PGW - PGG Wrightson

[percy]

Yes! :-(

SNOOPY

Perhaps that explains why they are no longer directors.

[Balance]

You mean just 1 in 754 of the shares on issue?



Did you miss the key word Balance? 'Hope' appears a well worn investment strategy at PGW!

SNOOPY

Yes, 754 of which 381 are in the hands of 3 shareholders.

And yes, I forgot about Agria's association with a company call New Hope!

[Snoopy]

So will PGW make an announcement on the capital repayment & corporate review on Monday, 1st July?

https://www.nzx.com/announcements/334292

"we would hope to be in a position to announce outcomes from that work-stream before the end of the financial year on 30 June 2019.”

'3 days late' and the capital repayment announcement is out:

http://nzx-prod-s7fsd7f98s.s3-websit...127/303000.pdf

No word on the corporate review though. Perhaps the high powered executives have considered that ex CEO Ian Glasson falling on his sword was all that is required? If I was in one of those high powered corporate positions, I think that is what I would decide!

31c paid to each shareholder for every share they own followed by a 10:1 share consolidation is the plan. With the share price up 5.7% today to 56c (yay), that is equivalent to a post consolidation share price of: (56c-31c) x10 = $2.50. A nice round respectable number that potential new shareholders will just love?

SNOOPY

[percy]

Three new directors,one of whom is the new Chairman.
New CEO......
All the right changes that were needed.

[waikare]

'3 days late' and the capital repayment announcement is out:

http://nzx-prod-s7fsd7f98s.s3-websit...127/303000.pdf

No word on the corporate review though. Perhaps the high powered executives have considered that ex CEO Ian Glasson falling on his sword was all that is required? If I was in one of those high powered corporate positions, I think that is what I would decide!

31c paid to each shareholder for every share they own followed by a 10:1 share consolidation is the plan. With the share price up 5.7% today to 56c (yay), that is equivalent to a post consolidation share price of: (56c-31c) x10 = $2.50. A nice round respectable number that potential new shareholders will just love?

SNOOPY

What are the tax implications?
The company has received a Product Ruling (BR PRD 18/05) from Inland Revenue confirming that the proposed return of capital to be implemented pursuant to the Scheme will not be treated as a dividend for New Zealand tax purposes. Inland Revenue’s confirmation applies on the basis that the conditions on which the Product Ruling was issued are satisfied. PGW considers that the Scheme meets these conditions. Shareholders should seek independent tax advice on the tax implications of the Scheme.


The above it taken from their Explanatory Notes 4/7/19: If all going to plan, am I reading this correctly, the 31 cents we receive for each share will be tax free?

[Balance]

What are the tax implications?
The company has received a Product Ruling (BR PRD 18/05) from Inland Revenue confirming that the proposed return of capital to be implemented pursuant to the Scheme will not be treated as a dividend for New Zealand tax purposes. Inland Revenue’s confirmation applies on the basis that the conditions on which the Product Ruling was issued are satisfied. PGW considers that the Scheme meets these conditions. Shareholders should seek independent tax advice on the tax implications of the Scheme.


The above it taken from their Explanatory Notes 4/7/19: If all going to plan, am I reading this correctly, the 31 cents we receive for each share will be tax free?

Standard disclaimer.

Tax free.

[Snoopy]

Previously I have speculated how large the capital return will be, that we PGW shareholders are due to receive. It has now been announced that it will be $235m; somewhat lower than the $292m shown in the projected balance sheet that we shareholders all voted on! Of the originally projected capital injection, $100.5m was shown to be used to retire debt, leaving just $17.5m of debt remaining inside 'PGW Rural Rump'. Yet because the projected capital return will be $57m lower, that means the amount of money available for debt to be retired is consummately higher - by $57m.

From an end of June 2018 balance sheet perspective, the maximum debt that can be retired is $100.5m + $17.5m = $118m. This means that with all debt retired, we still have:

$57m - $17.5m = $39.5m

of net cash on the balance sheet, after the $235m capital repayment has been made.

A smaller amount of debt outstanding means our indicative interest bill going forwards needs to be reworked:

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 calculated as per the steps below:

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 more capital going to debt repayment, then the funding requirements of the working capital, via interest payments, would be consummately reduced.

The half year balance sheet reported to the NZX for FY2019 (my post 4499) shows working capital requirements $29m higher that at the EOFY2018. However, based on the previous year, the half yearly reported debt is still $10m below annual peak debt. The annual peak debt of $29m + $10m = $39m will therefore be wiped out by the $39.5m of new net cash on the balance sheet. PGWRR can effectively be debt free all the year round going forwards

This means there is not longer any need to calculate 'incremental debt' over a business year: All interest payments should be wiped out going forwards.

Step 2/ Calculate Annual Debt Interest Payment

Answer: zero

In a departure from the previous calculation, this time I am going to use average EBITDA over the business cycle, as worked out in post 4486.

	Rural Services ($39.5m EOFY cash balance after debt repayment)
EBITDA	$29.875m
less DA	$6.918m
less I	$0.0m
equals EBT	$22.975m
x 0.72 equals NPAT {A}	$16.529m
No. shares on issue {B}	754.048m
eps {A}/{B}	2.19c

A big day with the announcement of when and how that capital repayment of $235m will be returned to shareholders, But what has not been revealed until now is the indicative debt level of the PGWRR company that is left.

From an end of May 2019 post capital repayment balance sheet perspective, the total bank debt on the books is:

$3.920m + $31.742m = $35.662m.

This is within the 'core debt' envelope of $25m to $50m forecast for FY2020 (p9 of the proposal). But this is only part of the debt of the company that is forecast to balloon out by way of an additional $70m for 'typical seasonal working capital'. This reality is somewhat different to the 'debt free' situation that I imagined PGW would be in all year round in 'Part 3.2'.

A greater amount of debt outstanding means our indicative interest bill going forwards needs to be reworked.

Using past debt balances and interest payments declared over FY2018, 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 we can calculate the indicative annual interest payments after debt repayment as per the steps below:

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 outlined in p9 of the 'Special Meeting' explanatory documents for the date of Tuesday 23rd July 2019. Peak working capital (and hence peak debt) is forecast to be between October and January, in line with selling spring seasonal goods to farmers.

Over FY2020, the minimum net working capital required is estimated to be $35.662m on July 1st 2019 peaking at $105.662m around November 2019.

$105.662m / $35.662m = 2.9629 (an increment of 196%). Yet averaged over a financial year and using a linear model, the average increase in incremental debt is only half this:

196% / 2 = 98% => Annual debt incremental factor = 1.98

Step 2/ Calculate Annual Debt Interest Payment

Using the liabilities in the balance sheet as presented on p10 of the Special General Meeting notice:

0.057x [$31.742m+$3.920m-$1.160m] x 1.98
= $3.894m

	Rural Services ($39.5m EOFY cash balance after debt repayment)
EBITDA	$29.875m
less DA	$6.918m
less I	$3.894m
equals EBT	$19.063m
x 0.72 equals NPAT {A}	$13.725m
No. shares on issue {B}	754.048m
eps {A}/{B}	1,82c

SNOOPY

[Snoopy]

	Scenario $157.5m debt repayment
eps {A}	2.19c
PGW Rural Rump: Market Valuation {B}	20.8c
PE ratio {B}/{A}	9.5
Gross Dividend Yield {A}/{B x 0.72}	14.6%

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/ The PE ratios are looking fair for this type of business, because I have considered a business cycle average value of earnings.

3/ The potential dividend yield looks fantastic. The lesser than expected capital repayment looks to have made PGWRR debt free going forwards. This could be handy in an industry notorious for 'rural downturns'.

In this low interest rate environment I would be prepared to buy with a gross dividend return of 8.5%. This implies a post capital return share price of:

20.8c x 14.5/8.5 = 35.5c

Post 'capital repayment' and a couple of years down the track into more favourable farming times, I am therefore guessing a capital appreciation of around 15cps, plus dividends of 2cps per year, are on the table, with the share now trading at 52c.

	Scenario $157.5m debt repayment and new FY2020 Investment
eps {A}	1.82c
PGW Rural Rump: Market Valuation {B}	54c - 31c = 23c
PE ratio {B}/{A}	12.6
Gross Dividend Yield {A}/{B x 0.72}	11.0%

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 ratio is now looking looking high for this type of business, despite the fact I have considered a business cycle average value of earnings.

3/ The potential dividend yield looks O.K.. The lesser than expected capital repayment has not made PGWRR debt free after all. This is no doubt because PGWRR has elected to keep spending to invest in the business. But, conservatively, I haven't modelled the effect of any of this increased earnings coming through.

In this low interest rate environment I would be prepared to buy with a gross dividend return of 8.5%. This implies a post capital return share price of:

23c x 11.0/8.5 = 29.8c

Post 'capital repayment' and a couple of years down the track into more favourable farming times, I am therefore guessing a capital appreciation of around (29.8c -23c =) 6.8cps, plus dividends of 2cps per year, are on the table, with the share now trading at 54c. Given we shareholders are currently in a dip in the earnings curve, and that means a rather higher PE than I have calculated above, patience may be required. I see no immediate bargain available for new shareholders buying in at 54c.

SNOOPY

[Snoopy]

One wonders what happens to the problematic under funded pension scheme if the crown jewel's are sold ?

I would have thought a sudden influx of millions of Danish dollars would be the ideal time to properly fund the outstanding pension liability. However the proforma post capital repayment balance sheet just published, dated 19th May 2019, shows a net pension liability of $10.761m, up from $10.574m at the last balance date of 30-06-2018. This means the golden opportunity to 'square up' the pension scheme has been lost.

Such a small increase in 'net pension liability' ordinarily might not raise eyebrows. Except that:

1/ Equity markets that fund this liability have had a pretty good year.
2/ Around $3m of deficit funding was planned over FY2019 and this has made no net difference to the problem. AND
3/ The PGW company earnings that will fund the capital deficit will be greatly reduced in the future, now that PGW is only half the business it was, before the seed sale.

PGW has a history of trying to solve this problem.

Pension Scheme Funding Not Declared in Profit & Loss

FY2017	FY2018	FY2019
$7.551m	$2.842m	$2.94m (est)

The fact that the pension funding issue has not gone away brings to mind the question:

"Will a $3m donation towards the deficit have to be funded indefinitely by PGW?"

$3m on a NPAT of $16.5m is 18% of net profit. That would mean the underlying PGW net profit today, and in the future, could be around 20% below any headline figure we shareholders read about!

SNOOPY

[Snoopy]

Using a capital repayment of $235m

<snip>

The 'GoBeef' and 'GoLamb' livestock financing seems to be a success, but is capital intensive. It might make sense to deploy some retained earnings in that direction?

The trend in 'GoBeef' and 'GoLamb' 'in house funding of purchases and sales' within the Livestock division is interesting.

Current Assets 'Go'

30 June 2016	30 June 2017	30 June 2018	19 May 2019
$12.178m	$32.371m	$39.419m	$48.806m

Slowly the reasons for not returning more capital to share holders, like $3m in shoring up the pension liabilities and an incremental $10m here, are coming out...

SNOOPY