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05-11-2018, 08:51 PM
#4341
Originally Posted by Snoopy
...
4/ Have I missed anything?
...
As Balance and the KM report says, and I will say it too, you have the debt position of the remaining company wrong.
$44M of debt goes with S&G and the net debt position of new PGW will be $36M2 or, if you insist in paying off an extra $18, about half of that.
Have you factored in the ongoing provision of services to the new owners of S&G ?
Have you also factored in that new PGW will be selling S&G seeds, hopefully for a profit?
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06-11-2018, 10:36 AM
#4342
Originally Posted by Snoopy
|
Scenario $100.5m debt repayment |
Scenario $118m debt repayment |
eps {A} |
1.63c |
1.73c |
PGW Rural Rump: Market Valuation {B} |
18.3c |
20.7c |
PE ratio {B}/{A} |
11.2 |
12.0 |
Gross Dividend Yield {A}/{B x 0.72} |
12.4% |
11.6% |
Notes
1/ In the gross yield calculation I am assuming that all earnings are paid out as dividends. With 'Agria' better capitalized following the capital repayment and with some potential investment to be made on 'PGW Rural Rump' going forwards, this might not happen.
2/ I feel the PE ratios are looking quite high for this type of business. This leads me to believe that at 57c, PGW pre break up is looking quite fully valued.
3/ The potential dividend yield looks fantastic, with the slightly better capitalized version of 'PGW Rural Rump' showing a lower yield. But perhaps that better capitalization could be handy in an industry notorious for 'rural downturns'. And in such downturns I would expect any dividend yield to drop .
4/ Have I missed anything?
5/ I don't seem to be very enthusiastic about getting out my wallet to top up on PGW shares before the split. In retrospect those near 70c prices that Mr Market was paying only a few months back look a bit crazy!
SNOOPY
Have had a chance to look closely at the KM report.
I think you have not backed out all the P&L items pertaining to Seeds & Grains.
Eg. Depreciation and Amortisation - total $13m but $6.1m was S&G - so your DA should be only $6.9m rather than the $12.97m you have in your calculations for Rural Rump.
Likewise, I believe your interest expense is too high - should be closer to $2m when you fully back out S&G debts and repayment of debts.
My tens cents' worth.
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07-11-2018, 10:30 AM
#4343
Originally Posted by Balance
Have had a chance to look closely at the KM report.
I think you have not backed out all the P&L items pertaining to Seeds & Grains.
Eg. Depreciation and Amortisation - total $13m but $6.1m was S&G - so your DA should be only $6.9m rather than the $12.97m you have in your calculations for Rural Rump.
Likewise, I believe your interest expense is too high - should be closer to $2m when you fully back out S&G debts and repayment of debts.
My tens cents' worth.
Do your own numbers guys.
Rural Rump probably one of the cheapest companies on NZX after the capital repayment from divestment of S&G.
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07-11-2018, 10:11 PM
#4344
Originally Posted by Snow Leopard
Have you also factored in that new PGW will be selling S&G seeds, hopefully for a profit?
First of all thanks to The Ice Cool Cat and the Scales for the feedback. I can see I have a bit more homework to do. I will make a start with the above question.
Here are some quote from AR2017 p19 under the heading 'Rural Supplies'.
-------
"The rural supplies business has a core foundation around owning the agronomy categories of agchem, seed and grain and fertilizer."
<snip>
"This year saw further growth in these key categories."
<snip>
"A key contributor to this growth was our team providing the best product and technical advice, at the right time to our customers. This sits alongside the science of the research that supports our product range."
-----
I read the above as the Rural Supplies division selling seeds and booking those sales through the rural division book already, while the seed division develops the technology. I would guess the seeds are sold to 'Rural Supplies' on an arms length basis. That means if the seeds division is sold, the profits from seed sales through the Rural Supplies division will remain as they are now. I.e. there will be no windfall increase as a result of the seeds division sale.
SNOOPY
Last edited by Snoopy; 07-11-2018 at 10:25 PM.
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11-11-2018, 09:36 PM
#4345
Seeds of Destruction 6: Seeds/Supplies Split Balance Sheet
Originally Posted by Snow Leopard
The left hand column is a view of the total company consisting of the details of the financial position of Rural Services who have an investment in Seed & Grain with a net book value of $285M (as per the initial sale announcement).
All the 'discrepancies' you are noting are the equivalent lines of the Seed & Grain financial position being consolidated down to that single $285M figure.
I present below my reconciliation of the two versions of the PGW balance sheet 'as published'.
'Column 1' {A} represents the balance sheet as published in AR2018.
'Column 2' {B} represents the balance sheet as published in the Korda Mentha deconsolidation report.
'Column 3' represents the difference between 'Column 1' and 'Column 2' ( {A}-{B} )
Effectively Column 3 represents the balance sheet of the 'Seeds & Grain' division as at balance date, prior to any cash injection from any takeover offer. This information was not published in the Korda Mentha report, although a similar table appears on page 33.
Despite all the figures adding up, this exercise may not be entirely correct. The AR2018 balance sheet contains many more categories than the KM balance sheet. This means I had to select what 'box' to post some AR2018 balance sheet items into. In some instances, I may have picked the wrong box. But I have recorded in the table Column 1, the destination box of each balance sheet item. So if anyone thinks that I have made a classification mistake, then the information is there so that they can challenge me on it.
The grand total of Column 3 should be zero. This is because the value of the 'Seed and Grain' 'investment' (pre split) has been included in Column 3 as a negative value to offset the positive 'investment' value of 'Seed & Grain' in Column 1. This is because pre-split, recording 'Seed & Grain' as an investment is an entirely artificial construct that must be eliminated in the consolidated balance sheet (Column 1). The actual total of Column 3 is ($0.174m), not zero. This represents the rounding error that is inherent in parts of the table being rounded up to one decimal place
|
PGW FY2018 Balance Sheet {A} |
Rural Services Balance Sheet with Seeds as Investment {B} |
Seed & Grain Balance Sheet {A}-{B} |
Trade & Other Receivables |
$267.627m+$39.419m+$0.733m= $307.779m |
$173.8m |
$133.979m |
Inventory & WIP |
$262.538m+$0.911m= $263.449m |
$78.2m |
$185.249m |
Trade & Other Payables |
($267.096m)+($6.741m)= ($273.847m) |
($109.6m) |
($164.247m) |
Accruals & Provisions |
($2.121m) |
($51.9m) |
$49.779m |
Other Working Capital |
$2.615m+$0.827m+($3.645m)=($0.203m) |
($6.7m) |
$6.497m |
Net Working Capital {A} |
$295.057m |
$83.8m |
$211.257m |
Property, Plant & Equipment |
$124.220m |
$46.2m |
$78.020m |
Investments |
$2.520m+$0.030m+$14.323m= $16.837m |
$286.0m |
($269.163m) |
Intangible Assets |
$13.017m+$2.641m= $15.658m |
$12.0m |
$3.658m |
Deferred Tax (Liability) Asset |
$16.259m |
$12.5m |
$3.759m |
Other Non-Current Assets (Liabilities) |
$0.020m+($0.966m)= ($0.946m) |
($18.9m) |
$17.954m |
Long Term Net Operating Assets {B} |
$172.028m |
$337.8m |
($165.772m) |
Cash & Cash Equivalents |
$10.926m |
$2.7m |
$8.226m |
Overdraft & Short Term Debt |
($30.806m) |
($9.2m) |
($21.606m) |
Long Term Debt |
($149.205m) |
($118.0m) |
($31.205m) |
Defined Benefit Superannuation Scheme Provision |
($9.669m)+($0.905m) = ($10.574m) |
($9.5m) |
($1.074m) |
Net Cash (Debt) {C} |
($179.659m) |
($134.0m) |
($45.659m) |
Net Assets {A}+{B}+{C} |
$287.462m |
$287.5m |
($0.174m) |
Originally Posted by Balance
Page 35 of KM report (Financial Position) 6.2.2 - Seed & Grains taking over $44m worth of debt?
Thank you Balance. As the above table shows, Seed and Grain has $8.226m of cash on hand, and this must be offset against the long ($31.205m) and short term ($21.606m) debt Seed and Grain debt.
$8.226m + ($31.205m) + ($21.606m) = ($44.585m)
Originally Posted by Snow Leopard
As Balance and the KM report says, and I will say it too, you have the debt position of the remaining company wrong.
$44M of debt goes with S&G and the net debt position of new PGW will be $36M2 or, if you insist in paying off an extra $18, about half of that.
'Rural Rump' has $2.7m of cash on hand, and this must be offset against the long ($118.0m) and short term ($9.2m) debt Seed and Grain debt.
$2.7m + ($9.2m) + ($118.0m) = ($124.5m)
The option detailed in the KM report p36 is to repay $100.5m of 'Rural Rump' debt from any money received from the sale of the seed division. If this plan is executed, then the 'Rural Rump' debt will reduce to.
($124.5m) + $100.5m = ($24m)
SNOOPY
Last edited by Snoopy; 17-06-2019 at 10:20 AM.
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13-11-2018, 08:51 AM
#4346
Originally Posted by Snow Leopard
Have you factored in the on going provision of services to the new owners of S&G ?
Here is a comment from section 1.2.2 of the KM report:
"PGW will continue to provide and recharge at cost a range a range of corporate functions and shared services to Seed and Grain for a transitional period between 12 and 18 months."
The 'at cost' comment (my italics) indicates there will be no extra profit stream into PGW 'Rural Rump' for the supply of transitional services to DLF Seeds, the prospective buyer of 'PGW Seeds'
And a couple of comments from the KM report, this quote from section 9.2.2.
"The level of corporate costs allocated to the Seed and Grain business is relatively low..."
"In FY2018, more than $20m of annual corporate costs related to shared services and these expenses were allocated across to PGWs core operating segments (Seed and Grain, Retail and Water and Agency). At an EBITDA level, this left approximately $10m of overheads within the Corporate segment, which are costs related to head office governance functions. The level of corporate cost is relatively high for what would be a reduced Rural Services business. We understand that PGW management will review the support and governance costs, should the Proposed Transaction proceed, with the objective of reducing costs to the appropriate level to reflect the structure of the remaining Rural Services business."
This does read like 'PGW Rural Rump' are serious about reducing what looks like an over burdensome corporate structure for the business that remains. But it also looks like 'PGW Rural Rump' will be shouldering all of these restructuring costs. That includes any likely redundancy packages and maybe even the abandonment of the head office lease and the associated costs of that if it follows that far less office space is required going forwards. These costs are likely to be significant, albeit one off items.
SNOOPY
Last edited by Snoopy; 13-11-2018 at 09:09 AM.
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13-11-2018, 04:43 PM
#4347
Originally Posted by Balance
Have had a chance to look closely at the KM report.
I think you have not backed out all the P&L items pertaining to Seeds & Grains.
Eg. Depreciation and Amortisation - total $13m but $6.1m was S&G - so your DA should be only $6.9m rather than the $12.97m you have in your calculations for Rural Rump.
As Balance has hinted, I need to look at the Segmented Result (p38 AR2018) to see how the Depreciation and Amortisation is allocated between 'Seeds & Grain' and 'Rural Rump'. However, only some of the D&A is segmented. There is a significant amount of D&A falling into the heading 'Other', perhaps mostly relating to head office. When there is no other guidance given on how to allocate 'Other Depreciation & Amortisation' I use a 'rule of thumb' to allocate this in proportion to the revenue of each working division.
|
Rural Rump |
Seed & Grain |
Other |
Total |
Revenue FY2018 |
$806.750m (64.2%) |
$449.495m (35.8%) |
|
(100%) |
Depreciation & Amortisation FY2018 |
$4.183m |
$6.056m |
$2.735m |
$12.974m |
D&A with 'Other D&A' reallocated FY2018 |
$5.939m |
$7.035m |
|
$12.974m |
Another method would be to assume that because 'Seeds & Grain' D&A is generally lower. Then you could add all the 'Other' D&A' onto 'Rural Rump'. This would produce a 'Rural Rump' Depreciation and Amortisation figure of:
$4.183m + $2.735m = $6.918m
This looks like the method favoured by Balance. And given this D&A figure is higher than the $5.939m that I calculated, the Balance figure is the more conservative assumption.
Balance also has a point on the projected interest payments that I will address below.
SNOOPY
Last edited by Snoopy; 15-10-2019 at 09:07 AM.
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13-11-2018, 05:15 PM
#4348
Seeds of Destruction: Part 3.1 - NPAT of 'PGW Rural Rump' going forwards
Originally Posted by Snoopy
If the indicative interest rate bill 'before' was $10.235m based on an average debt balance of $179.834m, this implies an indicative interest rate of:
$10.235m / $179.834m = 5.7%
That means the indicative annual interest payments after debt repayment will be:
0.057 x ($179.834m - $100.5m) = $4.522m
For comparison I will also look at an alternative scenario where $118m of debt is repaid:
0.057 x ($179.834m - $118m) = $3.525m
|
Rural Services ($100.5m debt repayment) |
Rural Services ($118m debt repayment) |
EBITDA |
$34.567m |
$34.567m |
less DA |
$12.974m |
$12.974m |
less I |
$4.522m |
$3.525m |
equals EBT |
$17.071m |
$18.069m |
x 0.72 equals NPAT {A} |
$12.291m |
$13.009m |
No. shares on issue {B} |
754.048m |
754.048m |
eps {A}/{B} |
1.63c |
1.73c |
There is a complicating factor that comes into my 'greater debt repayment' scenario. If extra debt is repaid then that money will no longer be available to shareholders as part of a capital repayment. Under the original scenario a capital repayment of $292m was modelled. Under the 'alternative scenario' this capital repayment drops to:
$292m - $18m = $274m
I am going to rework my projected earnings figures with the changes suggested by Balance.
If the indicative interest rate bill 'before' was $10.235m based on an average debt balance of $179.834m, this implies an indicative interest rate of:
$10.235m / $179.834m = 5.7% (use in Step 2)
That means the indicative annual interest payments after debt repayment will be:
Step 1/ Calculate the incremental peak seasonal debt multiplication factor:
PGW has various seasonal funding requirements that are met by taking on extra debt. The seasonal funding requirements are best measured by changes in 'Net Working Capital'. An annual picture of this variation in net working capital is graphed in the 'KordaMentha' October 2018 report on p34, Figure 6.1. Over FY2018, the minimum net working capital required was around $275m on July 1st 2017 peaking at just over $340m in November 2017. If more net cash was on hand through debt repayment, then these funding requirements would be reduced by the amount of that debt repayment.
((340 - 100.5)/(275 -100.5)) = 1.3725 (an increment of 37.25%). Yet averaged over a financial year and using a linear model, the average increase in incremental debt is only half this:
37.25% / 2 = 18.62% => Annual debt incremental factor = 1.1862
Step 2/ Calculate Annual Debt Interest Payment
Using the liabilities in the balance sheet in post 4345:
0.057x([$149.205m+$30.806m-$10.926m]
-[ $21.606m+$31.205m-$8.226m]
-$100.5m) x 1.1862
= $1.623m
For comparison I will also look at an alternative scenario where $118m of debt is repaid:
Step 1/ Calculate the incremental peak seasonal debt multiplication factor:
((340 - 118)/(275 -118)) = 1.4140 (an increment of 41.40%). Yet averaged over a financial year and using a linear model, the average increase in incremental debt is only half this:
41.40% / 2 = 20.70% => Annual debt incremental factor = 1.2070
Step 2/ Calculate Annual Debt Interest Payment
Using the liabilities in the balance sheet in post 4345:
0.057x([$149.205m+$30.806m-$10.926m]
-[ $21.606m+$31.205m-$8.226m]
-$118m) x 1.2070
= $0.4472m
|
Rural Services ($100.5m debt repayment) |
Rural Services ($118m debt repayment) |
EBITDA |
$34.567m |
$34.567m |
less DA |
$6.918m |
$6.918m |
less I |
$1.623m |
$0.447m |
equals EBT |
$26.026m |
$27.202m |
x 0.72 equals NPAT {A} |
$18.739m |
$19.585m |
No. shares on issue {B} |
754.048m |
754.048m |
eps {A}/{B} |
2.49c |
2.60c |
There is a complicating factor that comes into my 'greater debt repayment' scenario. If extra debt is repaid then that money will no longer be available to shareholders as part of a capital repayment. Under the original scenario a capital repayment of $292m was modelled. Under the 'alternative scenario' this capital repayment drops to:
$292m - $18m = $274m
SNOOPY
Last edited by Snoopy; 17-06-2019 at 09:54 AM.
Reason: Revised Interest Calculations
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13-11-2018, 05:20 PM
#4349
Snoops ..how much of the $450m of seed sales are going to be retained by PGW ....the agency deal?
“ At the top of every bubble, everyone is convinced it's not yet a bubble.”
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13-11-2018, 05:40 PM
#4350
Seeds of Destruction: Part 5.1 PE Ratio and Gross Yield calculations: PGW Rural Rump
Originally Posted by Snoopy
|
Scenario $100.5m debt repayment |
Scenario $118m debt repayment |
eps {A} |
1.63c |
1.73c |
PGW Rural Rump: Market Valuation {B} |
18.3c |
20.7c |
PE ratio {B}/{A} |
11.2 |
12.0 |
Gross Dividend Yield {A}/{B x 0.72} |
12.4% |
11.6% |
Notes
1/ In the gross yield calculation I am assuming that all earnings are paid out as dividends. With 'Agria' better capitalized following the capital repayment and with some potential investment to be made on 'PGW Rural Rump' going forwards, this might not happen.
2/ I feel the PE ratios are looking quite high for this type of business. This leads me to believe that at 57c, PGW pre break up is looking quite fully valued.
3/ The potential dividend yield looks fantastic, with the slightly better capitalized version of 'PGW Rural Rump' showing a lower yield. But perhaps that better capitalization could be handy in an industry notorious for 'rural downturns'. And in such downturns I would expect any dividend yield to drop .
4/ Have I missed anything?
5/ I don't seem to be very enthusiastic about getting out my wallet to top up on PGW shares before the split. In retrospect those near 70c prices that Mr Market was paying only a few months back look a bit crazy!
Reworking these calculations with the figures re'Balance'd
|
Scenario $100.5m debt repayment |
Scenario $118m debt repayment |
eps {A} |
2.49c |
2.60c |
PGW Rural Rump: Market Valuation {B} |
18.3c |
20.7c |
PE ratio {B}/{A} |
7.2 |
8.0 |
Gross Dividend Yield {A}/{B x 0.72} |
18.9% |
17.4% |
Notes
1/ In the gross yield calculation I am assuming that all earnings are paid out as dividends. With 'Agria' better capitalized following the capital repayment and with some potential investment to be made on 'PGW Rural Rump' going forwards, this might not happen.
2/ The PE ratios are looking fair for this type of business. But remember we are in a favourable time period in the rural cycle.
3/ The potential dividend yield looks fantastic, with the slightly better capitalized version of 'PGW Rural Rump' showing a lower yield. But perhaps that better capitalization could be handy in an industry notorious for 'rural downturns'. And in such downturns I would expect any dividend yield to drop .
4/ Have I missed anything else?
SNOOPY
Last edited by Snoopy; 17-12-2018 at 05:01 PM.
Reason: Update eps and downstream consequences
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