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  1. #4311
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    Default Dividend Capitalisation Method valuation: Part 2 (FY2018 Calculation)

    Quote Originally Posted by Snoopy View Post
    Plugging in a representative yield, one that represents the ups and downs of the farming cycle of PGG Wrightson in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation

    (Representative Dividend per Share) / (Acceptable Yield) = Share Price (an algebraeic manipulation of: Dividend per Share / Share Price = Yield )

    3.37c / 0.72 x 0.095 = 49.2c

    Note that I am using 9.5% as my acceptable gross yield. Some might argue that is high. But I think it is fair given that much of PGW's profit comes from low margin commodities subject to weather event demand. Some years ago PGW paid no dividend at all for several years in a row. This kind of risk is reflected in my selection of a 9.5% acceptable yield, about half as much again more than a tier one utility company.

    This 49c valuation is measured at the average point in the business cycle. One might argue that we are now riding high in the business cycle and that this 49c valuation is consequently too low given today's circumstances (sp closed today at 54c). I wouldn't argue with that. If I use my +20% rule of thumb, one might expect a share price of 59c at the top of the business cycle. Likewise 39.5c would be the bottom. Take off the imminent 1.75c fully imputed dividend and PGW doesn't look so overvalued today (remember too that there is a strong case to say that most of the market is slightly overvalued right now). I wouldn't be selling or buying more PGW shares based on these numbers.

    discl: hold PGW
    Plugging in a representative yield, one that represents the ups and downs of the farming cycle of PGG Wrightson in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation

    (Representative Dividend per Share) / (Acceptable Yield) = Share Price (an algebraeic manipulation of: Dividend per Share / Share Price = Yield )

    3.17c / 0.72 x 0.095 = 46.3c

    Note that I am using 9.5% as my acceptable gross yield. Some might argue that is high. But I think it is fair given that much of PGW's profit comes from low margin commodities subject to weather event demand. Some years ago PGW paid no dividend at all for several years in a row. This kind of risk is reflected in my selection of a 9.5% acceptable yield, about half as much again more than a tier one utility company.

    This 46.3c valuation is measured at the average point in the business cycle. One might argue that we are now riding high in the business cycle and that this 46.3c valuation is consequently too low given today's circumstances (sp closed Friday at 57c). I wouldn't argue with that. If I use my +20% rule of thumb, one might expect a share price of 56c at the top of the business cycle. Given agriculture is currently in quite a sweet spot in New Zealand I would say Mr Market has it about right. Likewise 37c would be the bottom. I wouldn't be selling or buying more PGW shares based on these numbers.

    Naturally all of this earnings based valuation doesn't reflect any takeover premium that might come to the table as a result of the offer for PGW Seeds, should that offer go through. This is still of interest for those who object to the proposed sale of the seeds business. Such shareholders may be able to invoke minority buy out rights. A buy out price should reflect the company valuation, pre any offer, and this could be below the recent market price for the shares!

    SNOOPY

    discl: hold PGW
    Last edited by Snoopy; 23-03-2019 at 09:39 AM.
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  2. #4312
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    Default A Snoopshot of PGW: the FY2018 Buffett Perspective

    Quote Originally Posted by Snoopy View Post
    Time for a little more snooping, in fact the full 'snoopshot' treatment! How does PGW go when subjected to my four investment selection tests?

    1/ Top Three player in chosen market?

    PGG Wrightson Limited (PGW) was formed in 2005, a result of a merger between two established agricultural supply service leaders: Wrightson Limited and Pyne Gould Guiness. However, the DNA of the operation goes back much further than this. Wright Stevenson & Company was established in Dunedin in 1868. Even they are a new boy on the block though, as Gould Beaumont & Co. had been founded in Christchurch as early as 1851.

    Under the leadership of CEO Mark Dewdney, PGW has regrouped under the 'One PGW' mindset. Despite being a diverse company, 'One PGW' is about customer relations in the widest sense: where one division not only looks after their own operations but seeks an awareness of opportunities for the complimentary group businesses. Down to earth people serving down to earth customers succinctly sums up the ethic. The recognised business units as detailed in the annual report are below:

    1/ Merchandising (rural themed products): Traditional competitors RD1 (Fonterra owned) and Farmlands (a co-operative) are the two other large players in the game. There are others, but on a smaller scale to 'the big three'.

    2/ Livestock Trading: PGW has NZs largest group of livestock representatives, handling 50%+ of transactions nationwide.

    3/ Insurance: Commission agents for AON and Vero

    4/ Real Estate: Specialising in rural and small town properties. Together with Bayley's, PGW is one of the largest two players in what is a fragmented market.

    5/ Water: At last with nationwide coverage through recent 'bolt on' acquisitions, PGW offer turf irrigation, for landscaping and sports use, along with their more traditional 'rural irrigation' and the bread and butter ongoing servicing work that tends to be higher margin. There is a wholesale side of the business too, supplying water and irrigation products. With nearly $85m of turnover in FY2015, PGW stands out as a major national player in a fragmented market.

    6/ Wool: PGW manages a substantial portion of the strong wool supply chain in New Zealand , from on farm procurement, freight and logistics through to sales (be they via auction, private sales, export (the Bloch & Behrens brand) and domestic). Higher value finer wool is marketed through the associtaed NZ Merino company.

    7/ Seeds: The largest seed producer in the Southern Hemisphere, with interests spread across New Zealand, Australia and South America.

    The beachhead of PGW remains in New Zealand. But there is potential to replicate the 'One PGW' model, particularly in South America in the coming years. Uruguay in particular is where PGW is building a strong presence.

    Conclusion: Ticks the 'major player' (top three) criterion across all markets in which they operate.
    Time to reprise my 'snooping'. How does PGW go when subjected to Buffett's four investment selection tests?

    1/ Top Three player in chosen market?

    PGG Wrightson Limited (PGW) was formed in 2005, a result of a merger between two established agricultural supply service leaders: Wrightson Limited and Pyne Gould Guiness. However, the DNA of the operation goes back much further than this. Wright Stevenson & Company was established in Dunedin in 1868. Even they are a new boy on the block though, as Gould Beaumont & Co. had been founded in Christchurch as early as 1851.

    Under the leadership of new CEO for FY2018 Ian Glasson, PGW has undergone a 'strategic review'. The review is to establish how much capital is required for PGW going forwards and how that capital might be supplied. This could include the divestment of certain business units. PGW is a diverse company. But the 'One PGW' motto of the previous CEO seems to have been dropped. The recognised business units are below:

    1/ Merchandising (rural themed products) with 94 stores branded 'PGGW Rural Supplies' and 'Fruitfed Supplies'. Traditional competitors are 'NZ Farm Source', the rebranded RD1 (Fonterra owned) with 71 stores and Farmlands (a co-operative) with over 80 stores. There are others, but on a smaller scale to 'the big three'.

    2/ Livestock Trading: PGW has NZs largest group of livestock representatives with 219 representatives across the country , handling 50%+ of transactions nationwide. The core market is sheep and beef cattle. But 'Livestock' will also sell dairy cows and deer velvet. The traditional saleyards are to be supplemented by a sophisticated on-line sales channel.

    3/ Finance & Insurance: Commission agents for AON and Vero. Commission agents for Heartland Bank, under the 'PGW Finance' brand (owned by Heartland). PGW finance their own in house livestock transactions via their GO-beef and GO-lamb initiatives.

    4/ Real Estate: Specialising in rural and small town properties. Together with Bayley's, PGW is one of the largest two players in what is a fragmented market.

    5/ Water: PGW offer turf irrigation, for landscaping and sports use, along with their more traditional 'rural irrigation' and the bread and butter ongoing servicing work that tends to be higher margin. There is a wholesale side of the business too, supplying water and irrigation products. Turnover in FY2018 of $41m is substantial but well down on the FY2015 peak. This business is now loss making at EBITDA level. PGW stands out as a major national player in a fragmented irrigation market. (source: Kord Mentha Independent Appraisal Report section 3.4.2)

    6/ Wool: PGW manages a substantial portion of the strong wool supply chain in New Zealand , from on farm procurement, freight and logistics through to sales (be they via auction, private sales, export (the Bloch & Behrens brand) and domestic). Higher value finer wool is marketed through the formerly associated NZ Merino Company. PGW sold their half stake to the growers co-operative in June 2011.

    7/ Seeds: The largest seed producer in the Southern Hemisphere, with interests spread across New Zealand, Australia and South America. For seed and grain production PGGWs key competitor is Barenbrug. Barenbrug is a global seed business headquartered in the Netherlands that trades as 'Agriseeds' in NZ and 'Heritage' in Australia Seed and Grain Australian and South American businesses facing challenging climatic conditions over FY2018.

    The bedrock of PGW seeds remains in New Zealand. The beachhead in Uruguay in particular is where PGW is building a strong presence. Building the business in neighbouring Argentina and Brazil looks to be the next step. Smaller acquisitions have been made in Australia in recent years.

    Conclusion: Ticks the 'major player' (top three) criterion across all markets in which they operate. 'Pass Test'

    SNOOPY
    Last edited by Snoopy; 01-11-2018 at 02:06 PM.
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  3. #4313
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    Default Buffett Test 2/ Rising eps Trend (one setback allowed): FY2018 perspective

    Quote Originally Posted by Snoopy View Post
    To be comparable 'year to year', I have removed all evidence of the now sold finance division from the results. This involved splitting the finance division off as if it was 'stand alone', then subtracting the finance division NPAT taking out from the total 'NPAT'. Please note these figures represent operational NPAT, discounting one off earnings effects.

    Earnings Per Share here is defined as NPAT / No. shares on Issue at end of year

    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

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

    Conclusion: Pass Test
    EBITDA add Associate Profit less D&A less Net Interest less Income Tax equals NPAT less Property sales equals Adjusted NPAT {A} No. Shares on Issue {B} eps {A}/{B}
    FY2014 $58.747m $2.521m $11.242m $6.262m $8.472m $35.312m $35.312m 754.8m 4.7c
    FY2015 $69.500m $0.181m $7.948m $7.921m $16.172m $37.640m $0.960m $36.680m 754.8m 4.9c
    FY2016 $70.181m $9.170m $9.016m $8.832m $43.163m $4.990m $38.173m 754.8m 5.1c
    FY2017 $64.499m $10.733m $6.540m $10.428m $36.728m $8.740m $28.058m 754.8m 3.7c
    FY2018 $70.174m $12.974m $9.986m $12.460m $34.754m $1.700m $33.054m 754.8m 4.4c

    Notes

    1/ (New) I have looked at the 'Interest- Finance Income and Expense' note (7 in AR2018) and removed the foreign exchange effects when calculating the net interest bill.
    2/ I have removed the contribution of property sales from the result as these are not indicative of operational performance.
    3/ Associate profits are included in Operating EBITDA from FY2016 forwards.

    After trending upwards for the first three years of our comparative periods, there was a sharp drop in normalized profit in FY2017, after which there has been just a partial recovery. Normalised profit is lower than five years ago.

    Conclusion: Fail Test

    SNOOPY
    Last edited by Snoopy; 28-10-2018 at 02:28 PM.
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  4. #4314
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    Default Buffett Test 3/ Return on Equity > 15% every year (one setback allowed): FY2018 view

    Quote Originally Posted by Snoopy View Post
    To be comparable 'year to year', I have removed all evidence of the now sold finance division from the results. This involved splitting the finance division off as if it was 'stand alone', and assigning the given shareholders equity between the finance division and all other divisions, then removing the finance division component from the total equity.


    ROE here is defined as: NPAT / End of Year Shareholder Equity

    FY2011 (*): $5.9m/ ($604.3m - 0.4171($766.814m)) = 2.13%
    FY2012 (*): $25.2m/ ($577.7m - 0.5892($51.736m)) = 4.61%
    FY2013 (*): $24.3m/($256.1m - 0.4134($19.155m)) = 9.79%
    FY2014 : $33.8m/ $269.7m = 12.5%
    FY2015 : $34.8m/ $267.4m = 13.0%

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

    Conclusion: Fail test
    ROE here is defined as: (Adjusted NPAT) / (End of Year Shareholder Equity)

    FY2014 : $35.312m/ $269.7m = 13.2%
    FY2015 : $36.680m/ $267.4m = 13.7%
    FY2016 : $38.173m/ $274.3m = 13.9%
    FY2017 : $28.058m/ $289.7m = 9.7%
    FY2018 : $33.054m/ $287.5m = 11.5%

    Conclusion: Fail test

    SNOOPY
    Last edited by Snoopy; 28-10-2018 at 02:37 PM.
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  5. #4315
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    Default Buffett Test 4/ Ability to raise margins above the rate of inflation: FY2018 view

    Quote Originally Posted by Snoopy View Post
    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
    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: (Adjusted NPAT)/(Sales)

    FY2014 : $35.312m/ $1,219m = 2.89%
    FY2015 : $36.680m/ $1,203m = 3.05%
    FY2016 : $38.173m/ $1,182m = 3.23%
    FY2017 : $28.058m/ $1,133m = 2.48%
    FY2018 : $33.054m/ $1,194m = 2.77%

    Three years of improving margins from FY2014 to FY2016 inclusive shows that sustained margin improvement is possible.

    Conclusion: Pass Test

    SNOOPY
    Last edited by Snoopy; 28-10-2018 at 02:45 PM.
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  6. #4316
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    Default Buffett Test: Overall Conclusion FY2018 view

    Quote Originally Posted by Snoopy View Post
    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 mean 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.
    We cannot apply a Warren Buffett style growth model to valuing PGW because it has failed:

    a/ test 2, the increasing 'eps' year on year test AND
    b/ test 3, the 'Return on Equity' test.

    These failures are not unexpected as these are tough hurdles for companies that must

    ai/ weather the effects of the weather (sic) AND
    bi/ 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 mean 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. This is otherwise known as the 'Capitalised Dividend Valuation Method'. Luckily for you readers I have already done this (my posts 4310 and 4311).

    SNOOPY
    Last edited by Snoopy; 22-10-2023 at 01:09 PM.
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  7. #4317
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    Default

    Reading all your summaries it does seem strange you hold PGW .....or don’t I get it
    “ At the top of every bubble, everyone is convinced it's not yet a bubble.”

  8. #4318
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    Default

    Quote Originally Posted by winner69 View Post
    Reading all your summaries it does seem strange you hold PGW .....or don’t I get it
    There are a few reasons why I hold:

    1/ PGW has been a good dividend payer since Alan Lai took control. And I make that comment even though dividends may be reduced from time to time (such as the last dividend). Over the business cycle, it is still a good dividend story.
    2/ 'Traditionally' (perhaps not at the moment), movements in the PGW share price are not that well correlated with the NZX50. So holding PGW has provided a kind of 'hedging effect' as part of a wider portfolio.
    3/ PGW has a diverse earnings base within the broader agricultural sector. Last year when dairy is down, horticulture was up. Likewise, I don't have to guess whether investing in 'sheep' or 'cattle' is the best livestock to finish off. Knowledgeable PGW Livestock buyers will do that for me.
    4/ Despite my publicised Buffett test failures, ROE is not totally shabby. PGW are still earning above their cost of capital (9.3% - 9.7% according to the KM report)
    5/ Previous CEO Mark Dewdney's 'One PGW' policy seems to be working. The cross selling between business units has yielded positive results and this looks to be continuing under the new CEO. New investments seem much more disciplined than under the old Norgate regime.

    I think those are enough reasons to hold for now!

    SNOOPY
    Last edited by Snoopy; 29-10-2018 at 06:16 PM.
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  9. #4319
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    Default Guanglin (Alan) Lai steps down from the board!

    Sensational news on the eve of the AGM!

    -------

    PGG Wrightson Limited - Retirement of Chair

    PGG Wrightson Limited’s (PGW) Chairman Guanglin (Alan) Lai announced today his intent to retire as a Director and Chair effective 30 October 2018.

    Mr Lai said “I will always have great fondness for New Zealand and for PGW. The work that Agria has been able to do to benefit PGW and New Zealand is not yet finished, but I think that my time in leading PGW as Chair must come to an end as I need to focus on the next phase in my career and spend more time with my family.

    “Leadership always needs to be refreshed and I have done everything within my power to lead and benefit PGW over the last 10 years to greener pastures and to greater success. I believe in this company and this country. I have been a proud caretaker for this iconic New Zealand company and have full confidence in the Board and trust they will continue to serve the shareholders and PGW well into the future."

    In the interim, existing Director, Joo Hai Lee has been appointed as Chair effective from 31 October with Trevor Burt continuing as Deputy Chair. Mr Burt said “a review of the Board’s composition and governance would be undertaken and the market would be updated on outcomes in due course.

    Mr Burt noted that “the Board wished to offer its sincere thanks to Alan for his leadership and dedication since his appointment as a Director in 2009, and wish him all the very best for the future.

    --------

    SNOOPY
    Last edited by Snoopy; 29-10-2018 at 06:23 PM.
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  10. #4320
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    Quote Originally Posted by Snoopy View Post
    Sensational news on the eve of the AGM!

    -------

    PGG Wrightson Limited - Retirement of Chair

    PGG Wrightson Limited’s (PGW) Chairman Guanglin (Alan) Lai announced today his intent to retire as a Director and Chair effective 30 October 2018.

    Mr Lai said “I will always have great fondness for New Zealand and for PGW. The work that Agria has been able to do to benefit PGW and New Zealand is not yet finished, but I think that my time in leading PGW as Chair must come to an end as I need to focus on the next phase in my career and spend more time with my family.

    “Leadership always needs to be refreshed and I have done everything within my power to lead and benefit PGW over the last 10 years to greener pastures and to greater success. I believe in this company and this country. I have been a proud caretaker for this iconic New Zealand company and have full confidence in the Board and trust they will continue to serve the shareholders and PGW well into the future."

    In the interim, existing Director, Joo Hai Lee has been appointed as Chair effective from 31 October with Trevor Burt continuing as Deputy Chair. Mr Burt said “a review of the Board’s composition and governance would be undertaken and the market would be updated on outcomes in due course.

    Mr Burt noted that “the Board wished to offer its sincere thanks to Alan for his leadership and dedication since his appointment as a Director in 2009, and wish him all the very best for the future.

    --------

    SNOOPY
    Something happening behind the scenes?

    Interesting day ahead tomorrow!

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