Buffett Test 4/ Ability to raise margins above the rate of inflation: FY2015
This test does not mean that PGW will always be able to raise margins above the rate of inflation. But it does mean that under certain market conditions it can, thus avoiding an eventual commodity price spiral to the bottom. The revenue associated with the now sold finance division has been removed from the appropriate years
Margin here is defined as NPAT/Sales
FY2011 (*): $5.9m/ ($1,243m - $55m) = 0.50%
FY2012 (*): $25.2m/ ($1,337m - $7m) = 1.91%
FY2013 (*): $24.3m/($1,132m - $2m) = 2.15%
FY2014 : $33.8m/ $1,219m = 2.77%
FY2015 : $34.8m/ $1,103m = 2.89%
(Asterisked figures have been adjusted to remove the former finance division NPAT profit or loss from that year AND the sales revenue relating to the finance division of that year)
Conclusion: Pass Test
SNOOPY
Buffett Test: Overall Conclusion FY2015
We cannot apply a Warren Buffett style growth model to valuing PGW because it has failed test 3, the 'Return on Equity' test. The failure is not unexpected as this is a tough hurdle for companies that must carry a high level of stock and sell that stock a relatively low margins to pass. The risk here of having a large amount of stock on hand that spoils or must otherwise be heavily discounted below cost is very real in companies that sell commodities. This doesn't necessarily that one should avoid PGW as an investment though. It means that you should probably use a more conservative evaluation method. The method I prefer in these circumstances is an (at least) five year average of dividend flows, with the underlying assumption of a steady rather than a growing market. I will have a look at that next.
SNOOPY
PGW, what's it worth?: 54c!
Quote:
Originally Posted by
Snoopy
The method I prefer in these circumstances is an (at least) five year average of dividend flows, with the underlying assumption of a steady rather than a growing market. I will have a look at that next.
A slight change in tack to my valuation method. PGW has now largely finished restructuring. They also have a policy of paying 100% of earnings out as dividends. So I shall assume all earnings over the last five years would have been paid out as dividends and make my PGW valuation from that.
eps figures, adjusted for the removal of the finance division over the last five years were as follows:
FY2011 : $5.9m/ 754.8m = 0.8c
FY2012 : $25.2m/ 754.8m = 3.3c
FY2013 : $24.3m/ 754.8m = 3.2c
FY2014 : $33.8m/ 754.8m = 4.5c
FY2015 : $34.8m/ 754.8m = 4.6c
I calculate that as an average earnings rate of 16.4c/5 = 3.3c
For a cyclical like this I would require a 'gross return' of some 8.5%. Given a 28% tax rate (72% reatined earnings rate), my valuation over the business cycle of PGW is that it should average:
3.3 / (0.085 x 0.72) = 54c
Increase that required gross return to 9%, and the valuation drops to
3.3 / (0.09 x 0.72) = 51c
SNOOPY
How much debt is too much?
Voracious shareholders are milking PGW of all the dividends they can. Yet PGW is not debt free. Could the long term future of PGW be at risk because of the high dividend draw down? This is a question that needs looking into:
|
2015 |
2014 |
Debt Short Term |
$57.195m |
$35.573m |
Deriv Liabilities Short Term |
$3.266m |
$0.887m |
Debt Long Term |
$66.000m |
$65.000m |
Deriv Liabilities Long Term |
$1.980m |
$0.005m |
Long Term Provisions |
$5.597m |
$6.609m |
Defined Benefit Liability |
$14.655m |
$13.528m |
Change in Receivables/Payables Adjustment (*) |
-$5.745m |
$1.304m |
Total |
$143.758m |
$120.298m |
(*) The Change in Receivables/Payables Adjustment takes into account that you can hide debt by:
1/ not paying your bills OR
2/ by collecting money that is owed to you faster than is normal, when you may not be able to do that in the future.
Alternatively if you do the opposite of 1/ and 2/ (as is the case in both years here) , then the debt is actually smaller than it appears. This is why the adjustment is negative for FY2015 and FY2014.
Taking the above debts and dividing them by normalised profits will give us a theoretical 'minimum debt repayment time - minDRT' (assuming all profits from the current year are directed to paying down debt). This assumption is not management policy. But it nevertheless gives us a measure of the indebtedness of PGW relative to underlying earnings.
min DRT(2015) = $143.758m / $34.8m = 4.1 years
Compare that with last years figure
minDRT(2014) = $120.298m / $33.8m = 3.6 years
Despite the slight deterioration, I rate this as OK. A debt repayment time of under two years I regard as low. Up to five years I would regard as a 'medium sized debt'. Once the minimum debt repayment time gets above ten years, this is a very definite warning flag for me.
SNOOPY