Wise move my friend. If you'd ever seen a beagle's face when presented with a half sized meal you'd never forget it :)
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Agree with this and thanks for posting. It's hard to see how the dividend can be sustained for too much longer and without that dividend I don't see a reason for holding. I'm another ex-shareholder who has enjoyed the dividends but is now looking for somewhere else to invest.
Major Review Announced
The principal announcement from the AGM was made by Deputy Chair of PGW, Trevor Burt (who also happens to chair the South Island Maori business powerhouse Ngai Tahu Holdings Corporation). The PGW board has appointed ‘Credit Suisse’ to conduct a wide ranging strategic review of the business. This review will neatly dovetail with the appointment of new CEO Ian Glasson who starts work today (1st November 2017). Credit Suisse will not review the performance of the existing business units. The board are very happy with the senior management team already in place. No, the purpose of this review is to look at the capital structure of the group, to see if it is appropriate to maximise the opportunities of the group going forwards. In many companies this would be code for an upcoming ‘cash issue’. But in the case of PGW, I think this is doubtful. Parent Agria has its own capital restrictions. And I don’t think Agria and PGW Chairman Alan Lai will tolerate his Agria parent holding in PGW dipping below 50.1%. My guess is we will see another capital injection by Ngai Tahu into the intermediate holding company ‘Agria Asia’ - where Trevor Burt’s Ngai Tahu are already shareholders. And a mechanism to allow this money to trickle down to PGW itself will be found. Either that, or shareholders will see the partial sell down of existing growth business units to strategic growth partners. But I am getting ahead of myself, and maybe fantasising a bit too much!
Trevor identified the ‘full digitisation of the customer offering’ to rural service customers as an opportunity for new capital spend – more on this later. Trevor further identified the underutilised IP in the seed business, which he believes could be leveraged globally rather than just regionally. During question time, we learned that the seed division spends 12% of its revenue on R&D, amounting to $15m annually across Australasia and South America. Today’s product idea from this R&D pipeline might take 10 to 15 years to emerge. But because the R&D pipeline is well established, there are new opportunities emerging from the R&D pipeline every year right now!
The Outlook for FY2018
FY2018 forecast: Operating EBITDA is predicted to be similar to FY2017 at $64-$65m. But operating NPAT will be 30% below FY2017, which equates to $32.4m. Yet $32.4m still represents an ‘eps’ of 4.3cps (That should allow the current annual dividend rate of 3.75cps ‘fully imputed’ to be retained.) The reasoning behind this lower profit forecast is that, during the first quarter, NZ has been wetter and colder than normal. Summer is ‘late’ this year. This in turn means more stock feed has been sold than expected. But offsetting that, less pasture seed and agricultural chemicals were sold. In addition, PGW expects a slower and lower grain crop harvest, resulting in less downstream drying and handling and ultimately less product for the seed division. Last year 25-30% of the maize crop was lost. Poor growth and wet weather conditions meant it wasn’t able to be harvested. FY2017 was the worst grain harvest year within PGW institutional memory. While PGW management now expects this ‘growing year’ to be ‘below average’, it shouldn’t be as bad as FY2017.
In Australia, the confidence of dairy farmers is very low, due to the local dairy co-operative Murray Goulburn being unable to pay a competitive farm gate price for milk to farmers. This has been brought about by MG overpaying farmers during the previous season. Last week MG was sold to a Canadian company ‘Saputo’. PGW hopes this will result in more confidence from Australian dairy farmers going forwards.
As of the end of Q1 FY2018, PGW is $2m behind in EBITDA compared with Q1 FY2017.
Further business unit market share gains on what has been achieved to date are going to be more difficult to come by. Furthermore most of the assets that were worth selling - to redeploy the released working capital - have been sold.. So future growth will largely come from working the existing capital base harder. This begs the question, what will be the growth drivers going forwards?
The vision going forwards for ‘Retail and Water’ can be summed up under the buzz acronym ‘Project RoBuSt’. This stands for the ‘Retail Business Transformation Project’. ‘RoBuSt’ involves an overhaul of all point of sale (POS) systems and greater use of mobile devices ‘on the spot’ in the sales process. This will continue the deeper, faster acquisition of sales data and open the possibilities of more cross selling across the PGW business units. The Water sub-unit of ‘Retail & Water’ will look to recover by ‘breaking even’, or even making a small profit, in FY2018.
‘Go Beef’ and ‘Go Lamb’ are a recent innovation in the Livestock subsection of the Agency Sector. Livestock is trading at all time record levels, helped by this innovation ‘Go Beef’ and ‘Go Lamb’ apply PGW company borrowings to ‘rent’ animals out to farmers who:
a/ are creditworthy AND
b/ have the on farm skills needed to efficiently grow the weight of a weaner.
PGW clips the ticket at both animal sale and purchase time, while collecting ‘rent’ by way of interest from the 100 or so days over which the animals are being fattened. I see ‘Go Lamb’ and ‘Go Beef’ as a ‘finance’ operation, but PGW sees those initiatives as just part of selling livestock. We will have to differ on this point. But we shareholders did learn more on the fate of ‘PGW Finance’, the formerly fully owned finance division now owned by ‘Heartland Bank’ during question time.
EBITDA from Heartland commissions were described by outgoing CEO Mark Dewdney as ‘almost negligible’. When pressed, he qualified this to mean about $200k per year. Now I am going to start making a few figures up...
1/ If this $200k represents an up front commission of one percentage point on the loan granted AND
2/ the average rate the farmer is paying is 8%, THEN
3/ Our combined farmer/borrowers total interest rate bill on new business for the year will be $1.6m. The capital value of new loans issued by PGW Finance during the year will therefore have been:
$1.6m/0.08 = $20m
4/ Traditionally PGW Finance had been 25% seasonal finance (3-6 months) and 75% longer term finance. It is likely that the longer term financing will still be, on average, over a shorter time period loan than a traditional bank loan. So I am going to assume an average duration of all PGW Finance loans to be 2.5 years (based on 3 years being half a business cycle, the time a farmer might need before conditions recover). This implies a total PGW Finance loan book size of:
$20m x 2.5 = $50m
By way of comparison, the PGW in house ‘Go Lamb’ and ‘Go Beef’ loan book (just don’t call it a loan book when you speak to PGW management!) sits between $30m-$33m. This is getting up to the loan level that ‘PGW Finance’ has (probably) shrunk to.
Readers, please feel free to challenge my assumptions above. But the balance of the loan book when PGW Finance was sold to Heartland was documented at $490m. So it looks like the hoped for synergistic relationship between the old ‘PGW Finance’ and PGW itself has broken down. Mark Dewdney noted that the process of waiting to get the result of the Heartland credit checks back to the PGW rural shop front was frustratingly slow. Hence the reason Heartland commissions had ‘slowed to a trickle’.
Other paths to profit growth
There are typically 5,000 tonnes of grower owned crossbred wool in the PGW wool stores nationwide. All wool in the stores is grower owned. At present that volume has ballooned to 25,000 tonnes. PGW will ‘clip the ticket’ when the wool is eventually sold. And that will be when the wool price heads above $3 per kilogram. That revenue is coming for PGW, while the cost of capital tied up in the meantime is largely borne by the farmer.
Moving to another business unit, Horticulture remains a highlight with market share and margins higher than the animal based rural side of the PGW business.
The high tech ‘Agri Optics’, recently a 51% owned subsidiary, has received a further capital injection from CB Norwood Distributors Limited, seller of sprayers and tractors. The current Agri Optics shareholding is now split ‘one third each’ between ‘McKemzie family’/ PGW/ CB Norwood. We now have three useful partners to advance the prospects of ‘smart cropping’ in for the future.
Board Composition
A shareholder, noting the high tech path charted for the future, questioned the lack of obvious ‘tech’ expertise on the board. Trevor Burt responded that Ronald Seah is currently Chair of ‘Nucleus Connect Pte Ltd.’ a fibre broadband company in Singapore, and has worked on the ‘computer front end’ of the managed fund investment industry. A further observation was made that there was little ‘hands on’ farm management experience on the board. Trevor Burt suggested that both he, after being on the board at Silver Fern Farms and Landpower Holdings and fellow director John Nichol, who has been on the board of Fortex Group, The New Zealand Salmon Company Limited, Alpine Dairy Products Limited, Craigpine Timber Limited and the New Zealand Dairy Board had vast experience in governing primary sector businesses. Furthermore, experience in ‘agricultural governance’ was more important experience than hands on ‘operational farm experience’ when becoming a PGW director. Another shareholder asked if there was a retirement age for directors. Trevor Burt replied that this would be illegal in NZ and that age does not necessarily wither directorial performance. A supplementary question on ‘company profit’ and the link to ‘performance pay’ yielded the information directors do not have a performance pay component. But sales people have a 20-30% boost to their income available from outperforming their sales targets.
I managed a brief word with Alan Lai after the meeting, and thought of you if you are still out there Agrainvestor. I didn’t ask the question directly but gave Alan plenty of chance to speak about the future of Agria. Without breaking any confidences, I think it is fair to say that what Alan has experienced with Agria’s US delisting is still pretty raw. And there is still no solution on the horizon for Agria shareholders who want out to cash out their Agria positions.
The meeting ended with a cup of tea/coffee and a good spread of Club sandwiches (including egg and asparagus, ‘yum’) , sausage rolls, and mini pie savouries. To cap the spread were freshly baked date scones to which shareholders could add NZ farmer bred butter or cream and NZ horticulturalist originated raspberry jam.
SNOOPY
Good work Snoopy.
New CEO is ex C.B.Norwood.
Life is still "difficult" for any agricultural based business/supplier.
The HBL/PGW tie up has not delivered the results either party expected.
The trust I help out with sold out yesterday.
Thanks Percy. Life is always difficult for Agriculturally based businesses. Sorry to lose you from the supporters team, even if you were a coach rather than a direct player.
Could you do me a favour? Ask how 'PGW Finance' is going at the Tuesday 21 November 2017 Heartland AGM! I would be fascinated at the view from 'the other side'.
Notwithstanding the superannuation fund top up issue, and after hearing the AGM presentation, I do expect a steady dividend fully imputed dividend of 3.75c from PGW for FY2018. Even with the 'profit downgrade' (can you have a downgrade if you haven't drawn a line in the sand previously?) eps is still 4.3c, so the dividend looks covered to me.
SNOOPY
[QUOTE=Snoopy;690941]Thanks Percy. Life is always difficult for Agriculturally based businesses. Sorry to lose you from the supporters team, even if you were a coach rather than a direct player.
Could you do me a favour? Ask how 'PGW Finance' is going at the Tuesday 21 November 2017 Heartland AGM! I would be fascinated at the view from 'the other side'.
I have spoken to PGW and HBL,[at separate presentations both gave to Hobson Wealth clients.].
Neither will say much,other than they "are happy with the tie up,but it has not produced the result they expected".
I very much doubt either will say more publicly.
I expect the problem is HBL is focussed online,while PGW are physically close to their clients.
I do worry about PGW's business model.
On a Sunday down around Barrington Mall I usually see a couple of PGW 4 wheel drive vehicles on the road.
On my travels around the country side I always spot PGW vehicles.Must own hundreds of vehicles,which are not cheap to run,even on a Sunday.?
Premises.How many buildings do they need to operate out of.Amberly,Hawarden , Culverden,and Cheviot.Each would need stock,staff and tea ladies,and need power and have to pay rent,rates and insurance.This is repeated everywhere.Blenheim Road,Waterloo Road.Massive buildings in and around Ashburton.
Now farmers are savvy.If I was setting up the business I would have one massive distribution centre in ChCh to supply the South Island,and one in the North Island at Hamiltom.Do most of the business online. Would doubt PGW could compete.Farmers would love the prices I would be able to charge.
Thanks for a good summary Snoopy
Adding my thanks too. Appreciate the time you have taken to give a full synopsis of the event.
Good one snoops
No mention of the pension fund?
Many pensioners (Wrightson ones) turn up for the snack