PGW - PGG Wrightson

[Balance]

https://www.nzherald.co.nz/bay-of-plenty-times/news/mark-lister-why-farmers-make-good-investors/A3KDAN2QUJFEHCDOHVS3YB7YZA/


Why farmers make good investors.

Actually not a bad summary and very topical these days as we see farming cashflows spread across other income streams.

Any good experienced farmer will tell you that they expect and prepare for at least 1 bad year out of 4. The ones feeling the pressure tend to be highly leveraged or inexperienced.

The market however prices farming assets in a bad year like it is going to last forever and in the good years, like that is going to last forever too!

Hence, the opportunity for the strong and experienced players to pick up farms cycle after cycle.

One Indian family (Waikato farmers) I socialise with always keep their powder dry and have over the decades, expanded their farming operations with each downturn. They also get their farms upgraded during the downturns - no hassles getting contractors and services. Quietly and low profile, they now are one of the biggest players n the industry.

[Snoopy]

Parts 2 and 3 concentrated on 'what happened'. Now we move onto the important part of the analysis. 'What is going to happen ' in FY2025. And as a reference for this, we are going to look 'what did happen' leading out of the FY2013 slump, into FY2014






EBITDAHY20132HY2013FY2013
HY20142HY2014FY2014Δ FY2013 to FY2014



LIvestock$0.607m$11.575m
$12.182m
$1.026m$12.363m
$13.389m+9.91%



Back Office($13.648m)
($11.479m)
($25.127m)
($15.456m)
($12.750m)
($28.206m)+12.2%



Revenues
[TD[/TD]



LIvestock$51.033m$47.467m
$98.500m
$29.494m$47.356m
$76.850m0% (1)






Table Notes

1/ Revenue decline was judged minimal if you account for the fact there were minimal live animal exports over 2014 (see AR2014 quotes below).


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

What was the story behind these 'recovery numbers'? From AR2014 p18
"A strong market for both dairy and beef cattle, along with better prices in the sheep meat market drove an increase in earnings for the livestock business."
"Cattle prices and tallies were up on last year with farmers enjoying good returns from international markets. Sheep number across the country continue to decline as land is converted into dairying or dairy support. Overall sheep numbers were further down this year as farmers rebuild flocks following last years North Island drought. However, with sheep prices almost 20% higher than last year (after falling 37% between FY2012 and FY2013) , overall earnings from sheep trading were up."
"Our livestock export business had a relatively quiet year with only one significant shipment during the year. This largely accounts for the difference in revenues when drawing comparison between periods."

That kind of outlook might resonate into FY2025. Yet a big change I think is that there is no longer pressure to convert sheep farms into dairy farms. The incentive today, if anything, is to convert such land into forestry blocks for 'carbon farming'.

A rise in sheep prices of 20% sounds credible, given that markets tend to overshoot 'on the downside' when confronted with unexpected shocks. But a rise of 20% would not compensate for a fall of 28% in the previous year (FY2024): (1-0.28)x1.2 = 0.86. IOW we would still be looking at a fall in sheep prices for FY2025 of 14% over FY2023 levels.

There has been some talk of resuming livestock shipments overseas from NZ. But I believe this will require suitable ships to be sourced. And I doubt if we will see a return to this trade by June 2025 (EOFY2025 for PGW).

A thing I find encouraging about this 'reflected view from the past' is that despite the lamb price crashing by 38% going into FY2013, then recovering by 20% over 2014, implying a price index change of 0.62x1.2= 0.74 (i.e. a two year drop of 26%), Livestock EBITDA managed to grow by 9.91% 'from the bottom of the trough'. This may be a result of more animals going through the stockyards, better control of stockyard costs, or a combination of both.

If we assume a flat year for the combination of wool and real estate over FY2025, and livestock represents about 50% of the now called 'agency division' (as it did in FY2013, post 5745), then Agency EBITDA should be able to grow 0.5x9.91%=5.0% over FY2025. That kind of growth would put Agency EBITDA for FY2005 at: 1.05 x $9.068m = $9.521m (refer post 5747). This is an increase of ($9.521m-$9.068m=)$0.453m

I want to say something on those 'back office charges', which seemed to have ballooned over FY2014. You would think that coming out of a bad year, PGW would seriously look at keeping these under control. Yet they ballooned by $3m or more than 10%! A possible explanation is that during FY2014, 'PGG Wrightson Irrigation & Pumping' acquired 'Water Dynamics' and 'Aquaspec' to create PGG Wrightson water. That may have increased the number of 'back office bods' within the company. However, I wouldn't expect to see an analogous increase over FY2025, as PGW are not looking to acquire other complementary businesses at this time.

SNOOPY

[Snoopy]

It means the loan balance must be fully repaid at least once during a financial year such that the balance at a point in time during the FY is zero.


Yikes! If we go back to post 5740 and the multi balance date banking loan position, we see that there was sufficient headroom in the Term Debt Facility to pay off the balance in the Working Capital Facility EXCEPT at the latest Half Year declared position, where the amount drawn on the Working Capital Facility of $65m is well in excess of the $44.81m headroom in the Term Debt Facility. Gulp! This isn't necessarily a disaster, because December is still a 'high stock month' and we can expect further sales of stock will reduce working capital debt to zero at some unspecified date in FY2024, before stock is built up again for the Spring. But it does mean that the 'annual clean down' of working capital debt is looking a lot tighter than the previous year. This looks to me to be another reason to hit the pause button on putting more money into PGW shares myself right now.

At some point EBITDA must increase or debt must decrease to keep that banking syndicate happy. The bankers have given PGW a bit more rope as from January 24th 2024 the term debt facilities have been raised by $10m to $100m (HYR2024 p26).

Free cashflow from operations over FY2023 was $25.509m. But take away the 'repayment of the principal portion of lease liabilities' (part of the old rent) and operational free cashflow reduces to: $25.509m-$19.532m=$5.977m. Now take another $18m off that (the EBITDA downgrade for FY2024) and you get a deeply negative number.

If IFRS16 corrected EBITDA is negative to the tune of $12m, how are PGW even going to start to reduce their debt burden? Wind up 'GoLivestock' or sell 'Fruitfed' are my two previous suggestions. But neither of those actions will do any favour to the earnings profile of PGW going forwards. The AGM is starting to sound like a 'must attend'.

SNOOPY

[Ferg]

Snoopy - do we know if PGW did their annual clean during the first half year? Also, given the nature of working capital facilities, they can be repaid pretty quickly using the timing of monthly cashflows to one's advantage. I'm not sure you can borrow from a term facility to repay the working capital facility given that is not the intention of the annual clean down. If the facility is too high and cannot be repaid, then better IMO to transfer some of the balance to a term loan and rebalance the 2 headrooms instead.

[Snoopy]

Snoopy - do we know if PGW did their annual clean during the first half year? Also, given the nature of working capital facilities, they can be repaid pretty quickly using the timing of monthly cashflows to one's advantage.


No we don't know when the annual working capital facility 'clean' happens, except it is not on the 30th June or the 31st December each financial year (the two reporting dates).

Below is the table of annual banking facilities repeated from post 5740, except I have updated the banking facility limits on 31st December 2023, to the new limits granted from 19/01/2024. Oh, and I have indicated the Working Capital facilities drawn in red.




EOHY2024EOFY2023EOFY2022EOFY2021EOFY2020


PGG Wrightson Cash Balance
$13.307m$4.643m$4.676m$3.367m$16.868m


Term Debt Facility (Amount Drawn)
$100m($45.19m)$90m($50m)$60m($30m)$60m($0m)$50m($2 0m)


Working Capital Facility (Amount Drawn)
$85m($65m)$70m($19.96m)$70m($7.50m)$70m($9.90m)$70 m($30m)



Overdraft Facility (Amount Drawn)
$3.0m($0m)$3.0m($0m)$3.0m($0m)$3.0m($0m)$3.0m($0m)



Letter of Credit (Amount Drawn)
$NAm($3.77mm)$NAm($3.77m)$NAm($3.58m)$NAm($3,53m)$ NAm($3.58m)



Total Facility Limit (Amount Drawn)
$163m($114m)$163m($74m)$133m($41m)$133m($13m)$123m ($54m)



Banking Syndicate Loans (Balance Sheet)
$110.190m$69.960m$37.500m$9.900m$50.000m




Now you could argue that the comparison table is not really fair, because the most recent date is the half year date, when more stock tends to be on the shelves. Whereas all other dates are end of year dates at 30th June (which obviously has not occurred yet for FY2024 as I write this post). But the mountain of Working Capital Debt drawn that must be 'cleaned down' as at 31st December is substantial compared to all previous periods, whatever light you shine on it.

I would argue the 'cleaned down' period is most likely at the end of the selling season, as that is the time most of the 'shop stock' will have moved off the shelves, the fattened up GoLivestock animals will have been sold off the farms, which means as many assets as possible will have been transformed into cash. Perhaps early to mid April? If that is so, that 'clean down date' is in the second half of PGW's financial year. But I guess this whole discussion is in the context of PGW's inventory levels, which are substantial: $107.553m at FY2023 balance date, $130.769m at the most recent half year date. So even with $65m or working capital owing, only half the store stock is 'on tick'.

SNOOPY

[Snoopy]

I'm not sure you can borrow from a term facility to repay the working capital facility given that is not the intention of the annual clean down. If the facility is too high and cannot be repaid, then better IMO to transfer some of the balance to a term loan and rebalance the 2 headrooms instead.


Hmmm, I am not sure if those two quoted sentences are logically consistent. Wouldn't transferring a 'too high' working capital balance to a term loan balance be exactly the thing you are hinting at which you suggest would not be allowed?

SNOOPY

[Ferg]

I am referring to swapping one facility for another on a permanent basis as part of capital management*. What you suggested was temporarily borrowing on one to repay the other which would not be allowed.

*per re-negotiated agreements with the banking syndicate.

On reflection 'headroom' was the incorrect word - it should have been 'limit'.

[Ferg]

Readers will notice that the 'Amount drawn against total facilities' and the banking syndicate total loans as measured on the balance sheet do not exactly match. The difference is the 'Letter of Credit' guarantee which is effectively an off balance sheet debt that may be called in should circumstances determine there be a need to do that.

https://www.investopedia.com/terms/l/letterofcredit.asp
I suggest you read up on the definition of a letter of credit. If in doubt refer to that definition.

Assuming we are not using invented definitions for words, the second half of the following interpretation is not correct:
"the 'Letter of Credit' ... is effectively an off balance sheet debt that may be called in should circumstances determine there be a need to do that."

The gist is that you shouldn't be including letters of credit in your total liability calculations. I get the sense you won't change your analyses in future but it doesn't belong in the debt calculations you are doing. It is effectively a promise to pay an overseas supplier for goods that have been ordered that have not yet arrived. Such commitments to purchase have also been made to local suppliers for the supply of goods at a point after the reporting date, and no such "LOC" or "debt" exists in the accounts for such transactions. The only difference between the two is the location of the supplier. A LOC is not a loan nor a debt, rather it provides the overseas supplier surety they will be paid and as such it is a commitment that will crystallise into an amount payable once the supplier has performed their half of the transaction.

The very rough life cycle for overseas sourced purchases is : purchase order created and sent -> supplier sends invoice -> LOC created -> supplier ships goods -> supplier paid [for simplicity purposes] from the working capital facility -> goods arrive -> working capital facility repaid from sale proceeds.

P.S. I forgot to mention LOC's are not needed in some situations where there is a long standing relationship and mutual trust between the overseas supplier and local customer, whereby normal credit terms can be negotiated without involving bank LOCs. In addition, there are different types of LOCs and I provided an example for a transactional LOC rather than a revolving or standby LOC.

[kiora]

Just to add to the mix.I suspect ?

Like most rural businesses the stock levels/liabilities will likely be effected by delayed charging whereby the wholesaler will supply the product for spring/summer/autumn/winter promotions and delay charge or extend credit for up to 3 months in some cases or until stock levels on the effected items are reduced to "Off Season" levels

[kiora]

https://businessdesk.co.nz/article/economy/productivity-drops-for-smes-xero-reports

"Agriculture leads the decline by output with 12.1 % less output"

[Toddy]

https://businessdesk.co.nz/article/economy/productivity-drops-for-smes-xero-reports

"Agriculture leads the decline by output with 12.1 % less output"

What a crap article. No insights. I would expect this quality from the Stuff Business reporters.

And I'm paying to view it.

[blackcap]

What a crap article. No insights. I would expect this quality from the Stuff Business reporters.

And I'm paying to view it.

It was written by an intern journalist to be fair. But agree, businessdesk is pretty crap all round.

[Sideshow Bob]

It was written by an intern journalist to be fair. But agree, businessdesk is pretty crap all round.

Not the right page, but a subscriber and disappointed about the overall quality/mix of articles and as you say Toddy the insights or lack there of. Most seem to be just re-written press releases. The AI generated ones are better.....!!

[Snoopy]

EOHY2024EOFY2023EOFY2022EOFY2021EOFY2020


PGG Wrightson Cash Balance
$13.307m$4.643m$4.676m$3.367m$16.868m


Term Debt Facility (Amount Drawn)
$90m($45.19m)$90m($50m)$60m($30m)$60m($0m)$50m($20 m)


Working Capital Facility (Amount Drawn)
$70m($65m)$70m($19.96m)$70m($7.50m)$70m($9.90m)$70 m($30m)



Overdraft Facility (Amount Drawn)
$3.0m($0m)$3.0m($0m)$3.0m($0m)$3.0m($0m)$3.0m($0m)



Letter of Credit (Amount Drawn)
$NAm($3.77mm)$NAm($3.77m)$NAm($3.58m)$NAm($3,53m)$ NAm($3.58m)



Total Facility Limit (Amount Drawn)
$163m($114m)$163m($74m)$133m($41m)$133m($13m)$123m ($54m)



Banking Syndicate Loans (Balance Sheet)
$110.190m$69.960m$37.500m$9.900m$50.000m






The table below has been changed such that it now only looks at the half year debt position. This means that all the snapshot periods are now seasonally comparable.

Banking facility notes (typically found in note 3 in the respective half year interim reports) can be rather a dry foot note to the presented figures and may end up not telling shareholders much. But if we look at such numbers over multiple sequential reporting dates, then longer term patterns can emerge. Such patterns can tell the story of how happy the banking syndicate really is with PGG Wrightson - a topic that rarely, if ever, is given any 'descriptive text time' in the annual report. So what can we deduce about the relationship of PGW with their bankers from the summary table of 'banking facilities drawn' and 'banking facilities offered' below?




EOHY2024EOHY2023EOHY2022EOHY2021EOHY2020


PGG Wrightson Cash Balance
$13.307m$2.484m$1.113m$1.764m$0.682m



Term Debt Facility (Amount Drawn)
$90m($45.19m)$90m($50m)$60m($30m)$60m($20m)$50m($2 0m)



Working Capital Facility (Amount Drawn)
$70m($65.00m)$70m($48.00m)$70m($18.00m)$70m($21.00 m)$70m($40.00m)



Overdraft Facility (Amount Drawn)
$3.0m($0m)$3.0m($0m)$3.0m($0m)$3.0m($0m)$3.0m($0m)



Letter of Credit (Amount Drawn)
$NAm($3.77m)$NAm($3.58m)$NAm($3.58m)$NAm($3.58m)$N Am($6.08m)



Total Facility Limit (Amount Drawn)
$163m($114m)$163m($101m)$133m($52m)$133m($45m)$123 m($66m)



Banking Syndicate Loans (Balance Sheet)
$110.190m$98.000m$48.000m$41.000m$60.000m






Notes

1/ The 'Overdraft facilities' and the ''Guarantee Letters of Credit Finance Facilities', collectively known as the 'Syndicated Facilities' are there to fund:
1i/ The general corporate activities of the group.
1ii/ The seasonal fluctuations of working capital.
1iii/ The 'GoLivestock' lending program

A guaranteed letter of credit (refer to post 5758) is effectively a promise to pay an overseas supplier for goods that have been ordered that have not yet arrived. So it doesn't increase the debt at PGW, unless PGW reneges on an account payable. In that case the banking syndicate steps in pays the bill, which they will no doubt recover from PGW at a later date. So a 'Guarantee Letter of Credit' is a statement by PGW's banking syndicate that PGW contracted for goods and services will be paid for. So technically it is only a 'conditional bank debt', if PGW do not pay their bills. But I guess for reporting purposes under 'financing facilities' (AR2023 note 9), conditional debts to your banking facility do require a mention.

2/ Working Capital Facilities are said to be subject to an 'annual clean down'. This means the loan balance must be fully repaid at least once during a financial year such that the balance at a point in time during the FY is zero..

Think of Working Capital as a means of buying goods for on sale to customers. Being a seasonal business, PGW buys in stock for farmers to buy to 'put on the farm' (mostly) in Spring. It then hopes to recoup that money outlay -with some profit- by the end of the business year. The end of autumn is usually when the last of PGG Wrightson's GoLIvestock animal assets are sold off as well. So this should be 'maximum cash' time for the company. We aren't informed exactly when the debt clean down date is. But the 'end of autumn' would seem to be the most logical time period for the annual working capital clean down.

3/ The Overdraft balances drawn at EOHY20xx, were not specifically declared. However because the short term loan balance was declared at the end of each of those years in the balance sheet, and it equated exactly to the Working Capital separately declared, I can deduce that the 'overdraft loan balance' must have been zero on the given reference dates.

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

Readers will notice that the 'Amount drawn against total facilities' and the banking syndicate total loans as measured on the balance sheet do not exactly match. The difference is the 'Letter of Credit' guarantee which is effectively an off balance sheet debt that may be called in should circumstances determine there be a need to do that.

These half year balance date figures alter the story on how PGW is using its borrowing facilities (compared to the full year figures in the quoted text). The 'blow out in debt' actually occurred between EOFY2022 and EOHY2023. While a seasonal build up of debt would be expected over this time, as the company builds up its rural store stock in preparation for Spring, this was a much bigger blowout of debt (+$50m more to $98m) than the equivalent period a year before that. But by the end of FY2023 the working capital debt was down again, as we might expect. By EOHY2024 the working capital debt had increased to a new record high from the previous year However the offsetting 'cash balance' was at a new record high as well. If you take one from the other:

$110.190m - $13.307m=$96.883m (HY2024 figures)
$98.000m - $2.484m = $95.516m (HY2023 figures)

....you can see that 'net working capital' was only a little more than $1m higher at EOHY2024 - not so significant. I take this 'zoom out view' and assess that -in real terms-, Working Capital is about the same year on year. The big change was instead the jump from the EOHY2022 base level of $20m to a new EOHY2023 level of $50m which has remained sticky. So the first published indicator that rising working capital debt was 'a thing' was back on 31st December 2022. I notice that although the amount of working capital drawn over the half year reporting periods has carried on increasing, the maximum Working capital available to be borrowed has remained at $70m. At least that was true until 14th January 2024, when the banking syndicate suddenly granted PGW $15m more working capital headroom (maximum working capital balance is now $85m).

There has been no tightening of the bank imposed debt caps of any kind over all of this time. On the contrary, the total amount able to be borrowed has expanded by $40m over four years. The banks would not have done this unless they were confident the PGW business could look after the security of their loan money. It will be interesting to see if this changes once the EOFY2024 has rolled over and the annual results are collated and submitted to those 'friendly bankers'. But as of now, this picture is showing me that the banks are on good terms with PGW. They understand the multi-year seasonal trends that such a business is subject to, and they are quite happy to keep on supporting PGG Wrightson 'through the trough'.

SNOOPY

[Snoopy]

Snoopy - do we know if PGW did their annual clean during the first half year? Also, given the nature of working capital facilities, they can be repaid pretty quickly using the timing of monthly cashflows to one's advantage. I'm not sure you can borrow from a term facility to repay the working capital facility given that is not the intention of the annual clean down. If the facility is too high and cannot be repaid, then better IMO to transfer some of the balance to a term loan and rebalance the 2 [b]limits[/] instead.




I am referring to swapping one facility for another on a permanent basis as part of capital management*. What you suggested was temporarily borrowing on one to repay the other which would not be allowed.

*per re-negotiated agreements with the banking syndicate.


OK thanks for the clarification. I guess the reason there are two different classes of borrowing is that one class of borrowing is cheaper than the other. Otherwise why not just run all classes of borrowing into a single classification 'big bucket' and 'get on with charging for it'?

$65m sounds like a lot of loan to 'draw down' to me. But is it?

I can take a linear average modelling guess at the average amount of store stock on hand during the year, by looking at three reference balance sheets: FY2022, HY2023 and FY2023.

Average Inventory = ($107.533m+$129.717m+$102.048m)/3 = $113.099m

The revenue for the year at 'Retail & Water' was $796.043m. That means the stock turn for FY2023 was: $796.043m/$113.099m= 7.0 times. That puts the $65m or working capital into context. It is only $65m/$796.043m or 8% of annual revenue. Still a lot of money of course. But nothing that a few judiciously priced end of season stock sales could not raise. Even the seasonal wind down of 'GoStock' might produce that kind of cash.

PGW is a seasonal business. So what is my estimate of stock turn over HY2023?

Average Inventory = ($129.717m+$102.048m)/2 = $115.883m
Revenue at 'Retail & Water' over HY2023 = $487.909m. => 6 Month Stock Turn = $487.909m/$115.883m= 4.2 times

Did the stock turn slow down over HY2024?

Average Inventory = ($130.769m+$107.533m)/2 = $119.151m
Revenue at 'Retail & Water' over HY2024 =$471.471m => 6 month Stock Turn = $471.471m/$119.151m = 4.0 times

So we did see a small drop off in stock turn over FY2024 as things got tighter. But not enough to suggest to me that 'enough cashflow could not have been rounded up' to temporarily repay the working capital debt of $65m.

SNOOPY

[Ferg]

OK thanks for the clarification. I guess the reason there are two different classes of borrowing is that one class of borrowing is cheaper than the other. Otherwise why not just run all classes of borrowing into a single classification 'big bucket' and 'get on with charging for it'?

Capital management has long term debts for long term assets (such as acquisitions and capex) and short term debts for short term assets (such as inventory). Hence the use of working capital facilities to fund inventory 'blowouts' until you sell them down and pay the loan off. Bankers don't like to see long term debt used to fund short term assets such as inventory, hence the reason you don't see one class of borrowing. The interest rate on the short term facility will likely be a bit higher, but it's not really a huge cost given it is supposedly a temporary facility and not drawn down 365 days per year.

I saw this note in their HY report:

The syndicated facilities fund the general activities of the Group, the seasonal fluctuations in working capital, and the Go livestock receivables.
So the facility funds both inventory and livestock receivables, although it doesn't explain the growth in the WC balance. Instead p22 of HY24 report pretty much explains it. It is not good reading.

If I were a shareholder I would want to know their receivables are actually collectible. Receivables of ($294m less GST=) $256m divided by (edit: not into!) HY daily sales of ($561m/184=) $3m implies there are an average of 84-85 days sales outstanding as at 31 Dec. On the face of it, it is not good but better to look at trends. But I would still be worried about collectability in today's economic climate.

Snoopy - if you are calculating stock turnover, it should be based on the cost of sales, not sales. But whatever floats your boat....

Also - I see the letter of credit facility is a "limit" of $3.77m not what has been drawn so you may want to amend your tables.


The syndicated facility agreement allows the Group, subject to certain conditions, to enter into additional facilities outside of the Company's syndicated facility. The additional facilities are guaranteed by the security trust. These facilities amounted to $6.77 million as at 31 December 2023.
– Overdraft facilities of $3.00 million. This facility was undrawn at 31 December 2023 (undrawn at 30 June 2023, undrawn at 31 December 2022).
– Guarantee, letters of credit and trade finance facilities of $3.77 million.

Question for you Snoopy - does PGW have debt denominated in a foreign currency?

The other thing I would be looking at is how does a decline in top line revenue impact NPBT given gross margin of 24.2% has fallen slightly compared to last year, and there are about ($139+58+30+10=) $237m of forecast fixed costs above the NPBT line. Following is a table of the sales value needed to break even assuming fixed costs of $237m, and a range of gross margins:

24% GM -> breakeven annual sales is $987m which requires H2 sales to grow +9% over H2 last year
24.5% GM -> breakeven annual sales is $967m (H2 +4% vs LY)
25% GM -> breakeven sales is $948m (H2 -1% vs LY)
25.5% GM -> breakeven sales is $929m (H2 -5% vs LY)
26% GM -> breakeven sales is $912m (H2 -10% vs LY)


What this tells me is even if they can lift their H2 margins such that the FY gross margin is 26% (last year 25.9%) then a fall in annual topline sales of 10% for H2 will result in zero NPBT. A fall greater than that will result in a loss.

You can also use similar maths to work out the forecast NPBT based on a range of changes in top line sales and changes in gross margins. The graphs on p2 of the recent presentation highlight the impact of falling sales and/or falling margins on profits - the percentage fall in NPBT is usually more than the % fall in top line revenues.

In light of the latest cashflow report and suspended dividend, I would not expect PGW to pay a dividend at year end or even next HY. Once the SP has finished doing it's thing, it could be 1-3 years to climb out of its current position. Investors will need to look through the short term funk to the longer term.

Sources:

Announcement (https://www.pggwrightson.co.nz/sites/default/files/2024-02/27%20Feb%202024%20PGW%20Half%20Year%20Results%20-%20Announcement.pdf)
HY Results (https://www.pggwrightson.co.nz/sites/default/files/2024-02/27%20Feb%202024%20PGW%20Half%20Year%20Report%20to% 2031%20December%202023.pdf)

[kiora]

re GM & stock turn
I am surprised they are even that high
re receivables that are actually collectible
They are likely very seasonal ,extended credit likely highest end Dec?,slowly paid down as milk checks come in(dairy) /stock are sold (S& B)

[kiora]

"SOPI report: Forecast dip in primary industry export revenue due to lower prices for key commodities"
https://www.nzherald.co.nz/nz/sopi-report-forecast-dip-in-primary-industry-export-revenue-due-to-lower-prices-for-key-commodities/M3X7ANC5VFDJHMJTIWEPROTPXQ/?utm_source=ST&utm_medium=email&utm_campaign=ShareTrader+AM+Update+for+Friday+14+J une+2024

[percy]

re GM & stock turn
I am surprised they are even that high
re receivables that are actually collectible
They are likely very seasonal ,extended credit likely highest end Dec?,slowly paid down as milk checks come in(dairy) /stock are sold (S& B)

Something does not add up to me regarding their stock turns.
It certainly is not in store stock.I would guess their in store stock would be lucky to turn over 1.5 or 2 times a year.
Therefore most of their stock turns must be from bulk stock that never comes through their stores.

[kiora]

Something does not add up to me regarding their stock turns.
It certainly is not in store stock.I would guess their in store stock would be lucky to turn over 1.5 or 2 times a year.
Therefore most of their stock turns must be from bulk stock that never comes through their stores.

Yes,that could be it, good point Percy
Just clipping the ticket.High value,low margin (10% ?)

[Toddy]

Most stock is seasonal. I. E only used for a number of weeks a year. A good percentage of customers pre order as the items are essential to a good outcome on farm.
Sure, they have gumboots and dog food etc

So I think it's a little tricky to talk about stock turn. I've never deep dived into their accounts.

[Snoopy]

I saw this note in their HY report:
"The syndicated facilities fund the general activities of the Group, the seasonal fluctuations in working capital, and the Go livestock receivables."

So the facility funds both inventory and livestock receivables, although it doesn't explain the growth in the WC balance. Instead p22 of HY24 report pretty much explains it. It is not good reading.

If I were a shareholder I would want to know their receivables are actually collectible.


I guess you are looking at the $16.400m increase in 'Accounts Receivable' over the half year period? Let's put some context on that.




EOHY2024EOHY2023EOHY2022EOHY2021EOHY2020


PGG Wrightson Cash Balance {A}
$13.307m$2.484m$1.113m$1.764m$0.682m



Accounts Receivable Asset {B}
$294.198m$321.851m$296.772m$234.765m$241.598m



GoLivestock Animal Assets (C)
$40.578m$42.470m$35.805m$30.582m$38.584m



Total Current Assets {A}+{B}+{C}={D}
$348.083m$366.805m$330.690m$267.111m$280.864m



Accounts Payable Liabilities {E}
($265.312m)($273.959m)($269.311m)($208.328m)($221. 050m)



Short Term Lease Liabilities {F}
($20.189m)($18.863m)($17.690m)($16.936m)($N/Am) (1)



Total Current Liabilities {E}+{F}={G}
($286.131m)($292.822m)($287.001m)($225.264m)($221. 050m)




Total Net Current Assets {D}+{G}
$61.952m$73.983m$43.689m$41.847m$59.814m



Working Capital Limit
$70m$70m$70m$70m$70m



Term Facility Limit
$90m$90m$60m$60m$50m



Current Ratio {D}/{G} (2)
1.221.251.151.191.27



Inventories
$130.769m$129.717m$111.939m$105.536m$107.750m



Average Days in Arrears, Accounts Receivable (3)
10010310191103





Table Notes

1/ Not Applicable because short term lease liabilities as a balance sheet item did not exist prior to IFRS16 implementation.

2/ I guess a real accountant would see my above calculation table as a corruption. Generally it is common practice to include inventories amongst current assets. The idea being you can just put a sale sign up on the door and all these consumers will rush in converting your 'stock in store' into cash. But with a specialist retailer such as PGW, with their farmer customers on the 'bones of their bums' and the banks refusing them credit, I am not sure this is a realistic. So I have chosen to leave inventories out of the current assets total.

3/ Days in Arrears for Accounts Receivable Calculations

Any Period: (Accounts Receivable less GST)/(Average Daily 'Retail & Water' Revenue)
HY2024: ((1/1.15)x$294.198m)/($471.371m/184) = 100days
HY2023: ((1/1.15)x$321.851m)/($500.008m/184) = 103days
HY2022: ((1/1.15)x$296.772m)/($468.989m/184) = 101days
HY2021: ((1/1.15)x$234.765m)/($413.421m/184) = 91days
HY2020: ((1/1.15)x$241.598m)/($373.837m/184) = 103days

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

It looks like PGW were more diligent following up their overdue accounts in FY2024 rather than FY2023. The 'GoLivestock' assets will generally be cashed up before the winter, and probably at a higher price than book value (because they have had a few months of fattening up by the farmer).

The accounts receivable are big numbers to be sure. And those numbers do rise going into that half year balance date, because this period marks the seasonal time that most farmers are making their purchases. But looking at the multi-half-year picture, this doesn't look like a company with a cashflow crisis spiraling out of control. And we should also remember, just after the close off period, the banking syndicate increased the allowable working capital draw-down to $85m. So it doesn't look like the banks have a problem with this picture either (or at least they didn't at the half year balance date).


SNOOPY

[Snoopy]

HY2024Retail & WaterAgencyBack Office Total


Revenue$478.301m (85.4%)$81.589m (14.6%)


EBITDA$39.962m$1.431m($4.775m)


less Back Office EBITDA ReAllocation($4.078m)($0.697m)


less Net Interest Allocation($2.019m)($1.035m)($1.666m)


less Back Office Interest ReAllocation($1.423m)($0.243m)


less Depreciation & Amortisation($8.214m)($4.771m)($1.537m)


less Back OfficeDA Reallocation($1.299m)($0.238m)


less Income Tax Benefit (Expense)($8.412m)$1.154m$2.469m


add Back Office Tax ReAllocation$2.109m$0.360m


equals NPAT$16.626m($4.039m)


Net Profit Margin3.48%-4.95%



Notes

1/ Reallocation apportioning is on the basis of divisional revenue.

SNOOPY

[Snoopy]

HY2023Retail & WaterAgencyBack Office Total


Revenue$500.008m (85.5%)$84.670m (14.5%)


EBITDA$48.918m$3.643m($4.717m)


less Back Office EBITDA ReAllocation($4.033m)($0.684m)


less Net Interest Allocation($2.969m)($0.904m)($1.084m)


less Back Office Interest ReAllocation($0.927m)($0.157m)


less Depreciation & Amortisation($8.017m)($4.301m)($1.411m)


less Back OfficeDA Reallocation($1.206m)($0.205m)


less Income Tax Benefit (Expense)($10.781m)$0.374m$2.023m


add Back Office Tax ReAllocation$1.730m$0.293m


equals NPAT$22.715m($1.941m)


Net Profit Margin4.54%-2.29%



Notes

1/ Reallocation apportioning is on the basis of divisional revenue.

SNOOPY

[Snoopy]

HY2023Retail & WaterAgencyBack Office Total


Revenue$785.298m (80.6%)$188.803m (19.4%)


EBITDA$54.129m$16.608m($9.003m)


less Back Office EBITDA ReAllocation($7.256m)($1.747m)


less Net Interest Allocation($3.779m)($3.857m)($1.937m)


less Back Office Interest ReAllocation($1.561m)($0.376m)


less Depreciation & Amortisation($16.067m)($8.787m)($3.009m)


less Back OfficeDA Reallocation($2.425m)($0.584m)


less Income Tax Benefit (Expense)($9.707m)($1.170m)$4.459m


add Back Office Tax ReAllocation$3.594m$0.865m


equals NPAT$16.928m$0.942m


Net Profit Margin2.16%0.499%



Notes

1/ Reallocation apportioning is on the basis of divisional revenue

SNOOPY

[Snoopy]

I can take a linear average modelling guess at the average amount of store stock on hand during the year, by looking at three reference balance sheets: FY2022, HY2023 and FY2023.

Average Inventory = ($107.533m+$129.717m+$102.048m)/3 = $113.099m

The revenue for the year at 'Retail & Water' was $796.043m. That means the stock turn for FY2023 was: $796.043m/$113.099m= 7.0 times. That puts the $65m or working capital into context. It is only $65m/$796.043m or 8% of annual revenue. Still a lot of money of course. But nothing that a few judiciously priced end of season stock sales could not raise. Even the seasonal wind down of 'GoStock' might produce that kind of cash.

PGW is a seasonal business. So what is my estimate of stock turn over HY2023?

Average Inventory = ($129.717m+$102.048m)/2 = $115.883m
Revenue at 'Retail & Water' over HY2023 = $487.909m. => 6 Month Stock Turn = $487.909m/$115.883m= 4.2 times

Did the stock turn slow down over HY2024?

Average Inventory = ($130.769m+$107.533m)/2 = $119.151m
Revenue at 'Retail & Water' over HY2024 =$471.471m => 6 month Stock Turn = $471.471m/$119.151m = 4.0 times

So we did see a small drop off in stock turn over FY2024 as things got tighter. But not enough to suggest to me that 'enough cashflow could not have been rounded up' to temporarily repay the working capital debt of $65m.




Snoopy - if you are calculating stock turnover, it should be based on the cost of sales, not sales. But whatever floats your boat....


To calculate the 'cost of sales' from the 'sales revenue' you have to know the net profit margin. You won't find that figure in any PGW report. However, it is possible to work in out. And this is an exercise that I have now done (posts 5774, 5775 and 5776). So I can now redo these stock turnover calculations as per Ferg's suggestion.

Period Stock Turn = (Cost of Period Revenue)/(Snapshot of Inventory value)

Average Inventory FY2023 = ($107.533m+$129.717m+$102.048m)/3 = $113.099m
Cost of Retail and Water Revenue = (1/1.0216)x$796.043m = $779.212m
=>FY2023 Annual Stock Turn = $779.212m/$113.099m= 6.9 times

Average Inventory HY2023 = ($129.717m+$102.048m)/2 = $115.883m
Cost of Retail and Water Revenue = (1/1.0454)x$487.909m = $466.720m
=>HY2023 Stock Turn = $466.720m/$115.883m= 4.0 times (equivalent to 8.0 times annual rate)

Average Inventory HY2024 = ($130.769m+$107.533m)/2 = $119.151m
Cost of Retail and Water Revenue = (1/1.0348)x$471.471m = $455.616m
=>HY2024 Stock Turn = $455.616m/$119.151m= 3.8 times (equivalent to 7.6 times annual rate)

The result of the correction is a little bit of a drop in the stock turn rate. But the basic narrative remains unchanged. That being that stock turns over faster in the first half than the full year, and that the stock turnover rate over HY2024 is a little behind that over HY2023, although it is not alarmingly lower. That is pretty much what you would expect in a rural downturn. This is of course not what shareholders would like to see. But I don't see a sign of mismanagement here. To improve the stock turnover you would have to reduce inventory even more, which may not provide farmers with the choices that they need or want.

SNOOPY

[winner69]

To calculate the 'cost of sales' from the 'sales revenue' you have to know the net profit margin. You won't find that figure in any PGW report. However, it is possible to work in out. And this is an exercise that I have now done (posts 5774, 5775 and 5776). So I can now redo these stock turnover calculations as per Ferg's suggestion.

Period Stock Turn = (Cost of Period Revenue)/(Snapshot of Inventory value)


Snoops …I’m sure when Ferg was saying Cost of Sales used in stock turn calcs he was meaning the actual cost of goods sold ……generally the difference between revenues and Gross Margin


I see you can do this at a Conpany lebpvel but not by segment as they don’t show Cost of Sales / Gross Margin by segment.

But I might have misunderstood you both

[winner69]

FY23 ..,.. Cost of Sales $723m …..Average Stock F22 and F23 $104m só about 7 stock turns ….amazingly what you got

I must have misunderstood you lol

[Snoopy]

Snoops …I’m sure when Ferg was saying Cost of Sales used in stock turn calcs he was meaning the actual cost of goods sold ……generally the difference between revenues and Gross Margin


Yes, that is what I took Ferg's comments to mean.



I see you can do this at a Company level but not by segment as they don’t show Cost of Sales / Gross Margin by segment.


No they don't give you the information directly. But there is enough segmented information given to allow you to work the segment margin out, which is what I have done in posts 5773, 5774 and 5775.

SNOOPY

[Snoopy]

Something does not add up to me regarding their stock turns. It certainly is not in store stock.I would guess their in store stock would be lucky to turn over 1.5 or 2 times a year. Therefore most of their stock turns must be from bulk stock that never comes through their stores.


I agree Percy that a 6.9x stock turn at those PGW retail stores does not 'feel' right. Your 'bulk stock that never comes through the store' could be one explanation. But might I suggest another. Perhaps PGW has an arrangement with many suppliers where stock is supplied in a consignment arrangement whereby PGW don't actually 'own' the stock until it is sold. The extreme example of this is the supermarkets, where the big players end up not paying for the goods until the end line customer has bought it. Turnover at the supermarkets is much higher than at a PGW retail store of course. But there is nothing to say the strong arm of PGW the retailer is not at work here.

"We will generously allow your stock to be displayed at our retail stores, but don't expect us to pay for it Mr Chump supplier unless it goes out the door."

PGW would no doubt pay up front for the high turnover stuff, but some of the slower moving lines? Maybe not. So could it be that the stock you see 'not moving' at a PGW retail store is not yet owned by PGW, so is not on the books as inventory?

SNOOPY

[percy]

Yes, that is what I took Ferg's comments to mean.



No they don't give you the information directly. But there is enough segmented information given to allow you to work the segment margin out, which is what I have done in posts 5773, 5774 and 5775.

SNOOPY

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

[percy]

I agree Percy that a 6.9x stock turn at those PGW retail stores does not 'feel' right. Your 'bulk stock that never comes through the store' could be one explanation. But might I suggest another. Perhaps PGW has an arrangement with many suppliers where stock is supplied in a consignment arrangement whereby PGW don't actually 'own' the stock until it is sold. The extreme example of this is the supermarkets, where the big players end up not paying for the goods until the end line customer has bought it. Turnover at the supermarkets is much higher than at a PGW retail store of course. But there is nothing to say the strong arm of PGW the retailer is not at work here.

"We will generously allow your stock to be displayed at our retail stores, but don't expect us to pay for it Mr Chump supplier unless it goes out the door."

PGW would no doubt pay up front for the high turnover stuff, but some of the slower moving lines? Maybe not. So could it be that the stock you see 'not moving' at a PGW retail store is not yet owned by PGW, so is not on the books as inventory?

SNOOPY

Sounds sensible,however I very much doubt that would happen at PGW.
My "in store' stock turns of between 1.5 and 2 maybe generous.I can not see Jacket,shirt or socks suppliers offering more than 60 days credit.
The likes of Pak'n Save turn over a great deal of their stock weekly.
Their logistics are incredible.Their ordering systems are integrated with their major suppliers.
Similar systems are used by Bunnings..
The only way I can see PGW stock turns being high are;
a].Extended Credit is offered in Spring.And end of year stock level is very low.
b]When farmer comes into store he buys $100 worth of displayed goods ,and orders $10,000 worth of Fencing/fertisliser or whatever, which is delivered ex supplier direct to the farm,never going near the PGW store.

[kiora]

I concur with Percy on this one

[Snoopy]

Also - I see the letter of credit facility is a "limit" of $3.77m not what has been drawn so you may want to amend your tables.


Ferg, the full text you refer to is from p26 of HYR2024 and is here:

"The syndicated facility agreement allows the Group, subject to certain conditions, to enter into additional facilities outside of the Company's syndicated facility. The additional facilities are guaranteed by the security trust. These facilities amounted to $6.77 million as at 31 December 2023.
– Overdraft facilities of $3.00 million. This facility was undrawn at 31 December 2023 (undrawn at 30 June 2023, undrawn at 31 December 2022).
– Guarantee, letters of credit and trade finance facilities of $3.77 million."

There is no mention of the "Guarantee, letters of credit and trade finance facilities." being drawn or undrawn. What is mentioned is that the overdraft on the line above is undrawn. My impression is that the "Guarantee, letters of credit and trade finance facilities.' is drawn, because if it wasn't, PGW would have told us, like they did with the overdraft facility on the line above.
I consider the "Guarantee, letters of credit and trade finance facilities" has been drawn, or should be thought of as such because such money can be called upon at any time, and there is nothing the banks can do or could have done about it. You say the letter of credit is a 'limit'. But that is your word. The word 'limit' is not mentioned in the quoted text. And if it were a limit, why pick such a strange number?: $3.77m? Why not just make the limit $4m? The mere fact the number is $3.77m is another hint to me that the $3.77m is already drawn. I could still be wrong about this. But you haven't convinced me that I am.

SNOOPY

[Snoopy]

Question for you Snoopy - does PGW have debt denominated in a foreign currency?


PGW source many of their product lines from overseas sources. The HY2024 report shows $265.312m "Accounts payable and Accruals". For the breakdown of what this figure might represent, you need to look at the equivalent entry in AR2023. Note 17 of AR2023 would suggest the majority of what is termed the "Accounts Payable and Accruals" are trade creditors. How many of these are overseas based is not directly disclosed. But this I believe is the extent of PGW debts denominated on foreign currency.

There is an extensive section on 'Financial Instruments' held by PGW in AR2023, starting on p91. From p94
"Foreign Currency Risk The group undertakes transactions denominated in foreign currencies and exposure to movements in foreign currency arises from these activities. The group manages this risk by using forward foreign exchange contracts to hedge foreign currency risks as they arise."

Immediately following that statement there is a table titled "Foreign Currency Exposure Risk". The first part of that table shows that the amount of foreign money owed to 'trade creditors', greatly exceeds the foreign money that is expected to come in from 'trade receivables', all as shown on the balance sheet. But below that, there is a line showing foreign exchange cover across four currencies (GBP,USD,AUD,Euro) to the total value of $42.787m. The same table contains another line of figures showing a net unhedged position that sums to $55.606m.

The balance sheet contains trade creditors to the value of $105.679m. (AR2013 p87). So my interpretation of this is that of the trade creditors ($42.787m+$55.606m=)$98.393m are overseas based. Of those creditor accounts, a bit under half, $42.787m, are hedged back to the NZD. And $105.679m-$98.393m=$7.286m of the creditor accounts are NZD based, and probably local suppliers. That is how I read the information as presented anyway. I am happy to be corrected if my interpretation is wrong.

So that sums up PGW's total exposure to foreign currency.

But if your question is related to 'working capital' or 'long term capital' funding via the banking syndicate, then no, PGW do not have any foreign debt funding of that type.

SNOOPY

[Snoopy]

The other thing I would be looking at is how does a decline in top line revenue impact NPBT given gross margin of 24.2% has fallen slightly compared to last year, and there are about ($139+58+30+10=) $237m of forecast fixed costs above the NPBT line.


I couldn't find the above series of numbers last night. I think it is because they were rounded. Referred annual figures from FY2023 from HYR2024 p17 Interim Consolidated Statement of Profit & Loss are close:


FY2023 Annual Fixed Costs


Employee Expenses $137.561m


Other Operating Expenses$54.590m


Depreciation & Amortisation Expense$28.063m


Net Interest and Finance Cost$9.573m


Total Fixed Running Costs$229.787m



That is a little different to your $237m total. But I think we are talking about the same figures. I guess the question is, can any of these fixed costs be reasonably reduced? Falling interest rates plus using cashflows that might otherwise have gone towards paying dividends to shareholders to reduce the loan balance should soon help.

There has been quite a large IT spend been going on at PGW, which I believe is nearing completion. So while that will not reduce and may even increase depreciation charges for FY2025, these are non cash items in any prospective income statement. So I expect some of the cashflow from FY2024 that has been pouring into computer equipment will in the future be available to pay down debt.

Employee expenses in a high inflation environment, can only really be reduced by sacking people, or putting on a 'hiring freeze'. This would result in customer service issues in the medium term which is unlikely to be good.

So in summary, I think there is light at the end of the tunnel from a cashflow perspective, if not a profit perspective.

SNOOPY

[winner69]

Só 130 page AR and you guys still have difficulty in finding answers ….PGW, not good enough

[Snoopy]

Só 130 page AR and you guys still have difficulty in finding answers ….PGW, not good enough


p130 of the Annual Report is the back cover with two farmers (or is it one farmer and a PGW rep) walking off into the cloudy reaches of a drying landscape. Maybe a hidden message for shareholders, that this path - walking away - is the path shareholders should take as well? So the Annual Report was perfectly clear after all. It is just that no-one noticed, until today.

SNOOPY

[winner69]

Hey snoops I read that post too quickly and got this


p130 of the Annual Report is the back cover with two farmers (or is it one farmer and a PGW rep) walking off into the cloudy reaches of a dying company. Maybe a hidden message for shareholders

[Snoopy]

The other thing I would be looking at is how does a decline in top line revenue impact NPBT given gross margin of 24.2% has fallen slightly compared to last year, and there are about ($139+58+30+10=) $237m of forecast fixed costs above the NPBT line. Following is a table of the sales value needed to break even assuming fixed costs of $237m, and a range of gross margins:

24% GM -> breakeven annual sales is $987m which requires H2 sales to grow +9% over H2 last year
24.5% GM -> breakeven annual sales is $967m (H2 +4% vs LY)
25% GM -> breakeven sales is $948m (H2 -1% vs LY)
25.5% GM -> breakeven sales is $929m (H2 -5% vs LY)
26% GM -> breakeven sales is $912m (H2 -10% vs LY)


What this tells me is even if they can lift their H2 margins such that the FY gross margin is 26% (last year 25.9%) then a fall in annual topline sales of 10% for H2 will result in zero NPBT. A fall greater than that will result in a loss.


Just figuring out where some of the above numbers came from. Refer to the 'Interim Consolidated Statement of Profit and Loss' for HY2024 for the input figures below.

Gross Margin = (Revenue - Cost of Goods Sold) / Revenue

Gross Margin FY2023 = ($975.692m - $722.849m)/$975.692m = 25.9%

Gross Margin HY2023 = ($585.756m - $441.463m)/$585.756m = 24.6%
Gross Margin HY2024 = ($560.878m - $425.247m)/$560.878m = 24.2%


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

(Gross Margin)(Revenue) = (Revenue - Cost of Goods Sold)

Assuming a Gross Margin of 24% and using the FY2023 figures as a base:
0.24xR = (R-$772.849m) => 0.76R = $772.849m => R= $1,017m

Actual operating revenue was $975m over FY2023, but gross margin, at 24.2%, was higher than that modelled above.

[Ferg]

I couldn't find the above series of numbers last night. I think it is because they were rounded.

Snoopy - my figures were in the context of a "forecast" not actual hence the reason they don't agree to what you are seeing (see people can make forecasts! .... but whether or not it is accurate remains to be seen).


$237m of forecast fixed costs above the NPBT line

Also, in banking parlance a "facility" is a limit.

P.S. If you are looking for the breakeven formula it is Fixed Costs / GM%.

[bull....]

new lows coming :scared:

[Snoopy]

Ferg, the full text you refer to is from p26 of HYR2024 and is here:

"The syndicated facility agreement allows the Group, subject to certain conditions, to enter into additional facilities outside of the Company's syndicated facility. The additional facilities are guaranteed by the security trust. These facilities amounted to $6.77 million as at 31 December 2023.
– Overdraft facilities of $3.00 million. This facility was undrawn at 31 December 2023 (undrawn at 30 June 2023, undrawn at 31 December 2022).
– Guarantee, letters of credit and trade finance facilities of $3.77 million."

There is no mention of the "Guarantee, letters of credit and trade finance facilities." being drawn or undrawn. What is mentioned is that the overdraft on the line above is undrawn. My impression is that the "Guarantee, letters of credit and trade finance facilities.' is drawn, because if it wasn't, PGW would have told us, like they did with the overdraft facility on the line above.
I consider the "Guarantee, letters of credit and trade finance facilities" has been drawn, or should be thought of as such because such money can be called upon at any time, and there is nothing the banks can do or could have done about it. You say the letter of credit is a 'limit'. But that is your word. The word 'limit' is not mentioned in the quoted text. And if it were a limit, why pick such a strange number?: $3.77m? Why not just make the limit $4m? The mere fact the number is $3.77m is another hint to me that the $3.77m is already drawn. I could still be wrong about this. But you haven't convinced me that I am.




In banking parlance a "facility" is a limit.


OK, but the text still does not specify whether that limit of $3.77m if that is what it is, is partially drawn, fully drawn or not drawn. Thinking further about this, I think my problem is that I am thinking of this "Guarantee, letters of credit and trade finance facilities" as a loan, when it is not really a loan at all.

The fact that $3.77m is 'not a round number', suggests to me it is based around a specific transaction, or maybe an annually repeating specific transaction. Some company that PGW deals with on a regular basis wants an absolute guarantee that they will be paid, to the extent that even the banks have been shut out of denying such a payment. In all probability the facility will remain undrawn. But if for any reason PGW misses a payment, then this unnamed creditor can cash in the 'guarantee facility', regardless of any banking covenants PGW may have agreed to with its banking syndicate at the time. Since the banks have no control over this $3.77m facility, it would be prudent for them to consider it drawn, even though it is not, because they have no control over whether it is drawn or not. And the $3.77m 'guarantee facility' could be drawn at any time.

Thus in my tables looking at banking facilities (posts 5764, 5740), I still think it is appropriate for the "Guarantee, letters of credit and trade finance facilities" to be considered drawn, even if they are not, because these facilities sit outside of the banking system arrangements of PGW. And to be conservative, the banking syndicate just thinks of them as 'permanently drawn', and adjusts the rest of their lending covenants accordingly.

SNOOPY

[Snoopy]

Snoopy - my figures were in the context of a "forecast" not actual hence the reason they don't agree to what you are seeing (see people can make forecasts! .... but whether or not it is accurate remains to be seen).


People can make forecasts - yes. But accountants are not allowed to forecast. An accountant must report figures faithfully and accurately. If they start to think for themselves then they become 'creative accountants'. And we all know where that road leads....;)

Economists OTOH are born forecasters. Their sole career purpose is to spin a plausible future business climate narrative that is suitable for the airways. Never in print mind you, because that would create a public record of what was said. Once the forecast period is up, it doesn't matter whether the economist was right or wrong, because no-one can remember what they said in their forecast in the first place! ;)

SNOOPY

[Baa_Baa]

I couldn't bring myself to investing in this or any sector that is proven to be subject to repeated cycles of doom and gloom, over and over again ad infinitum, but especially primary industry associated companies. It seems most of the time it's gloom and occasionally it's boom. Too volatile and unpredictable for me. Best left to the banks imo, they can decide what they're prepared to risk, it's not an independent investors stock. Same for insurance for example, there's so much that can and does go wrong, when we least expect it, and each time it does happen, our investment capital and earnings are screwed.

[Ferg]

Snoopy

You should have stopped here:

I think my problem is that I am thinking of this "Guarantee, letters of credit and trade finance facilities" as a loan, when it is not really a loan at all.

What you posted after that about an undrawn facility being fully drawn is, with all due respect, garbage. Your assumptions are wrong, namely:


suggests to me it is based around a specific transaction - WRONG (with the identical value from 6 months ago??)
or maybe an annually repeating specific transaction - WRONG (no such thing)
because if it wasn't, PGW would have told us - WRONG (they are not required to disclose, plus disclosing an undrawn O/D is not proof an unrelated facility is drawn)
In all probability the facility will remain undrawn - WRONG (these are used all the time and balances actually committed vary monthly, higher probability this facility is committed to a value >$0 and <$3.77m)
But if for any reason PGW misses a payment - WRONG (not possible under a LOC)
Since the banks have no control over this $3.77m facility - WRONG (they set the limit)
it would be prudent for them to consider it drawn, even though it is not - WRONG (not 'drawn' instead an 'exposure')


Only you can convince yourself that a facility that is undrawn is actually drawn!
:huh:

[Snoopy]

P.S. If you are looking for the breakeven formula it is Fixed Costs / GM%.


What about:

Fixed Costs + Variable Costs = Customer Receipts => 'No Profit' (breakeven)

SNOOPY

[Ferg]

People can make forecasts - yes. But accountants are not allowed to forecast. An accountant must report figures faithfully and accurately. If they start to think for themselves then they become 'creative accountants'. And we all know where that road leads.

What is your point? Given I know accounting like the back of my hand, I can't forecast? Absolute twaddle. I made a living making forecasts hence the reason I think statements such as "people can't forecast the future" are 100% nonsense. What is needed are some qualifications around that statement. For example, including words such as 'accurately' and taking into account various assumptions etc. And I stand behind my forecasts....not like economists.

I am trying to point out some of the risks for investors as a counter to your posts that attempt to minimise or downplay the risks with PGW. I am also trying to show where your analyses are off the mark but apparently there is a saying about old tricks and new dogs or something...? How many hours have you put into this so far? FYI I found the LOC mistake in under 5 minutes and spent about another 5 minutes looking at PGW financials - it probably took me longer to write my posts.

That breakeven technique is a forecasting tool using 2 predictable variables built on about 6 other known numbers - over which you would overlay your own probabilities. Investors can then assess the likelihood of varying sales and margin over H2 and come to a binary profitable/unprofitable forecast very quickly. One would hope the worst case scenario is not actually the best case scenario.

[Ferg]

What about:

Fixed Costs + Variable Costs = Customer Receipts => 'No Profit' (breakeven)

SNOOPY

The GM% method is volume independent and has been employed for decades by analysts. But hey if you want to forecast variable costs and volumes then go for it.

[Baa_Baa]

What is your point? Given I know accounting like the back of my hand, I can't forecast? Absolute twaddle. I made a living making forecasts hence the reason I think statements such as "people can't forecast the future" are 100% nonsense. What is needed are some qualifications around that statement. For example, including words such as 'accurately' and taking into account various assumptions etc. And I stand behind my forecasts....not like economists.

I am trying to point out some of the risks for investors as a counter to your posts that attempt to minimise or downplay the risks with PGW. I am also trying to show where your analyses are off the mark but apparently there is a saying about old tricks and new dogs or something...? How many hours have you put into this so far? FYI I found the LOC mistake in under 5 minutes and spent about another 5 minutes looking at PGW financials - it probably took me longer to write my posts.

That breakeven technique is a forecasting tool using 2 predictable variables built on about 6 other known numbers - over which you would overlay your own probabilities. Investors can then assess the likelihood of varying sales and margin over H2 and come to a binary profitable/unprofitable forecast very quickly. One would hope the worst case scenario is not actually the best case scenario.

Love your work Ferg, thank you, it's good to have someone qual'd casting their eye over the numbers and questioning whether they're sensible and whether this is investable. IMO PGW is a 'suck-in the investors' story, one year they'll make a motza, next year and the year after that, and the one after that, they'll be taken to the cleaners by events no one can predict, but are fundamentally ruinous. Primary industry is fraught for investors, boom, bust bust bust. The cycle repeats.



Thanks for posting.

[Snoopy]

Snoopy

You should have stopped here:
Snoopy wrote: "I think my problem is that I am thinking of this "Guarantee, letters of credit and trade finance facilities" as a loan, when it is not really a loan at all.

What you posted after that about an undrawn facility being fully drawn is, with all due respect, garbage. Your assumptions are wrong, namely:


suggests to me it is based around a specific transaction - WRONG (with the identical value from 6 months ago??)



Yes, an identical value as six months ago, because exactly the same letter of credit was in force six months ago as now. It is the same thing being reported at two different snapshots in time.




In all probability the facility will remain undrawn - WRONG (these are used all the time and balances actually committed vary monthly, higher probability this facility is committed to a value >$0 and <$3.77m)
Since the banks have no control over this $3.77m facility - WRONG (they set the limit)
it would be prudent for them to consider it drawn, even though it is not - WRONG (not 'drawn' instead an 'exposure')



If we:
a/ Accept your point that a 'Letter of Credit' is not for a fixed amount of $3.77m, but is instead for some varying amount between $0 and $3.77m at any particular time AND
b/ Accept your point that the $3.77m is an 'exposure' rather than being 'drawn'. (I think this is playing with words a bit. 'Exposure' has a context of something that might happen given certain circumstances and in those circumstances a payout might be required. 'Drawn' OTOH would suggest an event has happened and the money has actually been drawn out. But whether that $3.77m is a 'drawn risk' or an 'exposure risk' the amount of money 'at risk' is still $3.77m either way.)

BUT We know for a fact that this $3.77m is outside of the banking syndicate facilities.
YET we also know that the banks know the $3.77m is outside of the arrangements of the banking syndicate facilities.

Given the banks know this, they could therefore have set up their banking facilities to take account of the fact that this $3.77m facility exists outside of the banking facility arrangement they are about to set up. So although the banking syndicate does not control the $3.77m external facility directly, they do control it indirectly , in effect, because the banking facility they are about to set up will be on less generous terms compared to a hypothetical 'parallel universe facility' they would have set up if the $3.77m external facility did not exist.

So Ferg, I put it to you that although we are approaching this question from different directions, when each of us puts the building blocks in place, along our divergent expressive paths, what we end up with is the same thing. IOW in results terms, we agree. That $3.77m can be drawn down at any time and the banks know it.

SNOOPY

[Snoopy]

What is your point? Given I know accounting like the back of my hand, I can't forecast? Absolute twaddle. I made a living making forecasts hence the reason I think statements such as "people can't forecast the future" are 100% nonsense.


That post was meant to be a joke Ferg, to lighten up what was turning into a deadly serious thread. You think I could come onto a finance forum, diss all accountants and economists and get away with it? It was a play on stereotypes and not meant to be personal or taken too seriously. I have added smilies to the original post to make this clear! I very much appreciate and respect your contributions on accounting matters. No hard feelings I hope.

SNOOPY

[Snoopy]

"Since the banks have no control over this $3.77m facility" - WRONG (they set the limit)




BUT We know for a fact that this $3.77m is outside of the banking syndicate facilities.
YET we also know that the banks know the $3.77m is outside of the arrangements of the banking syndicate facilities.


You may not be aware of the full history of this Ferg. So this is a further explanation is just to show you I am not making this stuff up....

On 1st May 2019 PGW sold their seed division. Under Note 9 "Cash and Finance facilities" in AR2019 we are told:

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

"The company fully repaid the and cancelled the syndicated banking facilities during the year, using proceeds form the sale of the Seed & Grain segment."
"As at 30 June 2019, the group had the following finance facilities, which amount to $9.58m, comprise:
- Guarantee and trade finance facilities of $6.08m
- Overdraft facilities of $3.50m"

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

Go forward one year under the same Note 9 and we get this:

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

"On 2 July 2019, the Company entered into a new syndicated bank facility which provides the following:
– Term debt facility of $50.00 million maturing on 1 August 2021
– Working capital facilities of up to $70.00 million maturing on 1 August 2021 (subject to an annual Clean Down)
The syndicated facilities fund the general corporate activities of the Group, the seasonal fluctuations in working capital, and the Go livestock
receivables."

"The syndicated facility agreement allows the Group, subject to certain conditions, to enter into additional facilities outside of the Company’s syndicated facility. The additional facilities are guaranteed by the security trust. These facilities amounted to $6.58 million as at 30 June 2020 (2019: $9.58 million).
–Overdraft facilities of $3.00 million
–Guarantee, letters of credit and trade finance facility of $3.58 million."

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

The point of this post being to show you that the 'additional borrowing facilities' we are talking about were in place before the current banking syndicate was signed up. Not the other way around.

SNOOPY

[Ferg]

So what we are saying is that syndicated debt = the term debt + working capital facility. That is not in dispute. Typically 'syndicated debt' is debt provided by >1 banks (hence it is called a syndicate of banks) and usually includes at least 1 local bank and can include 1 or more overseas banks. Syndicated debt is therefore provided by a bank syndicate. The overdraft and trade finance/LOC facilities are typically (probability >99%) provided by a single local bank which is normal practice. That single local bank may or may not be a member of the bank syndicate. My prediction is that the single local bank is a member of the syndicate (Why? In my experience I have not yet seen a bank syndicate where one of the local bank syndicate members does not provide the day to day banking services). Whilst it could be a local bank that is not a member of the bank syndicate, I would be surprised if that were the case. Whilst the single local banker is not the same entity as the bank syndicate in toto, the banking syndicate would certainly have half an eye and some say on the size of the non-syndicated debt facilities - hence the 'banks' setting facility limits refers to the single local bank working in conjunction with bank syndicate as evidenced by your quote ("The syndicated facility agreement allows the Group, subject to certain conditions, to enter into additional facilities outside of the Company’s syndicated facility"). But all said and done, this changes nothing for the numbers...

[Snoopy]

So what we are saying is that syndicated debt = the term debt + working capital facility. That is not in dispute. Typically 'syndicated debt' is debt provided by >1 banks (hence it is called a syndicate of banks) and usually includes at least 1 local bank and can include 1 or more overseas banks. Syndicated debt is therefore provided by a bank syndicate. The overdraft and trade finance/LOC facilities are typically (probability >99%) provided by a single local bank which is normal practice. That single local bank may or may not be a member of the bank syndicate. My prediction is that the single local bank is a member of the syndicate (Why? In my experience I have not yet seen a bank syndicate where one of the local bank syndicate members does not provide the day to day banking services). Whilst it could be a local bank that is not a member of the bank syndicate, I would be surprised if that were the case. Whilst the single local banker is not the same entity as the bank syndicate in toto, the banking syndicate would certainly have half an eye and some say on the size of the non-syndicated debt facilities


OK, that is basically the point I was trying to make but you have said it better. But the way you previously expressed your view that I quote below I believe gave the wrong impression.



Snoopy "Since the banks have no control over this $3.77m facility" - WRONG (they set the limit)


You may have had it in your mind that you were saying the same thing. But it didn't come across that way to me. The above sounds like the new banking syndicate came in and said:
"Right, that existing day to day banking facility you already have. You can't have that any more. We are ripping that agreement up and from now on we will set the overdraft limit and any letter of credit conditions. That other bank you have agreed to those old terms with - they can get stuffed."

What I was saying was, the new banking syndicate can't come in and order PGW to default on their previously agreed to 'day to day' banking arrangements. Whenever you take out a new loan agreement, it is natural for any new loan provider to be aware of any existing loan agreements that already exist with others. They want to know about your total ability to repay all outstanding loan agreements - not just the new loan application you put in front of them. And yes, whether they approve that new loan or not, will require them to know the intimate details of other loans you have. But what a potential new loan provider cannot do is approach another loan provider and demand they change the conditions of another loan you have with that different third party loan provider.

They would as you so aptly put it:
"certainly have half an eye and some say on the size of the non-syndicated debt facilities."

But they can't demand changes to a contract that was not signed by them, and in which they have no direct interest. They can of course adjust their own proposed loan arrangement to take account of this. But they can't dictate the terms of as third party contract, which I believe what your quote immediately above implied.

SNOOPY

[Snoopy]

Only you can convince yourself that a facility that is undrawn is actually drawn!
:huh:

....and just to explain this apparent paradox. If PGW has a syndicated bank facility, and outside of that a non-syndicated bank facility with another party over which the syndicated bank facility has no control, that means the non-syndicated facility could be drawn down from anything to $0 to a maximum of $3.77m. Since the non-syndicated bank facility could be drawn down to $3.77m at any time, that means the syndicated bank facility, if being conservative, would need to assume it is drawn down all the time. Thus you have the superficially what looks like a paradoxical situation where a loan is assumed to be drawn, when it may be completely undrawn.

SNOOPY

[Entrep]

Soooooo, numba go up or down?

[Toddy]

Soooooo, numba go up or down?

The debt will go up.....

[Snoopy]

The debt will go up.....

I feel the need to qualify that statement. PGW is a seasonal business. And as part of the seasonal ebbing and flowing of the business there is an agreement that at some point the working capital, drawn to $65m at the half year balance date will need to be 'washed down' or completely repaid. $65m off company debt is quite a reduction. The wash down will be possible because of the sell down of shop stock, and the sell down of PGW owned animals 'rented out' to farmers from the GoLivestock program. The question is what happens 'after that', or about now?

PGW now has to choose to what level they will stock their retail operations for the 2024-2025 season. If they think Spring will be tough, they may not buy in as much shop stock as last year. Likewise, the farmers who do have spare feed may not have to pay as much for the beasts they plan to fatten up over the winter months. So the PGW GoLivestock balance may be reduced as a result of that. Less capital borrowed means lower profits but also less money borrowed from the banks to support those lower profits. Given no dividend was paid over 2HY2024 as well, I think that come the 30th June balance date, debt will be lower than many here think. Granted that will be against a backdrop of slower and lower profits going forwards.


SNOOPY

[percy]

Most of PGW's Spring stock orders were most probably placed in January/Feb/March.

[kiora]

"the farmers who do have spare feed may not have to pay as much for the beasts they plan to fatten up over the winter months. So the PGW GoLivestock balance may be reduced as a result of that"

No,beef prices will be higher with a shortage of stock likely.Works already indicating $6.50/kg later in winter

[Snoopy]

"the farmers who do have spare feed may not have to pay as much for the beasts they plan to fatten up over the winter months. So the PGW GoLivestock balance may be reduced as a result of that"

No,beef prices will be higher with a shortage of stock likely.Works already indicating $6.50/kg later in winter

Good to hear.

Higher beef prices
=> Higher prices paid at auction for cattle
=> Higher commission income for PGG Wrightson Livestock
=> More capital needed to support 'GoLivestock' (the only negative)
BUT ultimately farmers are better off
=> More money spent on the retail side of the PGW business
=> EBITDA increases
=> ability to support today's higher company debt increases
=> less need to conserve capital = 'dividends restored' YAY!

The 'virtuous circle' circles back.

SNOOPY

[FatTed]

"Higher beef prices" no one can afford to buy!

[Snoopy]

"Higher beef prices" no one can afford to buy!

They can in Japan.

SNOOPY