PGW - PGG Wrightson

[Snow Leopard]

Half year Operating EBITDA was $23.6M (excl IFRS16) so nothing added, nothing taken away for the second half.

No room for a final dividend then .

[Snoopy]

Takeover deals are usually done on EBIT and EBITDA multiples, rather than PE ratios. If we look at where PGWRR is forecast to sit for FY2020:

EBITDA = $30m

EBIT = $30m - $9.632m = $20.638m

If we use today's PGWRR share price of $2.49. This means the market capitalisation of PGWRR is:

$2.49 x 75.484mm = $188m

This gives an EBITDA multiple of: $188m / $30m = 6.3

This gives an EBIT multiple of: $188m / $20.632m = 9.1

'Enterprise Value' = Market Capitalisation + Total Debt − Cash
= $188m + ($3.920m+$31.742m) - $1.160m
= $223m

Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:

	Company	Enterprise value NZD	EBITDA Multiple	EBIT Multiple
	Ruralco Holdings (Oz) (FY2019)	$465m	5.8x	7.1x
	Elders (Oz) (FY2019)	$853m	9.0x	9.6x
	PGW Rural Rump (NZ) (FY2020f)	$223m	6.3x	9.1x

Half year Operating EBITDA was $23.6M (excl IFRS16) so nothing added, nothing taken away for the second half.

No room for a final dividend then .

The stage is now set for a Chinese low ball offer. The kiwi shareholder wants their money now. A cash offer for their shares goes straight to dollar signs in the eyeballs, by passing the brain. The kiwi grabs the cash on offer without thinking, then moans about the ever shrinking NZ sharemarket, with valuations of alternative investments being too high. Nowhere to put their proceeds!

By contrast, the Chinese shareholder thinks inter-generation-ally. They are able to look through the business cycle, and see the true value of a business going out many years into the future. They understand business cycles. And they know that the best time to strike is when the business cycle is at its low.

Takeover deals are usually done on EBIT and EBITDA multiples, rather than PE ratios. If we look at where PGWRR is forecast to sit for FY2020:

EBITDA = $23.5m

EBIT = $23.5m - $9.632m = $13.868m

If we use today's PGWRR share price of $2.92. This means the market capitalisation of PGWRR is:

$2.92 x 75.484mm = $220m

This gives an EBITDA multiple of: $220m / $23.5m = 9.4

This gives an EBIT multiple of: $220m / $13.868m = 15.9

'Enterprise Value' = Market Capitalisation + Total Debt − Cash
= $220m + ($3.920m+$31.742m) - $1.160m
= $255 m

Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:

	Company	Enterprise value NZD	EBITDA Multiple	EBIT Multiple
	Ruralco Holdings (Oz) (FY2019)	$465m	5.8x	7.1x
	Elders (Oz) (FY2019)	$853m	9.0x	9.6x
	PGW Rural Rump (NZ) (FY2020f2)	$255m	9.4x	15.9x

I can see it now. A takeover offer of $2.75 put on the table. An independent report citing the 'fairness' of the price given the Covid-19 uncertainty going forwards and the fat EBIT/EBITDA multiples on offer. Shareholders should 'sell sell sell'. And thus ends the tenure of PGW on the NZX.

SNOOPY

[Getty]

This site is very lucky to Have someone like you openly share your knowledge, and opinions Snoopy.
Thanks.

[Snoopy]

This site is very lucky to Have someone like you openly share your knowledge, and opinions Snoopy.
Thanks.

In the end Getty, I only have access to the same bucket of knowledge as everyone else on this forum. It is how deep you want to dig (behind the headlines) and what you want to do with that knowledge that counts. Balance put the case for a takeover offer from BAIC at up to $3.25. I am suggesting that if Agria wants out, then a takeover offer of $2.75 will still get Agria a fair price. And at $2.75, hopefully there are enough dissenting shareholders to allow PGW to remain listed. Agria has dumped all of their other business interests (such as they were) and is solely a holding company for Alan Lai's shareholding in PGW. If the debt burden at Agria is now under control, then there is no particular reason for Lai to sell. So I don't think we can guarantee that there will be any takeover.

The reason I am predicting a 'low ball' takeover offer is that I have observed over the years is that the Chinese prefer to work in east/west partnerships. Indeed for a western company setting itself up in China, it was a legal requirement to have a Chinese partner in whatever 'joint venture' proposal was on the table. In NZ we have the example of Silver Fern Farms, 50% controlled by the Chinese. The Chinese are strong equity partner in Synlait. There is the counter example of Westland dairy which is 100% Chinese owned. But Westland is a relatively small player in the dairy market. If the Chinese had wanted to buy out Fonterra, then that level of deal would have been blocked IMO. PGW is probably the biggest rural supplies company in NZ. To see it entirely in Chinese hands I think would be politically unpalatable and unpalatable to many of its farmer customers. So the way out for Agria (if they want out) is a low ball bid by BAIC. It could be that BAIC is buying shares above $2,75 (if they are, this is not confirmed) to establish a share price floor somewhere around $3. That would allow a $2.75 full bid to fail (except for the acquisition of the Agria stake). Thus we would get a joint Chinese/NZ controlled company going forwards. This might be the end game that BAIC are after.

SNOOPY

[Balance]

Combine all that information with the Appendix 4 'Valuation Evidence' in the KM report p54 (dated October 2018) and we get the following comparison:

	Company	Enterprise value NZD	EBITDA Multiple	EBIT Multiple
	Ruralco Holdings (Oz) (FY2019)	$465m	5.8x	7.1x
	Elders (Oz) (FY2019)	$853m	9.0x	9.6x
	PGW Rural Rump (NZ) (FY2020f2)	$255m	9.4x	15.9x

I can see it now. A takeover offer of $2.75 put on the table. An independent report citing the 'fairness' of the price given the Covid-19 uncertainty going forwards and the fat EBIT/EBITDA multiples on offer. Shareholders should 'sell sell sell'. And thus ends the tenure of PGW on the NZX.


SNOOPY

Really need to update your numbers to make the comparison meaningful, Snoopy.

Elders ASX :

EBITDA multiple 13.6X

EBIT Multiple 17x

PER 16.6x

Market cap today - $1.58b
Debt - $202m
Forecast EBIT - $105m
Forecast EBITDA - $131m
NPAT - $95m

[Balance]

https://thespinoff.co.nz/business/23...ger-than-ever/

$1 billion more in food exports despite pandemic.

[Snoopy]

Half year Operating EBITDA was $23.6M (excl IFRS16) so nothing added, nothing taken away for the second half.

No room for a final dividend then .

With the mid point EBITDA forecast at $23.5m I think you are being optimistic Snow Leopard. Even with EBITDA being zero for the second half, Depreciation and Amortisation are still occurring and the interest bill on a significant debt burden must be paid. So it is clear to me that PGW has made a trading loss in the second half. This is more serious than it sounds because traditionally PGW makes no money over the first quarter, a trickle in Q2 and the bulk of their earnings in Q3 and Q4. So we could be looking at PGW making no money at all for twelve months straight. I hope my previous warning saved some investors from diving in paying $2.75 and more for a business that looks to be in trouble. If I can reprise a couple of banking covenants.

Fixed Cost Coverage Ratio 2020f = [EBITDA+Lease Expenses] / [Total Interest(less interest income in cash)+Lease Expenses]

= [$23.5m + $21.904m] / [$3.826m + $21.904m] = 1.8 < 2.0 => PGW fails the FCCR test.

Using my 'forecast data' from post 4701

Senior Debt Coverage Ratio" (SDCR) 2020f =Senior Debt"/EBITDA
=( $3.920m + $31.742m ) / $23.5m = 1.6 < 3.00 (good) => PGW passes this SDCR test

That is the balance date figure. Things don't look quite so good with $70m of seasonal bank finance thrown in:

"Senior Debt Coverage Ratio" (SDCR) 2020f = "Senior Debt"/EBITDA
=( $3.920m + $31.742m + $70m ) / $23.5m = 4.5 > 3.00 (bad) => PGW fails this SDCR test

Grant has asked the banks to be forgiving of the position businesses find themselves in in a post Covid-19 world. The best I can say is that PGW will need some 'forgiveness' going forwards. The problem with my low season SDCR test (as at 30th June which is balance date) is that this will only occur if PGW has been able to pay down debt over the second half. They have made no profit in 2HY2020 so this hasn't happened. This suggests to me that PGW are in discussion with their banks right now about breaching both their 'Fixed Cost Coverage Ratio' and 'Senior Debt Coverage Ratio' covenants.

SNOOPY

[Norwest]

Before the seeds sale they had A/NZ bank facilities of:
$150m term (was to be maturing today - fully paid off)
$50m working capital (was maturing today - fully paid off)
$22.82m additional

After the seeds sale their A/NZ bank facilities:
$50m core facilities
$70m working capital

One year ago today they had $2.6m current debt + $9.58m for senior debt.

What you are saying above is that they have drawn down their entire working capital of $67.4m in 12 months. I find that preposterous. How did you come up with that figure?

[Snow Leopard]

....No room for a final dividend then .

With the mid point EBITDA forecast at $23.5m I think you are being optimistic Snow Leopard....

So you reckon they are going to ask for the interim dividend back?

[Balance]

Grant has asked the banks to be forgiving of the position businesses find themselves in in a post Covid-19 world. The best I can say is that PGW will need some 'forgiveness' going forwards. The problem with my low season SDCR test (as at 30th June which is balance date) is that this will only occur if PGW has been able to pay down debt over the second half. They have made no profit in 2HY2020 so this hasn't happened. This suggests to me that PGW are in discussion with their banks right now about breaching both their 'Fixed Cost Coverage Ratio' and 'Senior Debt Coverage Ratio' covenants.

SNOOPY

Seriously, Snoopy - do you know how debt covenants apply in the case of PGW with its seasonal funding profile?