PGW - PGG Wrightson

[SailorRob]

So what would you call a fair share price based on 37.6 today? I think my simple math over coffee must be wrong. 40 cents? I always liked PGW at a 10% plus return.

The fair price will be a multiple of what the market thinks the future earnings are likely to be and not the past 12 Months.

As an interesting example of this, the highest PE ratio of the SP500 was somewhere around 140. This was not when it was expensive but rather in the middle of the GFC.

How can this be possible, isn't a PE of 140 indicating massive overvaluation?

Well it's a ratio and everyone focuses on the Numerator. What sent the SP500 PE to the moon however was the Denominator.

In English - when earnings collapse the PE ratio sky rockets.

[SailorRob]

The last twelve months from the most recent reporting date HY2024 (30th December 2023) is actually a composite year (see table below).

Composite Year 2HY2023+ HY2024	FY2023	HY2023	=> 2HY2023 {A}	HY2024 {B}	{A}+{B}
EBITDA	$61.194m	$47.844m	$13.350m	$39.962m	$53.312m
less Depreciation and Amortisation	$28.063m	$13.729m	$14.334m	$14.522m	$28.856m
less Interest Paid	$9.573m	$4.957m	$4.616m	$4.720m	$9.336m
less Tax Paid (Refund)	$6.418m	$8.384m	($1.966m)	$4.789m	$2.823m
equals NPAT	$17.140m				$12.297m

We are looking at 'earnings per share' of: $12.297m / 75.484m = 16.3cps
PGW closed on the market today at $1.62. So I make that an historical PER of 162/16.3 = 9.94

Looking into the (not too far distant) future......

If you take my forecast profit for FY2024 (YE 30th June 2024) at face value:
https://www.sharetrader.co.nz/showth...=1#post1048625

We are looking at 'earnings per share' of: $3.252m / 75.484m = 4.31cps
PGW closed on the market today at $1.62. So I make that a forecast PER of 162/4.31 = 37.6

SNOOPY

Thanks Snoopy all makes sense, I will have a close look when I get time, but generally where has the margin compression come from of late?

[Snoopy]

Thanks Snoopy all makes sense, I will have a close look when I get time, but generally where has the margin compression come from of late?

I have been thinking all day about whether I can compose an intelligent reply to this important question. I am sure that I could compose a reply that sounds intelligent. But the problem is that PGW now reports under two broad segments being 'Retail & Water' and 'Agency'. The main difference being the former 'sells stuff' and the latter 'clips the ticket'. Both animal and horticultural farming are customers of 'Retail & Water' and 'Agency'. So how are the divisional profit figures quoted a reflection of the lamb , beef, pork, chicken, kiwifruit, apple, stonefruit, pear, vegetable and wine industries? I reckon I could write up a plausible narrative. But would it be real? Or just a reflection of my own unconscious bias? I will sleep on it and see if I have anything intelligent to say on this matter tomorrow.

SNOOPY

[mike2020]

The increased costs affecting every other business are no stranger to PGW. Lower farm incomes, higher costs, including interest, mean less money to spend for farmers, making it difficult for PGW to pass on these costs. Margin compression across the board. Take Dairy, lower income, less inputs, less cows. Less stock to ticket clip, less feed sales, less animal health products, less.

[SailorRob]

The increased costs affecting every other business are no stranger to PGW. Lower farm incomes, higher costs, including interest, mean less money to spend for farmers, making it difficult for PGW to pass on these costs. Margin compression across the board. Take Dairy, lower income, less inputs, less cows. Less stock to ticket clip, less feed sales, less animal health products, less.

Yes and another thought, seeing as this IS our economy, although we like to attack our Farmers in a way that the Russian Revolutionaries of 1917 would approve...

Isn't there an implicit sovereign backstop somewhere. I mean that our agricultural sector cannot implode and has to normalise or we don't have an economy.

[Snoopy]

where has the margin compression come from of late?

The following tables are compiled from the HY2024 and HY2023 reports, The columns in italics are the full year results, and do form part of the half year result landscape. I have used these to calculate the second half year results which reveal the changing seasonal profit picture.

I have omitted from these tables two items that I consider non-core to the business plan. The first being interest received on overdue debtor accounts. The second being sublease income. These are both small in terms of revenue received (less than 0.3% combined). But given the sublease income is primarily from committed PGW leases that were oversize to PGW requirements, and also that you wouldn't want interest income from late debts to be part of any business plan, it did not seem right to include them.

PGW Agency	HY2024	FY2023	2HY2023	HY2023	FY2022	2HY2022	HY2022
Agency Operating EBITDA {A}	$1.431m	$16.068m	$12.425m	$3.643m	$21.844m	$14.435m	$7.409m
Agency Sales Revenue	$40.430m	$87.556m	$49.478m	$38.078m	$75.061m	$44.303m	$30.758m
Agency Commission Revenue	$36.583m	$93.692m	$50.332m	$43.360m	$109.208m	$59.958m	$49.250m
Agency GoLIveStock Interest Revenue	$4.008m	$6.573m	$3.837m	$2.736m	$4.254m	$2.460m	$1.794m
Agency Operating Revenue Total {B}	$81.021m	$187.821m	$103.647m	$84.174m	$188.523m	$106.721m	$81.802m
Agency EBITDA Margin {A}/{B}	1.77%	8.55%	12.0%	4.33%	11.6%	13.5%	9.06%
PGW Retail & Water	HY2024	FY2023	2HY2023	HY2023	FY2022	2HY2022	HY2022
Retail & Water Operating EBITDA {C}	$39.962m	$54.129m	$5.211m	$48.918m	$52.495m	$8.767m	$43.728m
Retail & Water Sales Revenue	$471.471m	$765.661m	$277.752m	$487.909m	$746.093m	$286.036m	$460.057m
Retail & Water Commission Revenue	$0.062m	$0.092m	$0.032m	$0.060m	$0.076m	$0.026m	$0.050m
Retail & Water Construction Contract Revenue	$6.474m	$18.031m	$6.548m	$11.483m	$14.235m	$5.764m	$8.471m
Retail & Water Operating Revenue Total {D}	$478.007m	$783.784m	$284.332m	$499.452m	$760.404m	$291.826m	$468.578m
Retail & Water EBITDA Margin {C}/{D}	8.36%	6.91%	1.83%	9.79%	6.90%	3.00%	9.76%
Corporate Costs	HY2024	FY2023	2HY2023	HY2023	FY2022	2HY2022	HY2022
Corporate EBITDA	($4.735m)	($9.003m)	($4.286m)	($4,717m)	($7.186m)	($3.477m)	($3.709m)
Net Interest Cost	($4.720m)	($9.573m)	($4.636m)	($4,937m)	($5.089m)	($2.229m)	($2.860m)
Depreciation & Amortisation	($14.322m)	($28.063m)	($14.334m)	($13.729m)	($28.024m)	($14.495m)	($13.529m)

Comments to come in 'Part 2'.......
https://www.sharetrader.co.nz/showth...=1#post1052587

SNOOPY

[Snoopy]

where has the margin compression come from of late?

I want to draw attention to the sub-sections of the agricultural market that have received negative comments in HYR2024. These are likely to have been the drivers in the three EBITDA downgrades the company has issued over the last twelve months. And if we are looking for EBITDA to recover again over FY2025, these areas are where the recovery will most likely come from.

Sub Sector Report: Real Estate

From HYR2024 p11.
"Within the rural sector the most challenged were the sheep and beef farms where values look to be reset."
From HYR2024 p13:
"Beef prices are expected to remain stable. Although beef farmers are more optimistic (c.f. sheep farmers), there is concern about the year ahead which may translate to reduced investment,"

A slightly strange dual message here: With sheep/lamb prices under pressure, the price of sheep/lamb farms is down. That is understandable. But why is the price of cattle farms under pressure when the price of beef remains relatively steady? Perhaps all such land is seen as 'livestock land' and so the price falls when prices of livestock as a whole falls? I am speculating. I don't know the answer.
But I guess eventually circumstances mean that farms will keep changing hands, even if the transaction price is less than the sellers hoped for.



Sub Sector Report: Sheep

From HYR2024 p4
"Our Agency segment results were again impacted by the weak real estate market and softer commodity pricing, particularly in sheep and lamb markets where prices were back 28% year on year."
From HYR2024 p9
"Poor lamb prices has squeezed commission revenue."

Let's unpick these comments. Ten years ago (AR2013), PGG Wrightson were a lot more forthcoming in segmented result detail.
Like FY2024, FY2013 was regarded as a 'tough year' for farmers. Agency in FY2013 (less 'irrigation and pumping' (now 'water') which was moved over to the retail segment AND with livestock which was at the time a separate reporting unit added in) had revenue of $209.934m (c.f. $188.803m in FY2023). Of the FY2013 Agency segment total, Real Estate made up $24.178m or 12%. By contrast, Livestock made up $98.500m or 47% of that total. (The other main revenue constituency of Agency in FY2013 was Wool at $79.485m, making up 41%). Now I can't be sure that the sub section proportion of Agency revenue was the same in 2013 as it is today. But answer A10 from post 5699 confirms most of the Agency decline referred to in the quotes, from HYR2024 above, is from livestock, and in particular the commissions earned when the lamb stock is put through PGG Wrightson saleyards. Much of the current reduced lamb price has been put down to Australia de-stocking this year, and 'flooding' the lamb market - ironically a downstream drought related event. Furthermore the Australian Federal government has recently passed laws that will phase down and then ban the live export of sheep, that had mainly been bound for the middle east, from Australia by 2028.
https://www.abc.net.au/news/2024-05-...-ban/103839768

This will put even more pressure on the number of sheep slaughtered within Oceania in the medium term. Given that the main export market, -China- remains soft as well, I see no recovery in the Oceania lamb prices in the foreseeable future. Nevertheless market share at the PGW saleyards was preserved (refer post 5099, A10).

Wool remains a problem market, albeit with a small up tick over FY2023/HY2024, and is possibly the reason why overall Agency revenues have not increased over ten years.

In summary, from an investor perspective, I feel as though it is best to assume that the last year's decline in 'Agency' is permanent.



Sub Sector Report: Horticulture

From HYR2024 p8:
"The apple, avocado and kiwifruit industries have experienced weaker demand and declining client returns, with prices at levels for some crops not seen for several years."
From HYR2024 p13
"The outlook for horticulture is positive with good kiwifruit, apple and pear crops expected to be harvested. Kiwifruit is predicted to deliver improved quality fruit with higher volumes compared to last year."

The impact of Cyclone Gabrielle is rolling away into the prior period, which should result in growth in FY2025. Particularly helpful for kiwifruit growers is the NZ free trade agreement with Europe which will progressively come into effect over CY2024. It sounds like horticulture is in for at least a short term rebound.




Revenue Down

From HYR2024 p6:
"Farm and orchard spending across the board continues to trend downwards."

Cross referencing back to AR2013, the last time Fruitfed revenue was individually disclosed, it made revenue of $128.712m, which equated to 20.3% of the adjusted 'Retail & Water' total. Fruitfed has been a rising star at PGW over ten years. So I suspect the proportionate total of retail today from growers is much higher, perhaps 35% if we include the contribution from irrigation which has now moved under the 'Retail and Water' umbrella. That still leaves 65% of business done with animal farmers though.

35% of 'Retail and Water' over FY2023 amounted to: 0.35x $785.298m = $274.854m (Estimated horticulture revenue over FY2023)

Using post 5704 as a reference:
Lamb 'Agency' revenue = 0.56 x 0.47 x $188.803m = $49.7m (Estimated sheep auction revenue over FY2023). If sheep volumes were not affected but sheep prices dropped by 28% this figure would be projected to have reduced to (1-0.28)$49.7m= $35.8m over FY2024. That equates to an EBITDA drop of: $49.7m-$35.8m= $13.9m YOY.



Corporate Costs

Continuing from HYR2024 p4:
"In response to the trading conditions PGW has been actively managing and reducing spend in a range of cost areas. At the same time we have seen increases in costs through supplier price rises as evidenced by CPI increases."

That may be so. But the table in post 5696 shows that corporate costs have risen by of the order of 28% over just two years. That sounds dreadful. But in dollar terms, a $2m annual increase in corporate costs is not going to turn the PGW ship over.

From HYR2024 p12 (1):
"Financing costs were $1.4m higher as a consequence of higher interest rates."

Yet if you look at the above table, net interest costs were lower verses the first half of the previous financial year! If you look under HYR2024 note 1, this paradox is resolved by noting that the net interest bill reversal was on account of the position of the valuation of foreign exchange derivatives.

Nevertheless, the cold conclusion from the above two quotes is that underlying operating corporate costs have risen by $2m + $1.4m =$3.4m over two years. That corporate cost increase sounds permanent. Any interest rate reduction will likely remove $1m in corporate costs at best.

(1) This is not technically correct because EBITDA is 'earnings BEFORE INTEREST tax depreciation and amortisation'. So discussion on interest does not effect EBITDA. Interest is however a corporate cost which is why I thought to mention it here,

[SailorRob]

From HYR2024 p4
"Our Agency segment results were again impacted by the weak real estate market and softer commodity pricing, particularly in sheep and lamb markets where prices were back 28% year on year."

Let's unpick this comment. Ten years ago (AR2013), PGG Wrightson were a lot more forthcoming in segmented result detail.
Like FY2024, FY2013 was regarded as a 'tough year' for farmers. Agency (less irrigation and pumping that got moved over the the retail segment and adding in livestock which was at the time a separate reporting unit) had revenue of $209.934m (c.f. $188.803m in AR2023). Of that 2013 total, Real Estate made up $24.178m or 12%l. By contrast, Livestock made up $98.500m or 47% of that total. (The other main revenue constituency of Agency back then was Wool at $79.485m making up 41%). Now I can't be sure that the proportion of Agency revenue was the same as it was in 2013 as it is today. But I am fairly sure most of the Agency decline referred to in the quote, from HYR2024 above, will be from livestock, and in particular the commissions earned when the stock is put through PGG Wrightson saleyards. Much of the current reduced lamb price has been put down to Australia de-stocking this year - which was drought related. The Australian Federal government has recently passed laws that will ban the live export of sheep, that had mainly been bound for the middle east, from Australia by 2028. This will put even more pressure on the number of sheep slaughtered in the medium term. Given that the main export market, China remains soft as well, I therefore see no recovery in the Oceania lamb prices in the foreseeable future. Such price declines are liable to flow through to farm prices as well. So I don't see much respite for the real estate division either. Wool remains a problem market. From an investor perspective, I feel as though it is best to assume that the decline in 'Agency' is permanent.

Continuing from HYR2024 p4:
"In response to the trading conditions PGW has been actively managing and reducing spend in a range of cost areas. At the same time we have seen increases in costs through supplier price roses as evidenced by CPI increases."

That may be so. But the table shows that corporate costs have risen by of the order of 28% over just two years. That sounds dreadful. But in dollar terms, a $2m annual increase in corporate costs is not going to turn the PGW ship over.

From FYR2024 p6:
"Farm and orchard spending across the board continues to trend downwards."

Cross referencing back to AR2013, the last time Fruitfed revenue was individually disclosed, it made revenue of $128.712m, which equated to 20.3% of the adjusted 'Retail & Water' total. Fruitfed has been a rising star at PGW over ten years. So I suspect the proportionate total of retail today from growers is much higher, perhaps 35% if we include the contribution from irrigation. That still leaves 65% of business done with animal farmers though.

Everything below the line is speculative rubbish. Please disregard. Sorry but late at night I tend to write such stuff.

--------------------------

And I suspect a half split of that figure among cow farmers (for both milk and beef) , deer and pig farmers, with the other 50% of retail revenue in normal times dedicated to sheep farmers to be not far from the truth. With sheep farmers in particular in trouble and perhaps reducing their previous purchase budget by a quarter , but other sectors on a path back to normal, I expect 'retail revenue' to track back up to 100%-0.25x32.5%= 92% of the FY2023 sweet spot peak in the medium term.

In dollar terms, that comes out to: 0.92x( $783.784m+$187.821m)= $893.877m for FY2026

Exceptional stuff Snoopy, I will study in detail.

Did you listen to the most recent investor call, I have the transcript if you want it. One of the Analysts was really getting into them for details.

[Snoopy]

Exceptional stuff Snoopy, I will study in detail.

I am still rewriting that post. Adding some references and clarifying and trying to filter our my own conjectures (that I can't back up).

Did you listen to the most recent investor call, I have the transcript if you want it. One of the Analysts was really getting into them for details.

No I didn't listen, but I have found the link now
https://dl.dropboxusercontent.com/sc...iap8h&e=1&dl=0

Here are my notes on what was said....

There is no need for a transcript of CEO Steve Guerin's presentation. Listening to it now, it is a straight word for word recital of what was printed in the half year report for the period ended 31-12-2023. That means potential listeners can jump straight to the 30 minute mark for the more meaty 'question time'.

----------------------------------------


Q1/ (Jarden) Results are down in the first half, but despite the negative projections and commentary, you are still projecting the second half result will be in line with the previous year. What are your assumptions behind this? (Snoopy note: This is an interesting question because subsequent to this half year presentation, full year result forecasts were in fact downgraded again).

A1/ Forecasting is a result of going through the business on a line by line basis based on the results we have had. First half results are locked in. We have seen the results of trading in the January month and we are coming to the conclusion of the February period which is also visible to us. The second half of the year is weighted towards our livestock business results, and in particular this is around the dairy herd projections and also the genetics bull beef market, and we have a 'read on' note on that market. The weighting of trading, first half verses second half, makes for a reasonable expectation on our forecast for the year ended 30th June.

Q2/ (Jarden) If we are basically comparing the second half of this year with the second half of last year are you basically assuming you are going to have stronger dairy trading, are you able to fill in the gaps there?

A2/ We are seeing that upward tick in demand for dairy animals and prices holding. and that is driven off the sentiment of lift in the global dairy trade. In the genetics bull market we have some sales that were deferred from the June 2023 to July 2023 period due to cyclone impact, which were transacted in this year. These are significant sales, particularly in the East Coast area. So we have this delayed revenue that wasn't in last years financial results.

Q3/ (Jarden) How much was that deferred revenue worth?

A3/ I would have to go back and get that number. It is a reasonable number in terms of results as the bull market, genetics market is a significant contributor out of the Gisbourne / East Coast area, as those properties were inaccessible during the June period last year.

Q4/ (Jarden) So you are confident on those two areas of strength offsetting what seems like a weaker environment for other meat trading and also real estate that is going to potentially stall, and the the prospect of interest rates potentially going higher again? You are confident you have been conservative enough on those other areas?

A4/ Yes we are. Sheep trading is not weighted to the second half, we have visibility of the numbers through January and February and we are expecting the softer market in real estate to generally continue over the next wee while.

Q5/ (Jarden) You are also not paying an interim dividend despite improved cashflows, net debt that hasn't really changed and yet you are fairly confident on your second half guidance that is going to be similar to the prior year? Not paying a dividend at all, compared to paying 12cps in the prior comparative period does appear to contradict at least your near term confidence. Can you reconcile the difference in your position? Either the second half is a bit optimistic or perhaps you are worried beyond that over the next twelve to eighteen months? Can you help reconcile the messaging there?

A5/ The board had the opportunity to consider the dividend at yesterday's board meeting. On farm debt and financing costs for our own debt, as you say there is the possibility of interest rates rising. They will consider the dividend position as part of our year end results. The decision and cautionary position of the board allows us to retain income within the business and allows us to spend more on our strategy.

Q6/ (Jarden) Would it be fair to say that the board is being more cautious than you are with your guidance?

A6/ No , I wouldn't say that because the board are part of the guidance sign off process. EBITDA last year was $61.2m and we are now at $50m. There has been a material change in the market as well as rising interest rate costs. Naturally the board is cautious to make sure we are in a healthy position to take advantage of opportunities.

Q7/ (Jarden) I don't think you have a policy statement on your net payout ratio of NPAT in the public domain?

A7/ We do have a dividend policy. But you are correct that it doesn't have a payout ratio. It just lists a bunch of factors that the board considers when determining whether to declare a dividend or not.

Q8/ (Jarden) I guess it has averaged above 90% probably for the last two or three years. Are you able to please provide some sense as to what the thinking is there? And if possible what kind of percentage is in consideration compared to that 90%? And then secondly, is that purely to protect against interest rates? Or is it for growth, in which case would you be able to explain what those opportunities are?
Again going back to what looks like a difficult outlook at least in the near term.

A8/ The answer to the second half of your question depends on thew answer to the first half. The consideration there being interest rates potentially rising on us. I mean they are expensive, relative to what we have seen over the last few years. And we are a tight margin business. That is a fact of our business and your analysis would support that. So it is to deal with that issue and also to the growth opportunities that exist in the business. We see growth opportunities in our product innovation area and the growth of our 'GoStock' opportunity. But we have ongoing investment in our IT program which increases efficiency as far as the business is concerned, which will deliver a program of work into the FY2025 year, and we are on track for that. For the first part of your question on what distribution ratios we should be thinking about, that is an active question that is under consideration by the board. They will have something to say about that in the future.

Q9/ (Jarden) You have been in the media with this Agria shareholder activism. Have you had any information since your last update? Are you able to provide us with a bit of a summary on subsequent conversations you have had? And do you have any insight as to what the motivation is for that recent activism.

A9/ This is a matter for the PGW board to deal with. Management are focussed on the results and the operational performance of the business. I am not engaged with the shareholders in this matter.

Q10/ (Jarden) First half sales in FY2024 through Agency were flat, and that was despite low livestock volume and real estate activity. So how did you actually manage to keep your sales flat?

A10/ There are three business units within the agency business: Livestock, Wool and our Real Estate Businesses. So if you go to the segmented reporting section of our results you will see some more detail although it doesn't break down the reporting of those three individual sub unit businesses. The reality is that our wool business is stronger and we have commented on that in the commentary. Our livestock businesses for animal volumes is very similar to year on year in the sheep space, although values were back around 28%. That tells you that in a declining sheep market we are holding good market share. Some of our initiatives around GoStock and supply chain initiatives, where we link farmers with suppliers (like the meat companies) have been growing in the uptake from the client base predictor. Cattle volumes are very similar year on year and prices are holding up in that regard. So we have actually done pretty well from a market share perspective. It has been the value that has been the influencer from a contribution perspective. We have talked about our velvet business. We are transacting velvet on a principal basis. So we have taken ownership of the velvet product and then we sell that out onto the market. Previously we were run on an agency basis. So the agency product was transacted through a commission in the financial statements. I wouldn't want you to think that this was the cause of additional risk, because those contracts were based on complete documentation in the international market which we have been dealing with for a couple of years, this particular customer. There is bank securitization in terms of the payment for that particular product, before we even purchase and ship product over. But it is a slightly different treatment in terms of our accounting for those because we do own the velvet for a period of time. And then there is the real estate business that has been softer as we have commented on. I hope that gives you a breakdown in the flavour of the break down of the Agency business.

Q11/ (Jarden) What is the cost out you are expecting from the recent software investment you have made. Remind me what that was worth and are you expecting it to be an uplift on FY2025?

A11/ The 'cost out' is the operating cost to establish the program of work, which won't be repeated in subsequent years. We would have to go away and get that number. You are quite right. We will come back to you with that. I don't want to give you a (wrong) number on the fly. But there will be costs incurred in this financial year that won't be included in subsequent periods. Some costs will be in FY2025. They will start to reduce from FY2025 as the program work is 'stood up' in FY2025.

------------------------

SNOOPY

[SailorRob]

I am still rewriting that post. Adding some references and clarifying and trying to filter our my own conjectures (that I can't back up).



No I didn't listen, but I have found the link now
https://dl.dropboxusercontent.com/sc...iap8h&e=1&dl=0

Here are my notes on what was said....

There is no need for a transcript of CEO Steve Guerin's presentation. Listening to it now, it is a straight word for word recital of what was printed in the half year report for the period ended 31-12-2023.

Yes it was, but the Q and A isn't found elsewhere.