PGW - PGG Wrightson

[Snoopy]

This test does not mean that PGW will always be able to raise margins above the rate of inflation. But it does mean that under certain market conditions it can, thus avoiding an eventual commodity price spiral to the bottom. The revenue associated with the now sold finance division has been removed from the appropriate years

Margin here is defined as NPAT/Sales

FY2011 (*): $5.9m/ ($1,243m - $55m) = 0.50%
FY2012 (*): $25.2m/ ($1,337m - $7m) = 1.91%
FY2013 (*): $24.3m/($1,132m - $2m) = 2.15%
FY2014 : $33.8m/ $1,219m = 2.77%
FY2015 : $34.8m/ $1,103m = 2.89%

(Asterisked figures have been adjusted to remove the former finance division NPAT profit or loss from that year AND the sales revenue relating to the finance division of that year)

Conclusion: Pass Test

SNOOPY

[Snoopy]

We cannot apply a Warren Buffett style growth model to valuing PGW because it has failed test 3, the 'Return on Equity' test. The failure is not unexpected as this is a tough hurdle for companies that must carry a high level of stock and sell that stock a relatively low margins to pass. The risk here of having a large amount of stock on hand that spoils or must otherwise be heavily discounted below cost is very real in companies that sell commodities. This doesn't necessarily that one should avoid PGW as an investment though. It means that you should probably use a more conservative evaluation method. The method I prefer in these circumstances is an (at least) five year average of dividend flows, with the underlying assumption of a steady rather than a growing market. I will have a look at that next.

SNOOPY

[Snoopy]

Revenues struggle to grow at the rate of inflation and NPAT much the same as it always has been. Not actually exciting is it - pretty boring eh. I can't really see how this time its any different

Winner, I think the revenue dip shown in you graph is addressed by Mark Dewdney's CEO report for FY2013. Here is the quote from page 5

"Sales revenue fpor the group decreased although this has no bearing on the underlying business activity. Sale of the Agri-feeds molasses business rsulted in it being being accountede as equity earnings from associates, meaning the revenue is no longer recognised in our accounts. In addition, a number of key product lines in the retail business are now transacted on an agency basis, meaning that although gross profit generated by these transactions remains unchanged, only commission income is recorded as revenue rather than the full transaction value."

This change of policy is also reflected in the steadily increasing margins since FY2013. Smokes and mirrors? Or a genuine increase in margin performance?

SNOOPY

[Snoopy]

The method I prefer in these circumstances is an (at least) five year average of dividend flows, with the underlying assumption of a steady rather than a growing market. I will have a look at that next.

A slight change in tack to my valuation method. PGW has now largely finished restructuring. They also have a policy of paying 100% of earnings out as dividends. So I shall assume all earnings over the last five years would have been paid out as dividends and make my PGW valuation from that.

eps figures, adjusted for the removal of the finance division over the last five years were as follows:

FY2011 : $5.9m/ 754.8m = 0.8c
FY2012 : $25.2m/ 754.8m = 3.3c
FY2013 : $24.3m/ 754.8m = 3.2c
FY2014 : $33.8m/ 754.8m = 4.5c
FY2015 : $34.8m/ 754.8m = 4.6c

I calculate that as an average earnings rate of 16.4c/5 = 3.3c

For a cyclical like this I would require a 'gross return' of some 8.5%. Given a 28% tax rate (72% reatined earnings rate), my valuation over the business cycle of PGW is that it should average:

3.3 / (0.085 x 0.72) = 54c

Increase that required gross return to 9%, and the valuation drops to

3.3 / (0.09 x 0.72) = 51c

SNOOPY

[Snoopy]

Voracious shareholders are milking PGW of all the dividends they can. Yet PGW is not debt free. Could the long term future of PGW be at risk because of the high dividend draw down? This is a question that needs looking into:

	2015	2014
Debt Short Term	$57.195m	$35.573m
Deriv Liabilities Short Term	$3.266m	$0.887m
Debt Long Term	$66.000m	$65.000m
Deriv Liabilities Long Term	$1.980m	$0.005m
Long Term Provisions	$5.597m	$6.609m
Defined Benefit Liability	$14.655m	$13.528m
Change in Receivables/Payables Adjustment (*)	-$5.745m	$1.304m
Total	$143.758m	$120.298m

(*) The Change in Receivables/Payables Adjustment takes into account that you can hide debt by:

1/ not paying your bills OR
2/ by collecting money that is owed to you faster than is normal, when you may not be able to do that in the future.

Alternatively if you do the opposite of 1/ and 2/ (as is the case in both years here) , then the debt is actually smaller than it appears. This is why the adjustment is negative for FY2015 and FY2014.

Taking the above debts and dividing them by normalised profits will give us a theoretical 'minimum debt repayment time - minDRT' (assuming all profits from the current year are directed to paying down debt). This assumption is not management policy. But it nevertheless gives us a measure of the indebtedness of PGW relative to underlying earnings.

min DRT(2015) = $143.758m / $34.8m = 4.1 years

Compare that with last years figure

minDRT(2014) = $120.298m / $33.8m = 3.6 years

Despite the slight deterioration, I rate this as OK. A debt repayment time of under two years I regard as low. Up to five years I would regard as a 'medium sized debt'. Once the minimum debt repayment time gets above ten years, this is a very definite warning flag for me.

SNOOPY

[winner69]

A slight change in tack to my valuation method. PGW has now largely finished restructuring. They also have a policy of paying 100% of earnings out as dividends. So I shall assume all earnings over the last five years woudl have been paid out as dividends and make my PGW valuation from that.

eps figures, adjusted for the removal of the finance division over the last five years were as follows:

FY2011 : $5.9m/ 754.8m = 0.8c
FY2012 : $25.2m/ 754.8m = 3.3c
FY2013 : $24.3m/ 754.8m = 3.2c
FY2014 : $33.8m/ 754.8m = 4.5c
FY2015 : $34.8m/ 754.8m = 4.6c

I calculate that as an average earnings rate of 16.4c/5 = 3.3c

For a cyclical like this I would require a 'gross return' of some 8.5%. Given a 28% tax rate (72% reatined earnings rate), my valuation over the business cycle of PGW is that it should average:

3.3 / (0.085 x 0.72) = 54c

Increase that required gross return to 9%, and the valuation drops to

3.3 / (0.09 x 0.72) = 51c

SNOOPY

C'mon Snoops. You can do better than this

A good analyst presents things in best possible light, esp when like you they have been adjusting numbers left right and centre.

We all know 2011 was a ****e year. Thus ignore and replace it with a 2016 figure of 4.6 cents. It's in the bag so a 'proper' treatment and aren't markets forward looking

Sothe 5 year average is just over 4 cents

Valuation thus 60 cents

Much more acceptable eh

[banter]

Im interested Banter - what shares are you referring to?

See this thread

[Plutus]

IMO the dividend is being driven by a majority shareholder who has a need for cash, rather than being in the best interests of PGW itself,so not sure it an appropriate measure of EV. Have held shares but sold - still looking for the 'game-changer' strategy - all I see is same old same old.

[Crackity]

IMO the dividend is being driven by a majority shareholder who has a need for cash, rather than being in the best interests of PGW itself,so not sure it an appropriate measure of EV. Have held shares but sold - still looking for the 'game-changer' strategy - all I see is same old same old.

that is definitely a valid viewpoint but in the medium to long term if you are comparing a bank deposit rate to the fully imputed div yield and possible capital gain there may possibly be a case to consider an investment in PGW? Unless the wheels totally fall off as mentioned previously?.....

[winner69]

IMO the dividend is being driven by a majority shareholder who has a need for cash, rather than being in the best interests of PGW itself,so not sure it an appropriate measure of EV. Have held shares but sold - still looking for the 'game-changer' strategy - all I see is same old same old.

Aren't the tablets and associated apps for the sales reps are 'game changer'.........

Like you it all seems much of the same with PGW .....with probably the results being much the same.