PGW - PGG Wrightson

[winner69]

It is still not an issue.

..but I keep reading about pgw’s shortage of capital on the Internet ...so it must be an issue

[percy]

..but I keep reading about pgw’s shortage of capital on the Internet ...so it must be an issue

Ignore the noise.

[Snoopy]

Snoopy, very interesting bits and pieces you uncover from PGW's accounts ... thanks - feels more like watching an unfolding crime story rather than reading dry accounts!

I am just watching this company from the sidelines, but for shareholders I could imagine you might make some of them nervous (which is a good thing) ...

Just out of curiosity - you used to hold PGW, didn't you? Are you still holding?

Yes BP, I am still a PGW shareholder.

In fact, I significantly increased my holding prior to the capital repayment. I did this in anticipation of getting much of my capital back in the capital repayment. And also because I thought holding shares in:

1/ NZ's leading agricultural retailer,
2/ a retailer diversified across many different agricultural sectors,
3/ in a slimmed down but now far better capitalised PGWRR structure

would be a good idea. The potential dividend yield was an attraction too, even if, being a holder for a while, I am aware that I might expect this dividend to fluctuate across the business cycle. I don't subscribe to the ever increasing dividend theory expounded by some. I think PGW is probably a good thing to own but only at the right price. I still believe in all but one my reasons for holding. The part of my investment story I am having trouble with is point 3 above.

SNOOPY

[Snoopy]

Somehow millions of dollars worth of capital must have been leaking from PGW in recent years, out of the headline sight of shareholders, to bring them to the precarious capital position that PGW is in today. So how did it all unfold?

PGW was making much needed capital by selling their company owned premises to third parties and leasing them back. So what is all this about PGW losing money on property? PGW have certainly been vocal around the sell down of their property portfolio, but rather less forthcoming about their 'IMPAIRMENT AND FAIR VALUE ADJUSTMENTS' (Note 4 AR2019):

	FY2017	FY2018	FY2019
Impairment Property Plant & Equipment	$0.0m	$1.070m	$2.260m

A clue to what is going on is that the referenced FY2018 comparative figure is unchanged from when it was reported in the FY2018. Since the FY2019 reports are prepared from the point of view of a wholly owned New Zealand perspective, this indicates the 2018 write downs also solely relate to the New Zealand business. The only thing I can find in the verbal commentary of each year which even hints at NZ based property losses is the continued rationalisation of surplus stock sales yards. This rationalisation is not quantified in the text. The impairment figures quoted are not explained further in the annual report notes. I think it is reasonable to link the two (the missing quantification of the losses in the text with the unexplained effect of dollar losses in AR2019 Note 4.)

All up capital losses from property plant and equipment in the last couple of years come to:

$1.070m + $2.260m = $3.330m

SNOOPY

[Balance]

I find Snoopy's analysis of PGW useful (and sometimes, very insightful) so will always take note.

Certainly PGW's financials have gone through all kinds of somersaults in recent years - mostly at the instigation (imo) of the now disgraced and neutered major shareholder, Agria.

Post the capital repayment, the emergence of the Cushings as the principal driver (imo) of PGW's strategy going forward and the high level of corporate activity in the sector in Australia, I do not share Snoopy's concerns about PGW's financial position.

If anything, I think that PGW is now over-capitalized.

My numbers post the capital repayment and dividend payout :

Net debt $33m

Equity $158m

Committed bank facilities - core $50m and seasonal working capital debt $75m - provide plenty of flexibility.

EBITDA forecast of $30m - interest over will be over 10 times.

[percy]

Added to my holding today at $2.46."Interim dividend of not less than 8 cents ps" remains the catalyst.
Still have not added to the wife's.

[Snoopy]

Somehow millions of dollars worth of capital must have been leaking from PGW in recent years, out of the headline sight of shareholders, to bring them to the precarious capital position that PGW is in today. So how did it all unfold?

PGW has on the accounts a 'Bad Debt Provision' in which management judgement is used to provide for debts that are unlikely to be fully repaid. The treatment of bad debts was changed over FY2019 with the adoption of IFRS9. From p50 in AR2019.

-------

NZ IFRS 9 Financial Instruments

The Group has applied NZ IFRS 9 from 1 July 2018. The new standard changes how the impairment of financial assets are calculated from an ‘incurred credit loss’ model to an ‘expected credit loss’ model. Based on the Group’s assessment of historical provision rates and forward looking analysis, the Group has recognised an additional provision of $0.45 million as at 30 June 2018 which is expensed directly to Retained Earnings upon adoption of NZ IFRS 9.

------

In non accounting terms:

'expensed directly to Retained Earnings upon adoption of NZ IFRS 9'

means they have taken shareholder capital without telling them. Or at least they have excised this loss from the company's 'Profit & Loss' statement, which takes it away from plain view. That doesn't make the loss any less real though!

An increase in bad debts caused by this accounting rule change in consistent with what other NZ companies have experienced on adoption of IFRS9. There is nothing unique to PGW here.

Each year, whatever the particular standard is in place, a doubtful debt expense is used to add to the bad debt provision and there is an additional expense of bad debts actually written off. This information can be found under note 3 and note 11 of AR2019:

	FY2019	FY2018
Increase in Provision for Doubtful Debts	$1.072m	$0.529m
Bad Debts Written Off	$0.485m	($0.543m)
IFRS 9 Standard Adjustment	$0.450m	$0m
Total	$2.007m	($0.014m)

Sometimes bad debts are unexpectedly are recovered. Evidence of that was the 'negative expense' (i.e. a net debt recovery) that took place in FY2018. Yet even if we exclude that the doubling of the bad debt provision expense and the extra capital loss adjustment means an extra:

($1.072m - $0.529m) + $0.450m = $0.993m

or nearly $1m of extra hard earned shareholder capital has gone down the drain mitigating bad debts in FY2019 compared to the previous year.

SNOOPY

[Balance]

PGW has on the accounts a 'Bad Debt Provision' in which management judgement is used to provide for debts that are unlikely to be fully repaid. The treatment of bad debts was changed over FY2019 with the adoption of IFRS9. From p50 in AR2019.

-------

NZ IFRS 9 Financial Instruments

The Group has applied NZ IFRS 9 from 1 July 2018. The new standard changes how the impairment of financial assets are calculated from an ‘incurred credit loss’ model to an ‘expected credit loss’ model. Based on the Group’s assessment of historical provision rates and forward looking analysis, the Group has recognised an additional provision of $0.45 million as at 30 June 2018 which is expensed directly to Retained Earnings upon adoption of NZ IFRS 9.

------

An increase in bad debts caused by this accounting rule change in consistent with what other NZ companies have experienced on adoption of IFRS9.

Thanks, Snoopy.

All these accounting changes are getting out of control to follow and understand - so glad you are keeping on top of them.

[Snoopy]

Somehow millions of dollars worth of capital must have been leaking from PGW in recent years, out of the headline sight of shareholders, to bring them to the precarious capital position that PGW is in today. So how did it all unfold?

Parts 2 to 8 of this series have outlined the capital that has disappeared in 'extraordinary circumstances' since the sale of the seed division was contemplated. All of these events were left out of the Korda Mentha analysis, probably because they were not easy to cost out with accuracy. But now events have unfolded, the 'extra capital bill' has come in.

	FY2018 to FY2019
Part 2: Cash to Fix Pension Plan Deficit (All Other Income)	$20.677m
Part 3: Corporate Restructuring	$3.020m
Part 4: Holiday Back Pay Reassessment	$5.757m
Part 5: Impaired Lease Losses	$1.880m
Part 6: Reduction in Customer Deposits	$2.547m
Part 7: Unusual Property Plant and Equipment Impairment	$3.330m
Part 8: Unusual Increase in Bad Debts (Other Income $0.450)	$0.993m
Total	$38.204m

Here at last in one place is a tally of capital that shareholders have lost since the whole seed sale deal was mooted.

Observe that the total capital lost ( $38m) exceeds the base bank debt of circa $30m at balance date for PGW today. If none of these losses had occurred, then PGW could be debt free now (at EOFY balance date anyway, we know that working capital of up to $70m is needed during the year). The circa $30m actual core debt, which may yet balloon out to $50, represents a perpetual interest bill to shareholders, at an interest rate of 5% (say) of:

$30m x 0.05 = $1.5m per year

This 'perpetual bill' is something that the Korda Mentha report didn't tell any shareholders about!

SNOOPY

[Snoopy]

I was under the impression that debt at PGW would come down as a result of selling the seed division. However, this analysis shows it has not happened in an 'ability to service the debt' sense. When the capital return has been washed out of the system, the balance sheet that is left is still highly indebted (an MDRT figure of 8.12). This is the worst figure on record. All the benefits of selling the seed division have been passed through to shareholders, while the underlying leveraged position of PGW has been weakened. I would consider an MDRT of anything between 2 and 5 qualifies as 'medium level debt', so something over 8 means.... They say we are in for a period of sustained low interest rates. It looks like PGWRR will need that.

My work on 'Capital Loss Cumulation' has lead me to an alternative view on MDRT for FY2019.

In my last calculation of MDRT for FY2019, I took out the capital repayment due to shareholders. That gave me an 'after capital was paid back' view of what was happening. I considered that the correct approach, because I knew that this capital repayment was imminent - and it has since happened (calculation in 'Iteration i'). However, I now think that this capital repayment could have been stopped by the funding banks if they considered the 'PGW Rural Rump' that would be left, would be left seriously undercapitalised. So I now think that perhaps I should have used the actual profit for the year, which included the gain from the seed division sale (calculation in 'Iteration ii').

There is a third way of looking at this. At balance date, PGW had repaid all bank debt and had a strong 'cash on hand' balance. So there was no net debt to repay and the MDRT at that time was zero, even though 'at the time' plans were afoot to re-establish a significant bank loan. However, this was a snapshot in a transitory process. So this 'third way' is more a mathematical curiosity of a moment in time rather than a serious statistic on which to judge the debt position of the company as it moves into 2020.

	FY2019 (iter. 1)	FY2019 (iter. 2)
Short Term Bank Loans	$3.920m	$3.920m
add Long Term Bank Loans	$31.742m	$31.742m
add Net Defined Benefit Liability (Pension Plan deficit)	$5.883m	$5.883m
add Employee Entitlements	$16.821m	$16.821m
Total Bank and Worriesome Liabiliities {A}	$58.366m	$58.366m
NPAT + Impairment & Fair Value adj. {B}	$7.187m (i)	$113.876m (ii)
Minimum Debt Repayment Time {A}/{B} (in years)	8.12	0.51

Notes

Iteration i (Assuming Profits from Seed Sales paid through to Shareholders)

(i) Calculation of NPAT and 'Impairment & Fair Value Adjustments' (representing available cashflow for FY2019) is as follows:

FY2019: $4.000m+$3.187m = $7.187m

Iteration ii (Assuming Actual Profits as Declared)

(ii) Calculation of NPAT and 'Impairment & Fair Value Adjustments' (representing available cashflow for FY2019) is as follows:

FY2019: $131.806m+$3.187m- ($20.667m +$0.450m) = $113.876m

It looks to me as though management have tried to get as many cobwebs out of the drawers as possible, like the 'Shock Capital Loss Cumulation', where all these sins could be covered by the mega profit of selling the seeds division: The idea being to 'wipe the slate clean' for a simplified FY2020. And because of the huge profit from the sale of the seeds division that subsumed any 'wipe the slate clean' losses, PGW should have set themselves up well for future years.

SNOOPY