PGW - PGG Wrightson

[Snoopy]

Snoops ..how much of the $450m of seed sales are going to be retained by PGW ....the agency deal?

Are you referring to the $449.495m of 'Seed & Grain' revenue as listed in the Segment Result p39 AR2018?

If you take PGW's claim at face value that 'PGW Rural Rump' will operate only in New Zealand, then we have to subtract from that total all Australian ($76.024m) and South American ($112.036m) sales (figures from p37 AR2018).

$449.495m - $112.036m - $76.024m = $261.435m

My reading of the accounts is that, all else being equal, all of those seed sales will be retained but none of the $261.435m of 'Seed & Grain' revenue. IOW the seeds will be bought at arms length from the owners of PGW Seeds (as now), and 'on sold' at 'agency level' with a mark up via 'PGW Rural Services' (as now).

Of course with the 'seed division' owned outside of PGW ownership, I guess we might expect, over time, that a proportion of what were PGW seed 'family' seed sales would slowly leak out through other competitive rural retailers. A unavoidable consequence of the now 'Two PGW' policy?

SNOOPY

[Balance]

Reworking these calculations with the figures re'Balance'd

	Scenario $100.5m debt repayment	Scenario $118m debt repayment
eps {A}	2.27c	2.36c
PGW Rural Rump: Market Valuation {B}	18.3c	20.7c
PE ratio {B}/{A}	8.1	8.8
Gross Dividend Yield {A}/{B x 0.72}	17.2%	15.9%

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

Ballpark numbers heading in the direction of PGW (post sale of S&G) looking much more attractive.

I have lower interest cost (lower debt = lower interest rate charged by the banks) of around $750k.

Also, I believe corporate costs and overheads will be trimmed back much more than $4m allocated against S&G - more like $8m once S&G is sold.

Up to each poster to play around with the numbers but I end up with PER less than 8X.

[percy]

Ballpark numbers heading in the direction of PGW (post sale of S&G) looking much more attractive.

I have lower interest cost (lower debt = lower interest rate charged by the banks) of around $750k.

Also, I believe corporate costs and overheads will be trimmed back much more than $4m allocated against S&G - more like $8m once S&G is sold.

Up to each poster to play around with the numbers but I end up with PER less than 8X.

Yes PGW should end up a well focussed company,with a strong balance sheet, ready to take advantage of any opportunities that come their way,and the capacity to pay good dividends

[Snoopy]

Also, I believe corporate costs and overheads will be trimmed back much more than $4m allocated against S&G - more like $8m once S&G is sold.

I am doing a little tweaking, trying to refine my company valuation modelling.

There are forecasts given for divisional corporate costs in the KM report.

Turn to page 19 and you will see that 'Total Corporate Functions and Overheads' add up to ($30.5m).

From p29 we can get the 'Corporate Overhead Allocation' for 'Seed and Grain' ($3.6m). From p31 we can get the 'Corporate Overhead Allocation' for 'Retail and Water' ($11.4m) and 'Agency' ($6.3m).

	Corporate Overhead Allocation FY2018	KM Report Reference
Seed & Grain	($3.6m)	p29
Retail & Water	($11.4m)	p31
Agency	($6.3m)	p31
Total	($21.3m)

The difference between the two figures: ($30.5m) - ($21.3m) = ($9.2m) must represent the 'Corporate Costs Unallocated'. No doubt these costs include those associated with the strategic review. I don't think the strategic review costs have ever been separately disclosed: No doubt they are hidden in the 'Other Expenses' classification of 'Other Operating Expenses' (Note 4 AR2018)!

So it looks like Balance may have a point about 'plenty of fat to trim' yet from the on-going corporate costs. However, management seem determined to keep up the spending on outside consultants as the financial review of the company continues. So we may have to wait a little longer for these particular corporate savings costs to be realised.

If we go back to the Segment Reporting information from AR2018 p39, then ($9.355m) of 'Other' operating EBITDA is recorded. This is close to the ($9.2m) of unallocated Corporate Costs that I calculated above. It also suggests that those Corporate Costs that could be directly linked to the EBITDA of the operating divisions of the company have already been removed from the 'head office' basket, and netted off against the respective Segmented Divisional baskets of EBITDA results.

How does one allocate the unallocated corporate costs? One method could be to divide the $9.200m into three equal parts, and add those parts to each of the three customer divisions. However, in this instance we have been told a segmented allocation of overheads that can be separated out already (p19 KordaMentha Report, Fig3.6). I prefer to allocate the so far unbasketed overheads in proportion to that.

	Corporate Overhead Allocation FY2018 {A}	Percentage	Unallocated Overhead FY2018 {B}	Total Overhead FY2018 {A}+{B}
Seed & Grain	($3.6m)	17.4%	($1.6m)	($5.2m)
Retail & Water	($11.4m)	53.6%	($4.9m)	($16.3m)
Agency	($6.3m)	29.6%	($2.7m)	($9.0m)
Total	($21.3m)	100%	($9.2m)	($30.5m)

This curious part of all of this I can sum up in a question:

"Why did KM go to the trouble of separating back out head office functions previously grouped with the appropriate business operational business units (and offset in EBITDA terms against those) back into one overall 'head office' where all the costs totalled $30.5m?"

I don't see $30.5m in head office costs mentioned at all in AR2018!

SNOOPY

[Balance]

I am doing a little tweaking, trying to refine my company valuation modelling.

There are forecasts given for divisional corporate costs in the KM report.

Now turn to page 19 and you will see that 'Total Corporate Functions and Overheads' add up to ($30.5m).

The difference between the two figures: ($30.5m) - ($21.3m) = ($9.2m) must represent

	Corporate Overhead Allocation FY2018	KM Report Reference
Seed & Grain	($3.6m)	p29
Retail & Water	($11.4m)	p31
Agency	($6.3m)	p31
Total	($21.3m)

the 'Corporate Costs Unallocated'. No doubt these costs include those associated with the strategic review. I don't think the strategic review costs have ever been separately disclosed: No doubt they are hidden in the 'Other expenses' classification of 'Other operating Expenses' (Note 4 AR2018)!

So it looks like Balance may have a point about 'plenty of fat to trim' yet from the on-going corporate costs. However, management seem determined to keep up the spending on outside consultants as the financial review of the company continues. So we may have to wait a little longer for these particular corporate savings costs to be realised.

If we go back to the Segment Reporting information from AR2018 p39, then ($9.355m) of 'Other' operating EBITDA is recorded. This is close to the ($9.2m) of unallocated Corporate Costs that I calculated above. It also suggests that those Corporate Costs that could be directly linked to the EBITDA of the operating divisions of the company have already been removed from the 'head office' basket, and netted off against the respective Segmented Divisional baskets of EBITDA results.

How does one allocate the unallocated corporate costs? One method could be to divide the $9.355m into three equal parts, and add those parts to each of the three customer divisions. However, in this instance we have been told a segmented allocation of overheads that can be separated out already. I prefer to allocate the so far unbasketed overheads in proportion to that.

	Corporate Overhead Allocation FY2018	Percentage	Unallocated Overhead FY2018
Seed & Grain	($3.6m)	17.4%	($1.6m)
Retail & Water	($11.4m)	53.6%	($4.9m)
Agency	($6.3m)	29.6%	($2.7m)
Total	($21.3m)	100%	($9.2m)

SNOOPY

Excellent work, Snoopy.

Thanks!

[Snoopy]

The problem with estimating an interest rate equivalent for the PGW debt is that company debt quite seasonal, as the table below shows:

	FY2018	HY2018	FY2017
Short Term Debt	$30.806m	$91.215m	$26.719m
Long Term Debt	$149.205m	$130.634m	$110.925m
Total	$180.011m	$221.849m	$137.664m

We can calculate a linear approximation average of the total debt as follows:

($180.011m + $221.849m + $137.664m)/3= $179.834m

Over the year the 'interest funding expense' (AR2018 note 7) was $10.235m. (Note that I am leaving out the foreign exchange changes which I don't believe are representative of true funding costs.)

So the indicative interest rate that PGW pays on the average outstanding balance is:

$10.235m / $179.834m = 5.7%

If as a result of the seeds transaction $100.5m is repaid, then interest will no longer have to be paid on that amount into the future. The total interest saved on an annual basis for 'PGW Rural Rump' will therefore be:

0.057 x $100.5m = $5.73m

How does this saving in interest payments translate to the profitability of 'PGW Rural Rump' going forwards?

I am never sure in these loan situations whether the banks net off any 'cash in the bank' against any loan commitments when interest rates on company loans are charged. If we assume they do, then I need to rework my interest calculation as follows.

The problem with estimating an interest rate equivalent for the PGW debt is that company debt quite seasonal, as the table below shows:

	FY2018	HY2018	FY2017
Cash	$10.926m	$24.427m	$9.423m
Short Term Debt	($30.806m)	($91.215m)	($26.719m)
Long Term Debt	($149.205m)	($130.634m)	($110.925m)
Total	($169.085m)	($197.422m)	($128.221m)

We can calculate a linear approximation average of the total debt as follows:

($169.085m + $197.422m + $128.221m)/3= $164.909m

Over the year the 'interest funding expense' (AR2018 note 7) was $10.235m. (Note that I am leaving out the foreign exchange changes which I don't believe are representative of true funding costs.)

So the indicative interest rate that PGW pays on the average outstanding balance is:

$10.235m / $164.909m = 6.2%

If as a result of the seeds transaction $100.5m is repaid, then interest will no longer have to be paid on that amount into the future. The total interest saved on an annual basis for 'PGW Rural Rump' will therefore be:

0.062 x $100.5m = $6.23m

How does this saving in interest payments translate to the profitability of 'PGW Rural Rump' going forwards?

Perhaps more important is another question. Is this estimate of the 'interest rate paid of 6.2% better or worse than my prior estimate of 5.7%?

SNOOPY

[Snoopy]

I have lower interest cost (lower debt = lower interest rate charged by the banks) of around $750k.

PGW Debt Position	Consolidated 30-06-2018	PGGW Rural Rump 30-06-2018	PGGW Seed & Grain 30-06-2018
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)
Total	($169.085m)	($124.500m)	($44.585m)
add Debt Repayment		$100.500m
Total		($24.000m)

In my previous post I pondered the question of offsetting the company cash position against debt. On page 35 of the KM report we find the following quote:

"Seed and Grain's net interest bearing debt was $44m (similar to table total above) at 30th June 2018, being $52m of short and long term debt (including finance leases) less $8m of cash on hand."

This suggests KM does consider cash on hand as part of the net debt picture, although it leaves over the question of whether the lending banks think the same.

Yet, assuming the S&G sale goes to plan, the net debt position of 'PGW Rural Rump' will not be $24m except at balance date. If you look at p34 and p35 of the KM report you will see graphs of 'Consolidated Net Working capital' and 'Seed and Grain' net working capital. From these graphs we can see that the 30th June balance date represents the low point in the debt cycle. Peak debt for 'PGW Rural Rump' looks to be October/November (Consolidated debt peaks in September, but S&G debt is already declining by then.)

For November, the working capital required for 'PGGW Rural Rump' (calculated by subtracting Fig 6.2.1 from Fig 6.1) looks to be:

$340m - $200m = $140m

To get a baseline figure, we do the same calculation as of July:

$275m - $170m = $105m

With a simple subtraction we can therefore calculate a likely incremental 'debt peak' at 'PGGW Rural Rump, which is:

$140m -$105m = $35m higher than at balance date.

This in turn means the funding requirements for 'PGG Rural Rump' are not based around the deconsolidated debt repaid $24m as projected in the historical deconsolidated 'PGGW Rural Rump' debt repaid balance sheet. No, the actual peak debt to be managed is:

$24m + $35m = $59m

or more than double the figure given prominence in the KM appraisal report!

Banks tend to like a 'steady debt' from which they can derive interest income. Not a debt that 'jumps around' over the year like this. So I find it difficult to believe that the interest rate charged to 'PGGW Rural Rump' will be lower than before deconsolidation. In fact I would predict the exact opposite. Interest rates at 'PGGW Rural Rump' are likely to be much higher going forwards.

SNOOPY

[Blendy]

A person with no knowledge of shares but knows that I dabble just messaged me to say their friend just got a hot tip from their broker that PGW is about to dramatically go up! (isn't this how a bad investment story starts?!)

Having not followed PGW ever, I read the last few pages of this thread and am amazed at the extremely detailed analysis that this community offers as a resource. Wonderful work, people!

Ok so it's pretty complicated and I didn't understand a lot of it, and I'm not sure whether the consensus is to stockpile this one, but I am somewhat confused why a broker would be calling up saying this is the best deal available right now. Is it?

I've gone back to my friend saying thanks for the hot tip but it's not for me.

[winner69]

A person with no knowledge of shares but knows that I dabble just messaged me to say their friend just got a hot tip from their broker that PGW is about to dramatically go up! (isn't this how a bad investment story starts?!)

Having not followed PGW ever, I read the last few pages of this thread and am amazed at the extremely detailed analysis that this community offers as a resource. Wonderful work, people!

Ok so it's pretty complicated and I didn't understand a lot of it, and I'm not sure whether the consensus is to stockpile this one, but I am somewhat confused why a broker would be calling up saying this is the best deal available right now. Is it?

I've gone back to my friend saying thanks for the hot tip but it's not for me.

Good stuff ...love rumours ...or is it real inside info?

We’ll be kicking ourselves when PGW hits 80 cents eh ....before the big capital return is actually announced

[Balance]

A person with no knowledge of shares but knows that I dabble just messaged me to say their friend just got a hot tip from their broker that PGW is about to dramatically go up! (isn't this how a bad investment story starts?!)

Having not followed PGW ever, I read the last few pages of this thread and am amazed at the extremely detailed analysis that this community offers as a resource. Wonderful work, people!

Ok so it's pretty complicated and I didn't understand a lot of it, and I'm not sure whether the consensus is to stockpile this one, but I am somewhat confused why a broker would be calling up saying this is the best deal available right now. Is it?

I've gone back to my friend saying thanks for the hot tip but it's not for me.

Ask him to ask 'their' friend why the broker thinks it is about to go up dramatically.

NZX brokers are not allowed to give 'tips' or 'recommendations' like that anymore without proper basis - can get the firm sued and the broker disciplined (including NZX membership terminated if the behavour brings ill repute to the NZX).

You never know - the broker could have a good reason.

In any case, if you can show that you rely upon the broker to buy the PGW shares and you lost money, you certainly will get your money back - the brokers piss in their pants these days to receive a visit from the NZX
compliance gestapo.

One of those 'No way you can lose' investment!