PGW - PGG Wrightson

[Balance]

No, the sale was approved by just shy of 97% of shareholder votes cast. But not all shareholders who voted had equal number of votes to cast. I think if you all up the actual number of shareholders who voted for this transaction, the number would be well south of 50%.

SNOOPY

Like any elections, anyone who chooses NOT to vote forfeits their right surely to complain about the vote outcome.

Let's be blunt - we know most shareholders, especially the institutional ones, are simply there for the ride. Nothing wrong with that but investors better be aware!

[Aaron]

Definition in the Companies Act

special resolution means a resolution approved by a majority of 75% or, if a higher majority is required by the constitution, that higher majority, of the votes of those shareholders entitled to vote and voting on the question


If you don't vote you don't count. Actually thinking about it I thought it used to be 75% of the shareholders holding more than 75% of the shares/votes but obviously this is wrong and would be unwieldy in a publicly listed company especially with apathetic institutional investors.

[iceman]

A good and interesting article by Tim Hunter in the NBR (behind paywall) about PGW and it's newly retired Chairman. https://www.nbr.co.nz/analysis/goodb...-good-luck-sec

[Snoopy]

Seed sale approved

Although there are still some boxes to tick, it looks like the deconstruction of PGW is going ahead. My question now is, is there an arbitrage opportunity for those buying in today to make on the deal?
To find that out, you need to study the Korda Mentha report on the proposed transaction.

http://nzx-prod-s7fsd7f98s.s3-websit...209/288491.pdf

The key information potential shareholders should look at may be found on page 36 (or page 49 where the same table is repeated). The table is labelled 'Rural Services Balance Sheet Summary'. The starting point is the 'Consolidated Pro-forma' column on the left. This column is a 'balance sheet' of the company 'pre-split', assuming the split had happened on 30th June 2018 (the most recent balance date).

This left hand column then, should line up with the balance sheet in AR2018. The net assets certainly do ($287.5m in KM report, $287.462m in AR2018). However once you look a little deeper the parallels become puzzlingly murky. The declared debt position is what I am puzzling over the most:

	Korda Mentha Report	Annual Report FY2018
Cash & Cash Equivalents	$2.7m	$10.926m
Overdraft and Short Term Debt	($9.2m)	($30.806m)
Long Term Debt	($118.0m)	($149.205m)
Defined Benefit Superannuation Scheme Provision	($9.5m)	($9.669m) + ($0.905m)
Total	($134m)	($179.659m)

Here I come up against the limitations of my tiny dog brain. The debt position of the company should be the same in a balance sheet snapped on the same date. So why is it so different? If any other species reading can untangle this I am all ears (and beagle ears are big ones).

In the meantime I will continue to look at the KM table assuming that it is correct, despite my doubts.

The most important row for shareholders is the one showing 'cash and cash equivalents', because there you can see the $413m cash offer from DLF seeds come into play. If the actual future cashflows match the table, then we shareholders will see long term debt fall from $118m to just $17.5m, with that debt repayment of $100.5m. Or will the long term debt fall from $149.205m to $48.705m, assuming a $100.5m payment?

Whatever happens there will be a big saving on the interest bill going forwards on the 'Rural Rump' that remains. But how much will that saving be?

SNOOPY

[Snoopy]

We shareholders will see long term debt fall from $118m to just $17.5m, with that debt repayment of $100.5m. Or will the long term debt fall from $149.205m to $48.705m, assuming a $100.5m payment?

Whatever happens there will be a big saving on the interest bill going forwards on the 'Rural Rump' that remains. But how much will that saving be?

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?

SNOOPY

[Snoopy]

0.057 x $100.5m = $5.73m

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

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 any 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

Putting all of this together, how does this effect the forecast future returns of 'PGG Rural Rump' going forwards?

SNOOPY

[Snoopy]

Putting all of this together, how does this effect the forecast future returns of 'PGG Rural Rump' going forwards?

Immediately after the AGM the PGW share price was 57c. If we take this as Mr Market's 'reference figure', then this 57c will be split into a capital payout amount and the remainder which is Mr Market's worth of 'PGW Rural Rump'.

There are 754.048m PGW shares on issue. So working through both scenarios, for each share held, PGW shareholders can expect a capital repayment of either:

$292m / 754.048m = 38.7cps OR $274m / 754.048m = 36.3cps

By simple subtraction from the 57c PGW market value, we can now calculate the market value of 'PGW Rural Rump' after the seeds have split.

57c - 38.7c = 18.3c OR 57c - 36.3c = 20.7c

This gives us the information we need to work out post split PE ratios and dividend yields for both scenarios.

SNOOPY

[Snow Leopard]

...The key information potential shareholders should look at may be found on page 36 (or page 45 where the same table is repeated). The table is labelled 'Rural Services Balance Sheet Summary'. The starting point is the 'Consolidated Pro-forma' column on the left. This column is a 'balance sheet' of the company 'pre-split', assuming the split had happened on 30th June 2018 (the most recent balance date).

This left hand column then, should line up with the balance sheet in AR2018. The net assets certainly do ($287.5m in KM report, $287.462m in AR2018)....

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.

Keep up the good work

[Snoopy]

Immediately after the AGM the PGW share price was 57c. If we take this as Mr Market's 'reference figure', then this 57c will be split into a capital payout amount and the remainder which is Mr Market's worth of 'PGW Rural Rump'.

There are 754.048m PGW shares on issue. So working through both scenarios, for each share held, PGW shareholders can expect a capital repayment of either:

$292m / 754.048m = 38.7cps OR $274m / 754.048m = 36.3cps

By simple subtraction from the 57c PGW market value, we can now calculate the market value of 'PGW Rural Rump' after the seeds have split.

57c - 38.7c = 18.3c OR 57c - 36.3c = 20.7c

This gives us the information we need to work out post split PE ratios and dividend yields for both scenarios.

	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

[Balance]

This left hand column then, should line up with the balance sheet in AR2018. The net assets certainly do ($287.5m in KM report, $287.462m in AR2018). However once you look a little deeper the parallels become puzzlingly murky. The declared debt position is what I am puzzling over the most:

	Korda Mentha Report	Annual Report FY2018
Cash & Cash Equivalents	$2.7m	$10.926m
Overdraft and Short Term Debt	($9.2m)	($30.806m)
Long Term Debt	($118.0m)	($149.205m)
Defined Benefit Superannuation Scheme Provision	($9.5m)	($9.669m) + ($0.905m)
Total	($134m)	($179.659m)

Here I come up against the limitations of my tiny dog brain. The debt position of the company should be the same in a balance sheet snapped on the same date. So why is it so different? If any other species reading can untangle this I am all ears (and beagle ears are big ones).

SNOOPY

Page 35 of KM report (Financial Position) 6.2.2 - Seed & Grains taking over $44m worth of debt?