decent income and company car to tow the boat...I'd say they have incentive.

[kiora]

PGW is a funny business.

My understanding is

Delayed charge for seasonal items: A lot of their "inventory" doesn't have to be paid for until sold

Their markups is S*^t as far as I know

(other retailers wouldn't get out of bed for 20%GP or even less would they?)

[winner69]

NBR says Oliver and NZSA have gone soft

Has the Shareholders’ Association gone soft? At the annual meeting for PGG Wrightson in Christchurch on Wednesday, the NZSA’s personable CEO Oliver Mander began his questions by congratulating the board on its environmental and sustainability reporting and followed up by asking acting chair U Kean Seng what plans there were to appoint a permanent independent chair, since he had assumed the position “as a result of issues associated with Lee Joo Hai”. Those issues, some may recall, involved Lee being arrested and charged with securities offences in Singapore in March. U remarked that the appointment of an independent chair “is something the board will continue to review”. Mander thanked him. “And, just to reiterate, I think we all appreciated the swift response made by the company in relation to that situation,” he said. Just to reiterate, PGG Wrightson didn’t reveal Lee’s “lapses” until June 30 and initially said they had no bearing on his chairmanship. Four days later, the board changed its mind and said U would be acting chair while the Singapore charges were ongoing. A week later, it said Lee would not stand for re-election at the AGM. Swift? The Bin says bring back the biff.

Paywalled
https://www.nbr.co.nz/private-bin-2/...p-diversifies/

[Snoopy]

PGW is a funny business.

My understanding is

Delayed charge for seasonal items: A lot of their "inventory" doesn't have to be paid for until sold

Their markups is S*^t as far as I know

I would pick that due to PGWs 'strong market position' they might be in a position to 'strong arm their suppliers' into such deals. I don't know whether you saw my post 5463 yesterday kiora, but that post did partly allude to exactly the point you have just made. The relevant bit of that table, in post 5463, I reproduce below:

Reference Date	31/12/2021	30/06/2022	31/12/2022	30/06/2023
Reference Period Named	HY2022	FY2022	HY2023	FY2023
Trade and Other receivables	($296.772m)	($170.336m)	($321.851m)	($154.656m)
less Accounts payable & accruals	$269.311m	$189.290m	$273.959m	$164.107m

Cash balance generating position

equals Net Receivables................!	($27.461m)	$18.884m	($47.892m)	$9.451m
add Inventory	($111.939m)	($102,048m)	($129.717m)	($107.533m)

At the last balance date, the table is showing $164.107m of accounts payable, while the company has an inventory balance of $107.533m. Correct me if I am interpreting these figures incorrectly. But I think what this table is telling us is that PGW haven't paid for any of their inventory, because the accounts they have to pay vastly exceed, by about 50%, the total value of their inventory stock. LOL! What a great business model if you can make that work.

O.K. I realise it is not quite that simple.Some of those accounts for payment could be things like power bills, phone bills, rent due or even commissions from real estate sales not yet paid to the selling agent. You could pillory PGW for setting such egregious payment terms with their suppliers. But if you look at the table again you can see by the trade receivable balance, the billing total owed to them by farmers, is also very high. So another way of looking at that table is to say that PGW are using their suppliers credit to offer some pretty generous repayment terms to their farmer customers. IOW farmers are the winners and suppliers are the losers in this 'credit go around', while PGW sits roughly neutral -in terms of financial benefit-, right in the middle.

SNOOPY

[Snoopy]

To get a better idea what we are talking about with FCCR, from 'Investopedia':
What Is the Fixed-Charge Coverage Ratio?

"The fixed-charge coverage ratio (FCCR) measures a firm's ability to cover its fixed charges, such as debt payments, interest expense, and equipment lease expense. It shows how well a company's earnings can cover its fixed expenses. Banks will often look at this ratio when evaluating whether to lend money to a business."

Investopedia then goes on to show us a slightly different formula for calculating FCCR than the one used to evaluate the FCCR number for PGW in the past. That is annoying, so I will revert back to the PGW definition of FCCR used in the past, and use the 'guiding principle' expressed in the Investopedia opening paragraph (as quoted above) to keep myself straight on why we are doing this calculation in the first place.

Since PGW were not censured by their banking syndicate for their FY2023 result (publicly anyway), this is an indication that my calculation, as quoted above, may not be right.

The total interest figure of $5.521m (Note 6 AR2023) is made up of 'bank interest on loans and overdrafts' of $4.565m and a 'bank facility fee' of $0.956m. Now the bank facility fee is a fixed charge imposed by the banking syndicate. It is not part of the normal monthly operating free flow of cash in and out of the business. So it would be a little bizarre if the bank asked for an FCCR covenant test to be done, but then imposed a hefty one off charge to ensure that their customer, PGW, failed the bank's own 'FCCR test'! I don't see the benefit in a banking syndicate firing 'foot shots' into their own client base.

If I leave the bank facility fee out of the FCCR covenant equation, (while still subtracting GoIncome Interest Revenue of $6.573m from the top line, AR2023 p71) it changes to to this:

FCCR= [(EBITDA - 'GoLivestock Interest Income'] / [Total Interest(less interest income in cash)+Lease Expenses]
= [$61.194m - $6.573m] / [$4.465m + ($3.800m+$19.532m)] = 2.0 (That just scrapes in over our 'target margin of 2 or more'). Phew!

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?)

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).

This is not a correction. More an alternative point of view. I worked out PGW's borrowing costs in the past year, and I have quoted these above. But for that exercise I included the interest paid AND the borrowing establishment fees when calculating my number. Since the establishment fee does not change with account use, it is equally correct to calculate an interest rate charged while omitting the establishment fee from the calculation. I now find I need to do this because in my FCCR calculation, post 5475, I have just realised that I have double counted the establishment fee by removing it from the numerator as a cost, but then offsetting those consequently reduced earnings against that debt expense again by retaining the 'set up cost' in the denominator.

The reassessment of PGW's bank loan 'borrowing costs' is as follows. The borrowing costs over FY2023 were $4.565m (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, interest charges only, was: $4.565m / $64.552m = 7.1%. That is rather different to the 8.6% figure that I was using before. That 7.1% is quite a good interest rate for a rurally based business isn't it? No wonder senior management did not want to spell it out specifically at he AGM for all to see! Ah well, it is out in the public domain now.

SNOOPY

[Snoopy]

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

Another factor I have been thinking about in my 'Fixed Cost Coverage Ratio' formula in relation to 'the cost of doing business' is the 'cost of equity'. All that loan, sorry 'advance', money 'GoestoLivestock' 'out the door' on the strength of the PGW balance sheet. That is capital built up from 100 years of employee sweat (plus some capital from a certain Mr Lai in Hong Kong). Surely that has a cost which we need to reflect in these figures somehow? I am sure an investment banker would agree with this proposition.

Yet - it turns out, - in this context- , I believe our investment banker friend is wrong. FCCR is not about investment. It is instead an 'emergency siren warning' where 'cash coming in' is compared to 'cash going out'. I am not denying that capital has a cost. But by this FCCR measure there is no associated cash going out attached to the PGW share capital. That means, in the FCCR context, the cost of capital is zero - well maybe not quite.

There is the cost of the sausage rolls to warm the bellies of investors at the AGM. But as to the cost of that, a certain caretaker prime minister would have a much better idea than I do!

SNOOPY


'

[Valuegrowth]

I just went through their balance sheet. One positive factor is they don’t have a lot of debt, but I am concern about their cash generation. Cash is king for any business. However, they can have long term business opportunities. Any reason for stagnated stock prices for a considerable period. 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.

[Oliver Mander]

There is always some context involved :-). The 'biff' will be there when needed...

[Snoopy]

I just went through their balance sheet. One positive factor is they don’t have a lot of debt.

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 at the end of year balance date. 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