Bargin hunters stepping in today, one of the stars of the bourse.
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Bargin hunters stepping in today, one of the stars of the bourse.
PGW is certainly reaping the benefits of supplying the farming sector although the sector is not as profitable as some would think.
Farmer friend tells me that his input costs (fertiliser, diesel, wages, parts, freight, etc) have gone through the roof. On top of that, the government has been imposing all sort of regulations and costs as well and they have had issues with the supply chain as well - input & output.
So net net, his farm is only marginally more profitable than before. Still, better than going backwards.
So much for the low ball takeover offer I predicted in 2020! But in a surprise announcement to the market today, the Chinese government have reduced their holding over the period 26th February 2021 to 26th July 2022, from 12.928% of shares held down to 11.924% of shares held as of today.
http://nzx-prod-s7fsd7f98s.s3-websit...867/375259.pdf
$5.924m / 1.317m = $4.50 (average price at which shares were sold)
Old Conclusion
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Judging by the average share sale price (wrong number $5.21), it looks like most share sales were when the price peaked in January/February 2022. Not sure what to make of this, except to say "smart trading by BCA New Continent Agri Holding".
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The $4.50 average sell down price changes things. In February 2021 the share price hit a local peak of around $3.50. It did not surpass that price level again until August 2021. So if the average share price of shares sold was $4.50, the bulk of those sales must have occurred after August 2021. There was a large volume spike of sales at $4.50 in what looks like late October. So if that $4.50 average sales price is accurate, most of those share sales must have occurred between August 2021 and April 2022. If that is true, then the volume sales picture shows that there was not an excessive dump of shares on any one day. Those shares look to have dribbled onto the market in a spread out and planned way. Make no mistake the Chinese government has made money on these sold shares. But not as much as I had hinted at in my previous erroneous conclusion.
As is well known I am not a trader so don't usually follow the movement in price of sold shares like this. But if my observations are accurate, what does this mean?
SNOOPY
A couple of corrections for you:
The number of shares are 9M8 (12.928%) down to 9M0 (11.924%)
and
They sold 1.317M shares for $5M924 or approx $4.50 average.
Disc: a major part of the portfolio.
Here is a nice picture of a Snow Leopard to distract you from the fact that I have no idea at all:
Attachment 14012
Top 10 facts about Snow Leopards
Predictions for FY divvy? 18c or 20c..
Yep, more people keen to sell than people wanting to buy. I think it is that simple in this case.
Chairman says 'exceptional results' so they must be
But what the heck is '▪ Achieved CPI normalised EBIT growth of 29%' when according to the accounts EBIT increased by 7.5%
Maybe they might explain when/if they put up a presentation
An overload of superlatives in this full year announcement - had to stop reading it
EPS up 7% to 32.2 cents
http://nzx-prod-s7fsd7f98s.s3-websit...000/376581.pdf
Pretty amazing announcement. Sounds like pretty everything worked out well. Unusual to happen in an agricultural environment, but nearly unheard of that these things happen several times in a row :):
Just wondering, whether this is what peak performance looks like ... and what happens when they leave this peak?
BTW: Mainfreight would have called the results "satisfactory" at best, but for PGW this is "exceptional". Sort of telling, isn't it? It is an exception. What a message to shareholders ...
Hmm .... after getting all these warm fuzzies from the announcement, reality in the financials appears nearly like a cold shower:
ROE 14% ... I guess better than the recent years, but exceptional?
Debts (liabilities) at an all time high (66.2%) to total assets. Not that flash, is it?
Yes, revenue grew not too bad (+12%), but earnings did grow on a significantly lesser rate (+6.3%). Is this really exceptional as the chair says?
These naughty cost of sales, if anything, then they deserve the attribute "exceptional" (+12.74%), is this what the chair meant?
Somewhat disappointing ...
Happy with the results, can understand why there's no increase in divvy under current economic environment. Happy to keep collecting dividends along the way.
In these volatile times with everyone second guessing trends everywhere, steady as she goes is fine with me too...
Did your hear about the masochist who liked nothing better than a cold shower every morning?
He had a hot shower every morning. :)
The secret with any accounts, especially these days is to read and understand and adjust for those little details that add a few million here and remove a different few million there.
And of course everybody has their own filter through which they intepret things.
But these are, especially given the circumstances, a good set of results from where I am sitting.
So I will keep holding them.
Holding up very nicely here...
I asked them what this meant and credit to them I got a detailed explanation.
They adjust EBIT for non operating gains/losses and impairment/fair value gains/losses - that shows EBIT increasing from $28.7m in F21 to $391m in F22 - an increase of 36.1% and then they deduct CPI of 7.3% to get the 29%
Adjusting profits for CPI quite meaningful .....if other companies did it it might embarrass some
Hey Snoops - the Pension/Superannuation schemes seem to be in fairly healthy state these days. Contributions not as burdensome as a few years ago
Really cool the oldies and in some cases their spouses still get a monthly payment - even though some may have retired years ago - and some probably worked for parts of the businesses PGW have hocked off. Wonder if there's a few old dudes from Wrightson Bloodstock still alive and kicking and getting the pension
My Annual Report hasn't arrived yet Winner. My 'postie with the pack horse' is probably waiting for the river to go down. It is one report it 'doesn't seem right' to look up electronically. Last time I looked it was the 'discount rate' going up that saved the pension scheme balance. So with the rise in interest rates over the financial year, I imagine the pension scheme is looking sweet.
I imagine some of those thoroughbred horses bred through 'Wrightson Bloodstock', although long retired, may be still living out their post racing years on the farm too. The price of good horse feed over winter is not cheap. So that pension comes in handy for those cherished four legged scheme members as well.
We have to factor in all of those PGW Seeds staff who were let go to the Danes too. I mean, it is fun, but you can't really live on Lego. There are aging guys and gals, not at all seedy, who will no doubt be retiring with a significant nest egg that must be managed. On top of that you have the genetically hybridised trees that have bought that seeds division so much wealth over the years. They deserve a decent retirement too. Some of those retired genotype Rimus re-engineered for shelter belt breaks could live for hundreds of years. Go down to your local PGW and get a quote for 500 years worth of supplementary compost. You may be surprised by how fast those native tree feed bills add up.
So it is just as well that if what you say about PGW finally getting their pension scheme sorted is true. Cheers for the next few hundred years!
SNOOPY
https://www.nzx.com/announcements/400697
Trading Update - operating EBITDA forecast to be around $62m ($67.2m last FY)
PGW proudly touted a 'Inflation Adjusted Profit' number in full results
So this year ebita down about 16% in inflation adjusted terms ....ouch
Details of the transactions or other events requiring disclosure: On 14 December 2022, Elders agreed to
acquire 8,526,245 ordinary shares in PGW from BCA New Continent Agri Hldg. Limited by way of an off
market trade for consideration of NZ$4.35 per share (being aggregate consideration of
NZ$37,089,165.75) with settlement to occur on 16 December 2022.
"BCA New Continent Agri Hldg. Limited" is the Chinese government. The last declaration from these guys was on 25th July 2022, when their holding reduced from 9,758,714 shares (12.928%) to 9,000,915 shares (11.924%). The sale of 8,528,245 shares to Elders announced today means there are
9,000,915 - 8,528,245 = 472,670,
or just 0.626% of the shares in the company still in Chinese government hands. Or are they? I guess the imminent SSH declaration from "BCA New Continent Agri Hldg. Limited" will answer that question.
SNOOPY
SHAREHOLDER NUMBER OF SHARES HELD % OF SHARES HELD as at 1st August 2022
1. Agria (Singapore) Pte Limited 33,463,399 44.33
2. BCA New Continent Agri Hldg. Limited (BCA) 8,993,305 11.91
3. HSBC Nominees (New Zealand) Limited 1,489,589 1.97
4. FNZ Custodians Limited 973,536 1.29
5. New Zealand Depository Nominee Limited 936,608 1.24
6. Forsyth Barr Custodians Limited 689,547 0.91
7. Accident Compensation Corporation 579,446 0.77
8. Custodial Services Limited 508,379 0.67
9. Nicolaas Johannes Kaptein 500,962 0.66
10. Citibank Nominees (New Zealand) Limited 493,956 0.65
11. JBWERE (NZ) Nominees Limited 470,443 0.62
12. Elizabeth Beatty Benjamin & Michael Murray Benjamin
(Michael Benjamin Family a/c)
300,000 0.40
13. H&G Limited 295,000 0.39
14. Totara Grove Investments Limited 280,000 0.37
15. Ian David McIlraith 230,000 0.30
16. David Mitchell Odlin 214,400 0.28
17. Leveraged Equities Finance Limited 204,217 0.27
18. Robert Vincent Cottrell & Lesley Maureen Cottrell 202,898 0.27
19. GMH 38 Investments Limited 200,000 0.26
20. Colin Hugh Notley & Jan Marie Notley 175,000 0.23
Ah thanks for that Percy. I hadn't realised that the time dated BCA shareholding disclosure in the Annual Report for FY2022 was ahead of the last disclosure to the NZX on 25th July 2022. This means that the number of PGW shares that BCA retains that are available for sale reduces to:
8,993,305 - 8,528,245 = 465,060, or 0.616%
It is quite likely they have already been sold, but the imminent substantial shareholding notice from BCA will confirm that.
The buyer, Elders of Australia, has been linked to takeover rumours swirling around PGW back in 2018.
https://www.afr.com/street-talk/elde...0180509-h0ztt9
Subsequent to this the seed business part of PGW was sold. So Elders coming onto the share registry now makes more sense, because they were never interested in the seed part of the PGW business anyway. In relative terms, PGW would now be a smaller mouthful to swallow for Elders. They may not need a partner with which to structure such a deal.
Nevertheless a takeover of PGW would not be possible, without the agreement of defacto controlling shareholder Alan Lai, or Mr. Lai Guanglin, as he is more commonly known in Asia, and his now delisted company Agria holdings . So what has Mr Lai been up to of late?
It turns out that being the controlling shareholder of Hong Kong listed 'China Pipe Group Limited', he has just renewed a $US10m loan from that company.
https://www1.hkexnews.hk/listedco/li...2042201592.pdf,
until 31st July 2025. This, plus the capital return on disposal of the seed business, should have strengthened the Lai/Agria finances to the point where he is under no pressure to sell that Agria PGW stake. But the 5.5% interest rate he has agreed to pay is above 'bank rates' in Hong Kong. Security for the loan is 20% of the shares in Agria Asia Investments Limited (AAIL) (p5 of above reference).
"AAIL is indirectly holding a share equity investment in an agricultural enterprise in New Zealand (which is PGW) through Agria (Singapore) Pte. Ltd. (“Agria Singapore”), the only and wholly-owned direct subsidiary of AAIL."
"According to (i) the latest consolidated management account of Agria Singapore for the nine months period ended 31 March 2022 and (ii) the latest unaudited consolidated financial statement of AAIL for the nine months period ended 31 March 2022 provided by AAIL:-
(a) the net assets value of Agria Singapore as at 31 March 2022 is NZD66.1 million (equivalent to approximately US$45.6 million);
(b) the net assets value of AAIL as at 31 March 2022 is approximately US$172.5 million."
The PGW share price closed at $4.43 on 31-03-2022. With Agria Singapore declaring a shareholding of 33,463,399 shares, this shareholding was worth:
$NZ4.43 x 33,463,399 = $NZ148,242,857.
Yet we are told the net asset value of Agria Singapore, which I believe holds PGW shares as their only substantial asset, is only $66.1m. If my maths is right, this indicates a substantial quantum of borrowed funds on the Agria Singapore balance sheet: $148.2m - $66.1m = $82.1m.
Of course over the last twelve months, PGW has paid a substantial dividend to Agria Singapore:
33,463,399x($0.14+$0.16) = $10.0m
That would be cashflow neutral or better to Agria Singapore, provided borrowing interest rates were less than: $10.0m/$82.1m = 12.2%. Since interest rates for borrowing by Mr. Lai Guanglin are well under that figure, it looks like dividends from PGW would have to halve before Mr. Lai Guanglin would come anywhere near any financial strain. Thus I see no need for Mr. Lai Guanglin to come under any pressure to accept a 'cheeky' offer for the PGW shares from Elders that he indirectly owns via Agria Singapore.
SNOOPY
There was a follow up to the announcement yesterday, at the Elders AGM today. From the Chairman's address:
"The business development pipeline for the coming year, is encouraging with numerous successful businesses expected to join Elders in the next 12 months and furthering our growth."
"As announced yesterday, to further our geographic diversification, we have also taken an 11.3% interest in PGG Wrightson Limited, the New Zealand based rural services business, which was acquired by private sale. Elders does not intend to initiate a proposal to acquire control of PGW, however it does support our diversification strategy as part of our pureplay agribusiness."
So 'no bid' is to be brought to the table for other PGW shareholders.
SNOOPY
'Question answered' by the 16th December NZX announcement today. The 472,670 shares 'not acquired' by Elders were disposed of between 25 July 2022 and 24 August 2022 by selling on market at an average share price of:
NZ$2,090,424.15 / 472,670, = $4.42
So 'BCA New Continent Agri Hldg. Limited' have departed the share register completely. It is interesting to see that Elders paid a little less per share to acquire the remaining Chinese government shares ($4.35).
It was once said that western style investment managers like to shunt their shareholdings around on waves of greed and fear. Whereas the Chinese know how to recognise a good company, buy in, and stay as owners forever. So now we know how long 'forever' is. "BCA New Continent Agri Hldg. Limited" (actually their predecessor company) first appeared on the PGW share register as a 'substantial shareholder' on 17th April 2020. They exited the company on 16th December 2022. So "forever" = "two years and eight months".
SNOOPY
The above post was from nine years ago, but you are still a horse man Winner? I noticed in the very fine print on AR2020 p39 that he PGG Wrightson standardbred division had been closed. The end of 100 years of history. No mention of this in the main text of the Annual Report. Not even an announcement to the NZX!
Now the 'Standardbred Division', part of Livestock, had the monopoly on selling harness horses in New Zealand. In fact, if you go to the half year report for the 2017 financial year, on page 7, there is a glowing write up on the business.
"While the organisation’s roots have been intertwined with the horse industry for over 100 years (back to the early days of the Canterbury Horse Bazaar and later through the Trentham Thoroughbred Sales) it wasn’t until 1987 that a Standardbred Division was established."
"The Standardbred Division specialises in the trading of harness horses. The team has a dedicated staff of five, collectively with over 125 years’ experience at PGW between them. They have provided a solid and consistent service delivery for 30 years and as a result they are well respected in the industry. Prior to 1987 there were seven organisations selling Standardbred horses throughout New Zealand, but since 1991 PGW have been the sole auctioneer to the industry."
Wow! That 'm' word I mentioned before. Monopoly means no competition. What a money spinner it must have been!
“The team experiences an unusual combination of excitement and angst on the three big days of the year. We need to get it right, or it impacts significantly on the annual performance of the division and so far we have. In the last 30 years, the team have catalogued and sold over 20,000 Standardbred horses."
"When our division started the pedigrees in the catalogue were handwritten, but over the last 30 years our team has developed an electronic database of Standardbred race records and pedigrees. This database is unequalled in the country, so we consider it one of our most valued assets.”
Two years down the track and this 'valuable asset' of race records and pedigrees became worthless!
I thought it must have been a Covid related thing. But the last sales under the PGG Wrightson yearly sales banner was on February 2018
https://www.aldebaranpark.com/pages/...ch-new-zealand
And it looks like they only had one horse to sell - Aldabaran Tess! Looks like it was left to Mark 'the dude' Dewdney to shut the stable door after all his horses had bolted. Anyone have any idea what happened?
Those earthquakes we have been having in the North Island for the last few weeks Winner: Your old grandad, turning in his grave?
SNOOPY
Just in case anyone was wondering why I have become fascinated with, what is in the grand scheme of things, a small albeit (formerly) successful part of the Livestock business unit that no longer exists.....
PGW has changed a lot over the last five years, the most telling change being the selling off of the Seed business. Looking back over those years, I want to make an 'apples with apples' progress report. And that means, from a present day perspective, taking out historical cashflow streams that no longer exist under PGG Wrightson management today. This is why the 'secret' shutdown of horse trading back in FY2020 caught my attention.
Looking at the Consolidated Statement of Profit and Loss produces a slightly different picture to what I first thought (note that the 'discontinued operations' for the year in question relate entirely to Standardbred, even if you have to dive deep into other pages of the annual report to find this out):
Results from discontinued operations, net of income tax ($0.371m) plus gain on sale from discontinued operations, net of income tax $1.078m equals Profit/(Loss) from discontinued operations, net of income tax $0.707m
So it does appear that in its last year of operation (admittedly encompassing the Covid-19 lock-downs) 'Standardbred' was losing money. It could be that the sale price of $1.078m for discontinued divisions was largely made up of money for that much trumpeted 'electronic database' as well as a gavel and an auctioneers stand. So maybe we shareholders did not lose out as badly as I thought.
The segmented result presentation, which separated out the 'Standardbred' division (AR2020 p41), was a bit strange: $0.707m of 'after tax net profit' on zero revenue. But then we learn on AR2020 p75 that:
"the comparatives have been restated to present the Standardbred business as a discontinued operation."
Does this mean the sales revenue for Standardbred as already been removed from the overall revenue presentation? I certainly hope so. Because I don't like my alternative explanation below.
It could be we had these five guys who only work for three days per year (that means 362 days off on this full time job every year, where do I sign up?) only had one horse to sell. And the horse didn't sell - hence no revenue was raised.
That means the operational loss for the year of $371,000 represented these five guys wages: $371,000/5 = $74,200 each after tax on average. Close enough to $100k each before tax I reckon. Those guys were on a good wicket, too good as it turned out. And that is why 'The Dewd' bolted the stable door on 'Standardbred'.
SNOOPY
I made the above post in August 2020. My 'confident prediction' of 'no interim dividend' for FY2021 did not come to pass . It was 12.0cps. So a 'fail' for me on the predictive front, even though my bank account ended up taking an 'unexpected turn for the better' as a result of my 'failure'. So have I learned anything from this failed forecasting event?
The answer is yes. Whereas MDRT is a straightforward risk tool to use for trading companies, I feel it might be overstating the credit risk for financing companies. What is that you say? PGW is a rural services trading company is it not? Did they not sell off their finance arm to Heartland group a number of years ago? Well, yes they did, until they brought the finance business back by stealth under the new 'GoLivestock' (GoBeef and GoLamb) banner. Moving forward to FY2022, this new finance business is going from strength to strength with $66.109m of 'GoLivestock' loans on the books at the 30-06-2022 balance date.
$66.109m is an overstatement of the loan book on an annual basis. Livestock loans are seasonal. To get a representative loan balance over the year it is best to take an average of the three loan balance date points across FY2022 that we have: 30-06-2021 ($45.869m) , 31-12-2021 ($35.805m) and 30-06-2022 ($66.109m):
Averaged GoLivestock loan balance over FY2022: ($45.869m+$35.905m+$66.109m)/3 = $49.294m
We should note -in passing- that the interest earned on these 'GoLivestock' loans over FY2022 was $4.254m. Based on that averaged loan balance, this represents a gross return to PGW shareholders of:
$4.254m/$49.294m = 8.6%
That is a very nice little income stream for we shareholders. BUT -and here is my very important learning point- it is not the income on that loan that is taking the risk out of these loan transactions. It is the value of the livestock, that PGW still own, that is the security on this debt. This means that when we consider the debt risk we share holders face, we need to change the MDRT calculation from this:
MDRT = (Total Bank Debt) / (Declared NPAT)
to this
MDRT = (Total Bank Debt - Seasonally Adjusted 'GoLivestock' Debt) / (Declared NPAT - GoLivestock NPAT)
Effectively I am removing both the 'GoLivestock debt' and 'GoLivestock' income from the MDRT equation. Because the security of the 'GoLivestock' debt does not depend on the income earned from the livestock asset. The security of the debt is the livestock asset.
SNOOPY
Have a look at the 'Consolidated Statement of Financial Position' (AR2022 p50). There is a current asset there of 'Go livestock receivables'. $65.504m. This is not some bill that PGW needs to send their debt collectors around to hassle farmers over repaying. This book entry represents live animals 'down on the farm' that at some point will be rounded up and on-sold. The farmers that are looking after these animals are merely the guardians of these beasts that we shareholders own:
"the group retains legal title to the livestock until its sale" (from AR2022 p62)
These receivables are not loans taken out on cars that are depreciating by the day. They are not loans on holidays where the experience has been had and we are relying on the loan holder to keep sweating at their day job to repay it. These 'GoLivestock Receivables' are instead appreciating assets, carefully tended animals, entrusted to the care of farmers vetted by PGW itself. These are farmers that PGW know and have had successful business relationships with for several years.
There are some industry specific risks to consider. As an animal gains weight it generally becomes more valuable. But in a drought, where the animal sustaining capability of the land is reduced, there may be a sudden need to reduce the number of animals on farm. All of a sudden the freezing works are overwhelmed with stock and the price offered to the farmer 'per head' plummets (notwithstanding the animal weight). Add to that the 'storm risk' and the 'disease risk', which may account for some mortality among the stock being raised. But in general, even if a farmer is forced off their land (worst case), the farm itself still exists, bought by a new less leveraged farmer owner. So animals keep being bred, and keep needing to be fattened up. The 'fattening up' bit is what the 'GoLivestock' part of the PGW business supports. And the time frame for this aspect of farming is normally a few months, not years.
Debt Position PGW EOFY2022 Cash On Hand ($4.676m) add Short Term Bank Loans $7.500m add Long Term Bank Loans $30.000m add Net Defined Benefit Liability (Pension Plan deficit) $2.126m add Employee Entitlements $24.643m Total Bank and Worriesome Liabiliities $59.413m less Animal assets (annualised average) ($49.294m) Total Net Debt $10.119m
One tweak I might need to make on the above table is to put a 'fudge discount factor' on the value of PGW's animal assets. The above table is treating animals as 'cash in the bank' which might be a little optimistic. Then again that animal value is the value of the animal as bought at auction - not when it has been fed up six months down the track. So maybe I don't need any fudge factoring? I would welcome others comments on whether my overall picture of PGW debt is now more realistic. For me, accounting for the PGW animal assets in this way, puts the overall PGW debt picture in a new light. $10.119m of net debt sounds a lot better than $59.413m!
SNOOPY
The next task is to work out what the profit margin is on these GoLivestock loans. To work that out, we need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over FY2022 were $1.832m (AR2022 p55). Once again we will use our three time stamp data points to average the funds borrowed across the year.
Reference Date 30/06/2021 31/12/2021 30/06/2022 Cash & Cash Equivalents ($3.367m) ($1.113m) ($4.676m) Short Term Debt $9.900m $18.000m $7.500m Long Term Debt $0m $30.00m $30.000m Total Net Debt $6.533m $46.867m $32.824m
=> Average Debt over Year = ($6.533m+$46.687m+$32.824m) / 3 = $28.681m
So the interest rate charged by the banks on the funds loaned was: $1.832m / $28.681m = 6.4%. We know from part 1 of this analysis that the return on funds loaned by PGW was 8.6%. The difference between the borrowed and lent loan rates, multiplied by the average GoLivestock loan balance is the NPBT earned by PGW from these GoLivestock loans:
(0.086-0.064)x $28.861m = $0.635m.
Of course it is likely that PGW earns a commission on the buying and selling of this animal stock via its own sale-yards as well. But such a commission would have been earned whether the animal stock was financed by PGW or not. It is the financing risk we are interested in here. It is only the $0.635m that is directly connected to that.
The $0.635m of profit earned on the funding aspect of the GoLivestock loans is taxable. The associated after tax profit figure was: 0.72 x $0.635m = $0.457m.
Now the declared profit for FY2022 was $24.286m. I would subtract from that the after tax effect of the impairment reversals on saleyards and the impairment reversal on the right of use assets related to the water business (AR2022 p54).
$24.286m - 0.72($0.414m+$0.695m) = $23.488m
We now have enough information to do our two alternative MDRT calculations
MDRT (old way) = (Total Worrisome Debt) / (Declared NPAT) = $59.413m/$23.488m = 2.53 years
MDRT (new way) = (Total Worrisome Debt - Seasonally Adjusted 'GoLivestock' Debt) / (Declared NPAT - GoLivestock NPAT)
= ($59.413m - $49.294m) / ($23.488m - $0.457m) = 0.44 years
------------------------------
My rule of thumb for the MDRT answer in years is:
years < 2: Company has low debt
2< years <5: Company has medium debt
5< years <10: Company has high debt
years >10: Company debt is cause for concern
That means my revised modelling has seen PGW drop from what I had classed as a 'medium debt' company back to a 'low debt' company. And because PGW works in a turbulent sector like agriculture, this is good to see.
SNOOPY
Snoops …thanks for the memories re horse trading.
And there must still be few of those people still collecting their monthly pension payment courtesy of current shareholders
I have made my Christmas season brain exercise puzzle, the task of taking IFRS16 out of the NPAT results at PGW. FY2019 was easy (see above). Unfortunately subsequent years are more opaque. The main problem is that unlike other companies I have looked at, lease expenses (the old rent) are not separately detailed in the cashflow statement. So we have to infer what these might be from other annual report entries.
Nevertheless the cashflow statement is useful in calculating post IFRS16 'rent'.
New Rent (added to finance expense) Old Rent (removed from operating expense) Lease Amortisation & Impairment Post IFRS16 {A} (2) Financing Costs wrt Lease Payments Post IFRS16 {B} (2) {A}+{B} IFRS16 adjustment to Operating Expenses FY2019 N/A N/A N/A $21.904m (1) FY2020 $17.586m $4.185m $21.771m $21.744m FY2021 $18.299m $4.036m $22.335m $21.722m FY2022 $18.873m $3.786m $22.659m $?m
Notes
1/ Figure for FY2019 is prior to IFRS16 being adopted and is explicitly stated to be 'Rental and operating lease costs' (AR2019 Note 3 'Other Operating Expenses'). Had IFRS16 been adopted for that year, I believe that same figure would have been declared as the 'IFRS16 adjustment to Operating Expenses'. (Note: Under IFRS16 operating expenses reduce, because the old 'rent' is re-stated in a slightly different form as a finance expense.)
2/ Figures from columns (A) and (B) are from the cashflow statements of the respective years.
3/ The 'Segment Report' 'Operating Segment Information' (right at the bottom of the FY2020 and FY2021 annual report's operating segment table) contains the IFRS16 EBITDA adjustment. That same number is labelled as 'other operating expenses', when presented under the "Impact of NZ IFRS16 Leases" explanatory note (AR2020 p37). If you then go to 'Note 3' where all the 'Other Operating Expenses' are optimised you will see a big drop in the 'Rental and operating lease costs' of approximately this amount ($21.744m) year to year. This is a strong hint that the $21.744m IFRS 16 adjustment to EBITDA for FY2020 is what accountants used to call 'rent'.
( Background IFRS16 replaced a single operating expense (rent) with two charges:
a/ The 'depreciation of a right of use asset'.
b/ An associated 'interest on lease liabilities' charge.
Over the length of each particular rent contract, this IFRS16 change is a net zero adjustment. However, on any particular year the 'preIFRS16' and post 'IFRS16' 'rent' are typically not the same number. )
The other net effect of IFRS16, reducing traditional operating expenses and creating new depreciation and interest charges, is that EBITDA increases (under IFRS16): The result reclassifying a traditional operating expense (rent) by financial instruments. (I believe it is reasonable to regard the EBITDA IFRS16 adjustment to 'other operating expenses' (AR2020 p37) as the old 'rent').
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Inexplicably, PGW did not report and post a prior IFRS16 adjustment over FY2022. The way I see it, that means it is no longer possible to calculate what the PGW profit would have been prior to IFRS16 being introduced. And why does that matter? Because when considering banking covenants, the banks always remove the effect of IFRS16. And I think we shareholders should be allowed to evaluate our company the same way a bank does.
I would love it if I have misinterpreted the figures, regarding IFRS16, that PGW has produced (or not) for FY2022. Sadly, though, I feel I am correct :(
SNOOPY
New Rent Old Rent Post IFRS16 'rent' {A} Pre IFRS16 rent {B} NPBT adjustment to remove IFRS16 {A}-{B} NPAT adjustment (assume 28% tax, use adjustment factor x0.72) FY2019 N/A $21.904m N/A $0.0m FY2020 $21.771m $21.744m ($0.027m) ($0.019m) FY2021 $22.335m $21.722m ($0.613m) ($0.441m) FY2022 $22.659m $ ?m $ ?m $ ?m
Notes
1/ Rent has increased under IFRS16 reporting
=> NPBT has decreased under IFRS16 reporting
=> To restore NPBT back to where it was under the old accounting rules, you must 'add back' the difference in rent
SNOOPY
Huge changes since the last time I looked at PGG Wrightson, The world class global seeds business has been sold to DLF Seeds A/S of Denmark. PGG Wrightson has retreated to a purely New Zealand based rural servicing organization. How does the 'new' PGW go when subjected to Buffett's four investment selection tests?
1/ Top Three player in chosen market?
PGG Wrightson Limited (PGW) was formed in 2005, a result of a merger between two established agricultural supply service leaders: Wrightson Limited and Pyne Gould Guiness. However, the DNA of the operation goes back much further than this. Wright Stevenson & Company was established in Dunedin in 1868. Even they are a new boy on the block though, as Gould Beaumont & Co. had been founded in Christchurch as early as 1851.
The sale of the seed business was a catalyst for a deeply self reflective review on what makes PGW a 'go to' supplier of choice. A key differentiating factor identified was the level of technical expertise that the PGW sales force possesses. PGW creates a 'synergistic circle' whereby sharing this technical expertise is a key to creating new sales opportunities.
The recognised business units are below:
1/ Merchandising (rural themed products) with 87 stores branded 'PGGW Rural Supplies' and 18 branded 'Fruitfed Supplies' (total Turnover $900m, after subtracting $50m for Water division turnover). Traditional competitors are 'Farm Source', the rebranded RD1 (Fonterra owned) with 68 stores (Turnover $23.423b-$22,955m= $498m) and Farmlands (like Fonterra, a co-operative) with 82 stores (Turnover $2,000m+). There are others, but on a smaller scale to 'the big three'.
2/ Livestock Trading: PGW has NZs largest group of livestock representatives with more than 180 representatives across the country, operating more than 50 sale-yard sites across New Zealand. The core market is sheep and beef cattle. But 'PGW Livestock' will also sell dairy cows and deer velvet. Saleyard business is conducted by farmers on site concurrently with PGW's in house on-line sales platform bidr®. Others in the NZ livestock trading game include "NZ Farmers Livestock" with more than 100 staff over 15 sale-yard sites, complete with their own web based trading tool: 'MyLiveStock'. Listed 'Allied Farmers' currently owns 67% of "NZ Farmers Livestock."
3/ Finance & Insurance: Commission agents for 'BrokerWeb Risk Services', a broker with access to multiple insurance companies.. PGW finance their own in house livestock transactions via their GO-beef, GO-lamb, GO-deer and GO-dairy-cow initiatives. PGW are nominally commission agents for Heartland Bank, under the 'PGW Finance' brand (owned by Heartland). However, with Heartland stating they want to reduce low margin rural relationship lending, and PGW itself making no mention of this arrangement in recent years, it could be that 'PGW Finance' is effectively being wound up.
4/ Real Estate: Specialising in rural and small town properties. Together with 'Bayley's Country' (82 listed on line, excluding development sites), a specialized sub-brand founded in 1999, PGW (439 properties listed on line) one of the largest two players in what is a fragmented market. "Property Brokers' is another provincially focussed real estate brand that currently has 177 rural properties for sale across New Zealand.
5/ Water: PGW through their 'Water Force' brand, have looked to diversify their business so as not to be dependent on dairy price cycles. 'Water Force', through the AIS (Advanced Irrigation Systems) sub brand, offer turf irrigation, for landscaping and sports use, to sit alongside the more traditional 'rural irrigation' and the bread and butter ongoing servicing work that tends to be higher margin. There is a wholesale side of the business too, supplying water and irrigation products. Turnover in FY2018 of $41m is substantial but well down on the FY2015 peak. No separate disclosure of turnover or profitability has been published since FY2018. What we do know is that the business has been restructured to lower its cost base, and Covid-19 supply chain issues are continuing. PGW stands out as a major national player in a fragmented irrigation market. (source: Kord Mentha Independent Appraisal Report section 3.4.2)
6/ Wool: PGW , manages a substantial portion of the strong wool supply chain in New Zealand, from on farm procurement, freight and logistics via four large warehouses, through to sales (be they via auction, private sales, export (the Bloch & Behrens brand) and domestic). Higher value finer wool is marketed through the formerly associated NZ Merino Company. PGW sold their half stake to the growers co-operative back in June 2011. But pricing for cross bred wool in an already depressed market - slowed further by Covid-19 - continues to be challenging. From AR2021 p23: "We anticipate an increasing shift from synthetics to natural fibres, which will ultimately result in stronger returns for our growers." I certainly hope so. But is hope a viable investment strategy?
Conclusion: Ticks the 'major player' (top three) criterion across all markets in which they operate. 'Pass Test'
SNOOPY
Thanks Snoopy.
Happy holder here and glad indeed that a takeover at $3.50 did not happen when PGW sp was $2.75!!!!
I have always liked the company but I do feel the next results won't thrill, the last one's didn't. My reasoning is the RE division will be down and quite possibly the retail side as well with farmers under huge cost pressure. I would expect the company to have expenses rising as well.
I would rather be in than out but I am expecting a bit of a down cycle which was showing on the last results.
I can't help but agree with you Mike2020. The rural real estate business is a bit feast or famine. The one saving grace is that rural land is valued by the income that can be earned from it. So as long as commodity prices hold up, the price of the land producing those commodities should hold up too.
Labour cost pressure is an issue for all companies in a inflationary environment, But as of two years ago, PGW had a policy of paying all employees the 'living wage'. I guess the living wage has gone up since that time. But it should mean the wage cost pressures are not as intense, in the short term at least, as those companies with many workers on the minimum wage.
I concur with your comments that FY2023 may be a the start of a 'down cycle'. But the thing I like about PGW is their exposure to a wide range of farming commodities: Dairy, beef, lamb, fruit - including the prized kiwifruit-, and other field crops like wheat and forage. In my experience it is very rare for all commodities to sink to a low price point at the same time. So PGW sales have a built in cross commodity 'averaging effect' across different commodity cycles. I never try to predict what the individual commodity cycles are. Instead I 'react' to expected low commodity prices, and use such situations as an opportunity to add to my PGW shares cheaply. I have been on the Wrightson (as it was then) share register since 1995 in a small way. However around 2014 was when I got serious about it. My average buy in price is $1.78, plus useful divvies in most years along the way. So I guess you could say my strategy is working ;)!
SNOOPY
There is only one 'crossover year' (FY2018) in the above referenced post with this one. However results for FY2018 in this post have been restated to include only those from the NZ based farm service business. The seed business, now sold, has been removed from the profit figures in this post.
Profit Normalisation table FY2022 FY2021 FY2020 FY2019 FY2018 Reference Declared Profit $24.286m $22.720m $7.133m $4.510m $9.004m less (add) Fair Value Gains (Losses) net of Impairments 0.72x$2.182m 0.72x($1.832m) 0.72x$0.807m 0.72x$3.187m 0.72x$1.086m AR Note 5 less (add) Foreign Exchange Gains (Losses) 0.72x($0.430m) 0.72x$0.094m 0.72x($0.178m) 0.72x($0.812m) 0.72x$1.035m AR Note 6 less (add) Standardbred Business Profit (closed business unit) ($0.707m) Post 5341 less (add) IFRS16 adjustment 0.72x($0.613m) 0.72x($0.613m) 0.72x($0.027m) Post 5347 less (add) Non operating gains (losses) 0.72x($0.699m) 0.72x($4.456m) 0.72x($0.132m) 0.72x$2.170m 0.72x$7.024m AR Note 4 equals Normalised Profit $24.603m $17.819m $7.471m $7.782m $14.881m
Notes
1/ I don't believe there is sufficient disclosure in AR2022 to allow us to calculate an IFRS16 profit adjustment for FY2022. In the absence of this, I have rolled forward the IFRS16 adjustment for FY2021 into FY2022, assuming it to be the same.
2/ Earnings per share calculations (below) have been adjusted to take into account the 9th August 2019 10:1 share consolidation, reducing the number of shares on issue to 75.484 million.
Earnings Per Share Calculations
FY2018: $14.881m / 75.484m = 19.7c
FY2019: $7.782m / 75.484m = 10.3c
FY2020: $7.471m / 75.484m = 9.9c
FY2021: $17.819m / 75.484m = 23.6c
FY2022: $24.603m / 75.484m = 32.6c
The extraordinary drop in profits between FY2018 and FY2019 had me diving back to my FY2019 annual report to see what went wrong.
From AR2019 p5.
"Reflecting on FY2019, we believe it was one of the most operationally challenging of recent years. Farmer confidence in parts of the agriculture sector remains subdued, constraining farm spending and therefore our revenue for the year. This has also been evident in recent months with a discernible tightening of the credit environment"
From AR2019 p6:
"The impact of mycoplasma bovis (present in NZ since mid-2017) was felt across the livestock and rural supplies business. Most particularly with reduced dairy herd settlements, a reduction in tallies, a softening in demand for dairy beef and and a more cautious approach to spending in the dairy sector across a range of farm inputs."
"Market conditions continued to challenge both our Real Estate and Wool businesses with results down on last year."
That all seems like a reasonable 'excuse'. But I guess it reflects the view that when the dairy industry catches a cold, it is hard for the rest of the farmers in NZ in other sectors to make up the lost income. Two down years in a row is enough to sink this test result.
Conclusion: Fail Test
SNOOPY
ROE here is defined as: (Adjusted or Normalised NPAT) / (End of Year Shareholder Equity)
FY2018: $14.881m / ($123.7m + ($292m-$234m)) = 8.19%
FY2019: $7.782m / ($398.264m-$234.000m) = 4.74%
FY2020: $7.471m / $156.702m = 4.77%
FY2021: $17.819m / $173.538m = 10.3%
FY2022: $24.603m / $172.684m = 14.2%
Notes
1/ A retrospective balance sheet for FY2018, assuming the Seed Business was already sold at the 30-06-2018 balance date, was prepared in the Korda Mentha October 2018 report (p36, p49). This provided a view of what a stand alone balance sheet for the PGW rural servicing business would look like. This was based on a projected capital return, following the purchase of the seed business by DLF Seeds A/S of Denmark, estimated at $292m. In fact the capital return would end up being only $234m. The difference between these two capital return numbers - equalling capital not paid out - I have added to shareholders equity as at 30-06-2018 for the purpose of calculating return on the total equity for FY2018.
2/ The $234m capital return eventually took place in FY2020, on 09/08/2019, following the settlement of the 'seed deal' on 01/05/2019. These two dates straddle the PGW end of year reporting date of 30-06-2019. A capital return was well signalled. So I believe it would be most representative to remove the capital return from the shareholder equity held on the books at the 30-06-2018 balance date for the purposes of making a 'Return on Equity' calculation.
An interesting observation to note is how far the return on equity figure has fallen in 2018, as the transition to the 'new PGW' was made in divesting the seeds business. The seeds business was where most of the intellectual property of PGW was held. And successfully exploiting intellectual property will generally yield a higher commercial return on assets than selling commodities. Given this, it is no surprise that the ROE over 2018 has dropped with the removal of the seed division. But it is quite sobering to see ROE almost cut in half!
None of the above makes a difference to the 'Buffett ROE picture', as ROE is consistently below the 15% goal for all years under consideration. But given the sharp improvement in the fortunes of the PGW rural servicing business over the last couple of years, I do wonder how high the ROE would have risen if the seeds business had not been sold.
Conclusion: Fail Test
SNOOPY
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 closed down Standardbred division has been removed from the appropriate year (FY2018).
Margin here is defined as: (Adjusted NPAT)/(Sales)
FY2018: $14.881m / ($808.695m - $10.421m) = 1.86%
FY2019: $7.782m / $798.834m = 0.974%
FY2020: $7.471m / $788.036m = 0.948%
FY2021: $17.819m / $847.815m = 2.10%
FY2022: $24.603m / $953.700m = 2.58%
Notes
1/ AR2020 p35 states "The 2019 comparatives have been restated to represent the 'Standardbred' business as a discontinued operation. Now we know that in AR2019 overall revenue was listed as $809.965m. The restated comparative figure for FY2019 was $798.834m. So I am making the assumption that the comparative difference:
$809.965m - $798.834m = $10.431m
represents the turnover of the now closed 'Standardbed' operation over FY2019. The turnover for 'Standardbred' over FY2018 has not been revealed. But as a best guess I am assuming it was the same as over FY2019.
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Three years of improving margins from FY2020 to FY2022 inclusive shows that sustained margin improvement is possible.
Conclusion: Pass Test
SNOOPY
The table below reflects the dividends actually paid during the years in question.
Year Dividends Paid 'per share' Sub Total PGW Rural Servicing Normalised Earnings 'per share' FY2018 20.0cps + 17.5cps 37.5cps 19.7cps FY2019 12.5cps + 7.5cps 20.0cps 10.3cps FY2020 7.5cps + 9.0cps 16.5cps 9.9cps FY2021 0.0cps + 12.0cps 12.0cps 23.6cps FY2022 16.0cps + 14.0cps 30.0cps 32.6cps Total FY2018 to FY2022 inclusive 116.0cps 96.1cps
Notes
1/ For FY2018 and FY2019 I have adjusted the 'dividends per share' and 'earnings per share' to be consistent with the subsequent 10:1 share consolidation,
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Discussion: What is a sustainable business cycle dividend range from 'the new PGW'?
The farming years from FY2018 to FY2022 certainly cover a business cycle. But that time period also spans perhaps the most significant restructuring ever of PGW itself. What insight into future farming cycles might we take from this historical earnings and dividend record? Because PGW is such a mature business, the past can reflect on the future. I think it is best to examine what has happened 'year by year'.
FY2018 (Ending 30th June 2018)
The acquisition of PGG Wrightson's seed division by DLF seeds of Denmark was announced on 5th August 2018. However, it is safe to assume that preliminary negotiations were going on for months before that. Nevertheless the dividends paid over FY2018 would have been from the old PGW 'combined business'. For this pre-split PGW business over FY2018 (see post 5352, referred post), I would consider 'eps' to be:
$33.054m / 75.483m = 43.8cps
Earnings of 43.8cps would see the actual dividend paid over FY2018 of 37.5cps well covered. But such earnings will not be coming PGWs way in the near future. So it would not be reasonable to expect the level of dividend paid over FY2018 to be indicative of any future dividend payments.
FY2019
Re-reading the Chairman's and CEOs commentary for FY2019 (AR2019 p5), much is made of the $138.1m NPAT (even though only 5.6% of that - $7.782m, or 10.3cps - was from continuing normal operations). There must have been considerable reserve in the imputation credit account to allow for the annual dividend paid over FY2019 to be nearly twice the continued operating earnings figure! How was this even possible? It may have just been prudent management using up any imputation credits previously accumulated by the seeds division and set to expire when its controlling shareholder changed. Furthermore, it may have been that some of the funds that were on the books for FY2020's 'capital repayment', (the capital repayment that eventually ended up being less than forecast), were instead directed towards a higher dividend over FY2019 than any reasonable shareholder might expect (A $7.32m cumulative higher dividend based on continuing operational profitability). My conclusion, given that actual dividends paid were nearly four times remaining operating earnings, is: "As a 'forward indicator', the actual dividends paid over FY2019 should be ignored."
FY2020
It is disappointing to see a small pull back on net profit margin over FY2019. But this could be explained by the higher holding costs associated with getting more stock in earlier to try and get around Covid-19 induced supply chain issues. This means I am not convinced a new downtrend in net profit margin has started.
This year saw a big improvement in operational cashflow. Included in that is a $15m (or 19.8cps) turnaround in the trade creditor balance (AR2020 p63). Perhaps this is what gave the company the confidence to pay yet another dividend well in excess (+67.7%) ahead underlying earnings? I am not sure where the imputation credits to cover the hyper dividends of FY2020 came from. The Agria friendly board has been very assiduous in extracting as much cashflow as they can from PGW over the years: fully imputed dividends matching profits. So it seems very unlikely that, since Agria became a controlling shareholder, a stash of unused imputation credits at PGW has been building up over an extended time frame - particularly so given the previous years apparent 'clear out of imputation credits'. How to explain it then? Perhaps there was some clever part of the seed division sale deal where new imputation credits were generated on the sale of seed stock to DLF seeds of Denmark's NZ Branch? That explanation sounds contrived. But when more likely explanations are eliminated, then the less plausible explanations are what remain. I am happy to be proved wrong, if someone can come up with a better explanation of where all of those excess imputation credits to fill out the hyper FY2020 dividends came from! Nevertheless, my conclusion is that FY2020 was also a financial outlier in terms of indicating where future dividends might go.
FY2021
In this 'new era of PGW' (i.e. after shedding the seeds division), there were only two years, FY2021 and FY2022, where earnings exceeded dividends. FY2021 ended in June 2021. So the first half of FY2021 covered the second half of CY2020. CY2020 was the year New Zealand went into 'Covid panic'. The pandemic arrived in New Zealand in early 2020, with Major Alert Level 4 restrictions imposed on 30th March. By that point PGW had already committed to their April 9th 2020 dividend, paid for by payments from farmer customers and already in PGW's bank. However, as 2020 progressed, logistical concerns of getting NZ farm product to international markets became a real concern. PGW became 'conservative' (rightly so IMO) and did not pay their customary October (2020) dividend. Dividend payments were back on stream by April 2021, as it became clear that even in a Covid-19 affected world, international buyers were prepared to 'pay the freight' for quality NZ farm produce. This explains why FY2021 was an 'outlier' in terms of the extra low 'dividend payment ratio'.
FY2022
The dividends paid during FY2022 represent the recent high water mark in operational earnings, and are certainly sustainable if profits hold up. The cyclical nature of farming though, would suggest that the FY2022 'good times' may not last forever. Nevertheless as a portent of future 'good times', I believe the FY2022 level of dividend is indicative.
Conclusion
Only the FY2022 dividend payments qualify as future dividend indicators. In the past, in exercises like this, I have used all of the previous five year dividend payments as 'future dividend indicators'. That was using the assumption that management generally know more than we shareholders, and could 'look through' any unusual single year events to provide a smoothed multi-year dividend stream. However, if you read through some of the individual dividend report years above, there are events that have happened that cannot be 'looked through'. In this special instance I propose to use historical earnings, rather than historical dividends, to forecast future dividend payments as part of a 'capitalised dividend valuation' model.
SNOOPY
The above quoted post is based on the FY2019 dividend viewpoint. As per the previous post (5355), I have now reverted to past earnings to give us the best forecast of a 'capitalised dividend valuation' from here going forwards.
The five year earnings per share average for FY2018 to FY2022 inclusive is: (19.7c+10.3c+9.9c+23.6c+32.6c) / 5 = 19.2c
The capitalised dividend required rate of return I have selected is 8.5%. I believe that this is appropriate for a retailer with a relatively weak moat that services a set of customers at the mercy of the weather gods. This means my 'fair value' centre of business cycle valuation is now:
19.2c / (0.72 x 0.085) = $3.14
At $3.14, PGW would be on a normalised historical PE of 314/32.6 = 9.5. That sounds about right for a no growth high yielding share. However PGW closed on the market today at $4.49. That implies of PE of: 449/32.6 = 13.8. Yes I know the share price has traded a whole dollar higher than this within the last twelve months. But $4.49 does seem a lot of money to pay for an agricultural share riding into the high of a business cycle wave.
My 'rule of thumb' is to both add and subtract 20% from the centre of business cycle valuation, to get an idea of where the share price should sit as the business cycle fluctuates.
Upper Cycle Value: $3.14 x 1.2 = $3.77
Lower Cycle Value: $3.14 x 0.8 = $2.51
I notice one area of agriculture where PGW do not have much of a presence is forestry and logging. But if one shareholder were to start chopping at that $4.49 share price and another shareholder cried 'timber', could that be the start of it?
SNOOPY
discl: Still holding, and thinking about what to do.
Interesting speculation from me 2.5 years ago, questioning the reasons for Chinese Government interest in PGW. Elders have quite recently bought the Chinese government stake and are now on the PGW share register at $4.35 (although $4 was judged too high a price for Elders to pay back in 2018). The Chinese government are now out of PGW for quick profit of more than $1.50 per share in just 2.5 years. So which side was a winner on this deal? Reprising the international comparative valuation exercise drawn up by KordMentha in October 2018 - using 2022 values - might give us a clue.
I have redone the figures for PGW and its nearest Australian equivalents, Elders (Australia) and Ruralco (Australia). In the case of 'Ruralco', the comparison is not so straightforward because it was taken over by Canadian multinational Nutrien on 30th September 2019. Nutrien is the world's largest provider of crop inputs and services, and own their own production facilities. Nutrien produce 27 million tonnes of potash, nitrogen and phosphate products for distribution world-wide. But Nutrien's multi-nationally scattered ''rural serving distribution outlets" (the equivalent of the PGW business) made up only 16% of turnover in 2021. So Nutrien is not strictly comparable to PGG Wrightson, Elders, or indeed Ruralco before it was absorbed. More sales emphasis on undifferentiated commodities would suggest lesser earnings multiples at Nutrien might be expected. Readers should bear this in mind when looking at the comparative ratio multiple numbers.
To enable a more suitable comparison between 2018 and 2022, I have adjusted the 2022 EBITDA and EBIT figures for all three protagonists back to what they would have been had IFRS16 on property leases not been introduced.
Comparable Companies
Year Company Share Price Enterprise Value EBITDA EBITDA multiple EBIT EBIT multiple 2018 Ruralco (Australia) $A2.82 $A425m $A67.5m 6.3x $A54.5m 7.8x 2022 Nutrien (Canada) $C100.66 $C64.02b $C11.63b 5.2x $C10.75b 6.0x 2018 Elders (Australia) $A6.34 $A780m $A75.7m 10.3x $A71.6m 10.9x 2022 Elders (Australia) $A9.91 $A1,712m $A268m 6.4x $A229m 7.5x 2018 PGG Wrightson (NZ) $NZ2.60 $NZ212.7m $NZ34.5m 6.2x $NZ19.5m 10.9x 2022 PGG Wrightson (NZ) $NZ4.49 $NZ371.7m $NZ44.49m 8.4x $NZ33.86m 11.0x
Notes
1/ Enterprise Value = Market Value + Total Debt - Cash. The market value must be taken at a particular date. For the 2018 valuations, this date was 23rd August 2018. For the 2022 valuations the date was 13th January 2023. 'Total Debt' and 'Cash' are items from the respective balance sheets.
a/ For Elders this was 30th September,
b/ For PGG Wrightson this was 30th June
c/ For Nutrien I have used information from the third quarter report, 9 months ending 30th September. This includes a forecast EBITDA for the whole year of between $C12.2m - $C13.2m (I picked the middle $C12.7m before IFRS16 adjustments).
d/ For RuralCo (now delisted) this was 30th September.
2/ Earnings (EBITDA, EBIT) and payments (Interest on leases and capital repayments on leases) accumulated over a year used to construct the above table are from the respective annual reports. The exception being Nutrien where I have used the nine month figures and annualised those by taking the previous full year result and subtracting from that the previous year's nine month result and adding that difference.
3/ EBITDA multiple = Enterprise Value / EBITDA
4/ EBIT multiple = Enterprise Value / EBIT
5/ Figures for PGW for 2018 have been altered to remove the (subsequently sold) seed division from the capital and earnings figures.
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Discussion
With the exception of the Elders EBITDA multiple in 2018, PGW sits at the top of the multiple class. What happened at Elders over FY2018? 2017 was a drier than average year for much of inland Queensland, most of New South Wales, eastern and central Victoria, and all of Tasmania. So with gross underlying earnings looking to go lower, there can be a situation where present day market multiples become high as shareholders anticipate a recovery. This may explain the 10.3xEBITDA multiple that the market was prepared to pay for Elders shares in August 2018, approaching the 30-09-2018 balance date. By contrast, Ruralco (on only a 6.2x EBITDA multiple), and also Australia based, claimed in their annual report for 2018 that with diversification into Western Australia and more emphasis on 'water products', they were able to grow profits (+12%) in a drought year. When you are 'on a roll' in an ultimately cyclical market, it follows that Mr Market will not pay a high multiple for your shares.
There are a couple of reasons that I can think of to explain why Mr Market seems OK with paying a high multiple for PGW shares, both connected to the valuation reference dates. The first reference date of 20-08-2018 was only a couple of weeks after the announcement of the sale of the seed division on 06-09-2018. So the expectation of a significant capital payout would be at the front of share buyers minds. Likewise the second reference date of 13-01-2023 was only a month after Elders took over the Chinese Government stake on 14-12-2022. Such a chunky share transfer always brings with it rumour of perhaps more corporate activity, and speculative shareholder interest. Personally, I am not anticipating more corporate activity (see my posts 5336 and 5337 for an explanation). More generally PGW have been riding the farming 'headline trend' since Covid-19. Other global farmers struggle to replicate in efficiency, quality and 'greenness' of technique, of the produce from NZ farms. And PGW has become very good at servicing our farmers.
In summary, there are lots of reasons to like PGW, particularly when stacked up against other rural service providers. But is it 50% better than the others, as suggested by the FY2022 EBITDA multiples? NZ investors today who can take full advantage of the NZ dividend imputation system:
PGW historical gross yield = ($0.16+$0.14) / ($4.49 x 0.72) = 9.3%
would have no obvious reason to sell out of share with a gross yield like that. But is this kind of gross yield sustainable? Read my post 5355 again, looking at the commentary on dividend payments back beyond two years. I have a lot of respect for the way PGW as a company is run. But successful investing is all about buying into a good company at a good value price. When taking a broader multi-year view, I think PGW could be a value trap at $4.49. I think it is the Chinese government who came out looking smart on the sell side of this share sale deal to Elders.
SNOOPY
Multi-year trend results show a creditable rise in return on shareholder equity (test 3). This is particularly so over FY2022, when international logistics issues required higher than normal product stocking rates to ensure supply. Nevertheless the improvements fall short (albeit tantalizingly close) to the minimum Warren Buffett return on equity target. This means, in practice, that when farmers suddenly snap their cheque books shut, PGW will likely struggle to clear any 'surplus stock' at a profit. Hence the predictability of profit, so crucial for longer term Buffett style profitability forecasting, goes out the window. Normalised earnings per share was trendless, resulting in failure at Buffett test 2. None of this undermines the other business strengths which saw solid pass marks in Buffett tests 1 and 4. But it does mean alternative 'non-Buffett' ways to value this business will likely yield better results.
Capitalised dividend valuation is conservative (a zero growth assumption model) that makes the current share price look satisfactory, based on current dividend payout rates. Less so when you back track out the 'seed division sale hype' from earlier dividend payments made in the business cycle.
The PGW business is currently rated at the top of valuation metrics in relation to international peers, which is justified because NZ farmers never have down cycles - farm profitability always goes up every year. La Nina weather from here on in means more moisture in eastern NZ and no more drought. NZ has come out of climate change as the only global perpetual winner - a miracle country in fact. And my nose hasn't grown that much longer in telling you this. For those who 'believe this story', then at any price under $4.50 per share, PGW looks cheap. But for me PGW is a well managed company that Mr Market is currently pricing too highly.
Yes we are well down on our highs of over $5.50 from early in calendar year 2022. But I believe those were freak prices, based on an almost zero background interest rate outlook. The Chinese government 'smart money' has exited at a share price lower than today's. The new PGW chairman Joo Hai Lee has already lowered EBITDA expectations from $67.2m in FY2022 to $62m over FY2023, - a 10% fall. That 18th October 2022 announcement saw the PGW share price slip to under the $4 level, before rising again towards $4.50 - apparently based on 'corporate activity' expectations. For those of us who don't hold those corporate activity expectations, there is a good chance that PGW priced at $4.50 is currently a dividend trap. Consequently any share price strength that might happen into the expected late February first half year profit announcement might be an opportune time for overweight shareholders in PGW to reduce their holdings. I intend to do so, should that opportunity arise.
SNOOPY
One thing I am not sure I made clear when discussing 'GoLivestock' before is that on the balance sheet 'GoLivestock' is listed as an asset. That is because PGW retains ownership of the animals in the 'GoLivestock' scheme. So those 'GoLivestock' assets on the balance sheet really are live animals. However, this is where things get a little complicated. These animals are 'loaned' to farmers all around the country in the expectation that they can be fattened up, sold and the initial capital (dollar value of the animals delivered to the farmer) will be recovered, plus a 'financial loan fee'. You can think of the 'financial loan fee' as 'interest paid' on the (animal) capital borrowed.
Now go one step further back. Where did PGW get the money to buy the animals in the first place? I would argue that they borrowed it. Or at least borrowed some of it. Why do I say that?
One thing I have noticed is that the average GoLivestock balance over the year is greater than the average funds borrowed by PGW over the year ($49.294m>$28.681m). So one way of looking at this is to say that all of the funds borrowed by PGW from the banks are on lent as livestock loans to farmers (but from a PGW viewpoint their 'livestock placements' are seen as assets to the company, so appear as assets on the PGW company balance sheet).
PGW have a right to charge a 'competitive interest rate' (which includes a margin on the money PGW themselves borrow form the bank) to their animal guardians (the farmers). Since the company loan balance is less than the value of animals on the balance sheet 'loaned out', one way of looking at this situation is to consider that all bank money borrowed by PGW is on loan to farmer animal guardians. Thus my analysis tells me that PGW is immune from market interest rate rises, because any costs of higher interest rates are passed directly through to those farmer 'animal guardians'.
Am I right here, or is this another example one of my late night thinking screw ups?
SNOOPY
All the Superannuation Fund financing issues goneburger, done and dusted - Snoopy ? ;)
Errrrrr, I was hoping no-one would bring that up. After being 'solved' it would seem the pension scheme deficit is back! So what are PGW doing to solve it?
Cashflow Lump Sum Contribution to Plan {A} Contributions paid into Plan {B} {A}-{B} ({A}-{B})/{A} FY2017 $7.551m $5.920m $1.631m 21.6% FY2018 $2.842m $3.011m -$0.169m -5.9% FY2019 $10.274m $8.455m $1.819m 17.7% FY2020 $0.0m $0.692m -$0.692m NM FY2021 $0.563m $0.960m -$0.397m -70.5% FY2022 $0.0m $0.567m -$0.567m NM Total $21.230m $19.605m
We have an interesting situation in FY2020 and FY2022 where PGW contributed to the pension scheme without dolling out any cash. That is a very strange thing. One explanation could be that the managed pension scheme(s) into which PGW invests pay a dividend and that dividend is simply reinvested back into the said fund(s). Thus while no cash comes out of PGW coffers, they have forgone cash coming in by reinvesting that 'fund dividend' back into the fund that created it.
The above explanation shows how more money can be put into a pension scheme than by merely moving cash. It does not explain how in FY2017 and FY2019 a significant percentage of the funds contributed disappeared. There may be a clue in the cashflow statement where for FY2019 it says 'ESCT included'. ESCT stands for 'Employer Superannuation Contribution Tax'.
The ESCT rate paid per employee is set in advance of the tax year and does not change over that year. The rate of ESCT payable for each employee determines each employee's 'ESCT rate threshold'. This is calculated is by combining their annual salary or wages and the employers gross annual KiwiSaver employer contributions and is designed to mirror the tax rates paid under the PAYE income tax system. Taking FY2019 as an example, the 17.7% of contributed funds 'lost' is close to the 17.5% ESCT rate that applies to employees earning between $16.8k and $57.6k per year back in 2019
https://www.accounted4.co.nz/blog/po...-at-1st-April/
That sounds low until you remember that many of the people in that PGW superannuation scheme are already retired, and so may not be earning high incomes. People in that situation would drag the 'average' ESCT rate down. Thus this seems to be the most likely answer to my original question posed in the quoted text in bold. The 'missing' money disappeared as tax.
If this is the explanation, why was the percentage of tax taken off higher in FY2017? That is the opposite of what you might expect if wages increase with time. It could just be that the the average 'wage' decreases in retirement, and more people took retirement between 2017 and 2019, than took wage increases, thus causing the average 'wage' as seen by the pension scheme to fall. (We have to keep in mind that the pension scheme has been closed to new members for many years, so it will have an increasingly 'greying' profile.)
With the disappearing pension money over FY2017 and FY2018 finally 'explained', a new question arises in the 'in between' year FY2018. How did the pension scheme end up getting **more** money added to it by the company than was shown in the cashflow statement? There is a puzzle for the punters at home to ponder, and no I don't know the answer!
Back to nztx's question. The total defined benefit liability was $2.126m at the last balances date (30-06-2022) (See AR2022 p69). This is a marked deterioration over the EOFY2021 position where the figure was a surplus of $311k. I don't understand why more money ($960k) was being poured into a scheme over FY2022, when that scheme was in surplus at EOFY2021. Nevertheless it is just as well this did happen, because they scheme suffered a $2.437m 'value blowout' over the year. Without PGW's $0.537m contribution, the shortfall would have been close to $3m!
Interest rates have risen during the year and the value of share investments has generally fallen. Those two effects should be having opposite effects on the 'blowout deficit', and which effect is stronger is unknown. But who would bet against PGW continuing to bail out their pension fund, even if that bail out does tend to be more hidden in the accounts (using the trick of not taking income due, rather than stumping up cash) these days.
SNOOPY
In the table below, I am effectively looking at the pension schemes as a 'black box' and observing the cashflow that comes in and out. The information in this table can be found in the respective annual reports under the header "Defined Benefit Asset/Liability" (e.g. Note 18 in AR2022).
PGW Pension Plan(s) External Cashflows
Financial Year Pension Plan Deficit EOFY PGW Contribution {A} Tax Adjustment (1) Members Contribution {B} Total Contribution {A}+{B} Benefit Paid {C} Net Cash Movement {A}+{B}-{C} 2012 -$26.264m $2.727m $1.363m $4.090m ($3.819m) $0.271m 2013 -$20.819m $1.402m $1.364m $2.766m ($6.412m) ($3.646m) 2014 -$13.528m $1.427m $1.337m $2.764m ($4.709m) ($1.945m) 2015 -$14.665m $1.301m $1.300m $2.601m ($5.304m) ($2.703m) 2016 -$20.715m $1.204m $1.254m $2.458m ($3.482m) ($1.024m) 2017 -$12.271m $5.920m -$2.389m $1.199m $7.119m ($6.010m) $1.109m 2018 -$7.722m $3.011m -$0.961m $1.170m $4.181m ($8.914m) ($4.773m) 2019 -$5.883m $8.455m $0.703m $1.268m $9.723m ($14.044m) ($4.321m) 2020 -$9.838m $0.692m $1,104m $0.832m $1.524m ($5.301m) ($3.777m) 2021 +$0.311m $0.960m -$2.694m $0.782m $1.742m ($3.907m) ($2.165m) 2022 -$2.126m $0.567m $0.706m $0.816m $1.383m ($3.265m) ($1.882m) Bold Total $19.605m -$3.551m
Notes
1/ The 'tax adjustment' referred to here may be found in the 'Consolidated Statement of Comprehensive Income' of the respective annual reports from FY2017. More fully, the tax figure is the 'tax on re-measurement of the defined benefit plan' relating to the PGW superannuation scheme. Prior to FY2017 this tax adjustment was amalgamated within the income tax calculation in the "Statement of Profit or Loss'. A negative number indicates a tax payment due to be made, whereas a positive number indicates a tax refund.
--------------------------------------
Question/ Why have I highlighted the contributions of PGW to the pension plan over the last 6 years only?
Answer/ In AR2017 report p64, PGW states:
"Previous expensing of the return on plan assets for the 2014 through to the 2016 year (Snoopy note: if this 'expense' ends up being negative then profits increase) have now been recognised through other comprehensive income."
So for the years 2016 and older, the money that PGW have pushed into supporting the pension plan had been taken out of the headline profits. As an example of what has happened in the past, and how the accounting treatment has now changed, 'Basic Earnings Per Share (Continuing Operations)' was listed as 5.3cps (AR2016 p35 'Statement of Profit & Loss'). Yet the equivalent comparative figure, also relating to FY2016 in AR2017 was 5.8cps (AR2017 p35). This difference was solely due to:
i/ The removal of a $5.835m 'Remeasurement of Profit and Loss' OFFSET BY
ii/ a $1.634m 'Deferred tax on re-measurements of defined benefit liability'
making a net -($5.835m-$1.634m) = -$4.201m 'item that will never be classified to profit and loss'. [see my post 4135 on this thread for more detail]
Yet this net $4.201m pension plan propping was 'real cash' that could have had alternative possible uses such as:
a/ To pay shareholders higher dividends, OR
b/ To shore up the capital position of the company.
-------------------------------
Now, I have added up that effect for all subsequent years and I get the 'bold total' of $19.605m and I have to subtract from that any deferred tax liability on re-measurements of defined benefit pension scheme.
$19.605m - $3.531m = $16.074m
In todays terms, given that the number of shares on issue have been adjusted, to 75.484m at the latest balance date:
$16.074m / 75.474m = 21.3cps
This in my view is the 'cumulative since FY2017' net 'lost capital' per share of PGW shareholders as a result of maintaining the PGW 'in house' 'defined pension scheme'. 21.3cps, so far, has effectively been 'swept under the table' to an obscure area of the accounts where questions are not commonly asked. Please note I am not suggesting that PGW has done anything wrong by doing this. They are just following the accounting rule book that allows them to present their headline profit figures exactly as they have done. Nevertheless in presenting the performance figures quoted, I think it is fair to point out to shareholders what has legally gone on 'under the hood'. The other point to remember is that all of this is now historical.
SNOOPY
I wrote on 27-10-2017. Like nearly four & half years ago:
I despair: Possibly I should say something.
Attachment 14457
The above taken from your post 4149 dated 26-10-2017 on this very thread.
As a fellow shareholder it might be useful if you said something. After four and one half years, all of your slothful suntanning on those alpine rock outcrops is forgiven. I hereby grant you permission to reply.
SNOOPY
And thus the Snow Leopard pontificated:
Trying to square the circle of the accounts for any company or indeed any one aspect of any company over any length of time longer than the issuing of 2 annual reports (that being 1 year and 1 day) is fraught with perils because:
> The company changes;
> The accounting standards change;
> The reporting of accounts change.
The PGW Pension Scheme, here we go :scared:...
Cash Flows:
Inwards:
1/ Employer Contributions:
Regular yearly payments made every year - tends to be hidden in employee costs in the main part of the accounts.
Lump sum payments made as necessary - tned to have their own line in the main accounts.
Shown in the Defined Benefit Tables net of taxes.
Gross payments include ESCT where appropiate. As an operating expense they are offset by the reduced companies tax.
becomes an asset of the fund and increases the fund value
2/ Employee Contributions:
Shown in the Defined Benefit Tables net of personal taxes.
This cash asset received gives rise to a equal liability
3/ Interest Earned:
This cash asset gives rise to a similar sized liability :mellow:.
Outwards:
1/ Benefits Paid:
Reduces both assets and liabilities equally :)
2/ Current Service Costs:
Surely this is must be a cash outflow ?
I am going to preface my reply by saying that I am not and have never been an employee of PGG Wrightson, or any of its ancestral companies. Thus I am not privy to the exact details of the PGW 'defined benefit scheme', or indeed schemes as implied by the AR2022 text (p69).
"....provides a range of superannuation and insurance benefits for employees and former employees."
"Former employees are entitled to receive an annual pension payable for their remaining life and in some instances the remaining life of a surviving spouse."
My reading of the above quotes is that, for current employees, they will likely receive some kind of life insurance benefit should they not survive their employment term with the company. At retirement age, the surviving scheme members will receive an annuity, or pension for life, which must be on favourable terms. I say that because if the terms were not favourable, the working members of the scheme would stop all contributions and put that money into Kiwisaver instead (and that hasn't happened).
This 'defined benefit scheme' then is quite a different arrangement to Kiwisaver, where no ultimate return is guaranteed and instead the final payout, which some may nevertheless consider converting to an annuity at retirement, is left to the ebb and flow of the markets with no guarantee.
Straight away then, we can see that PGW is in an onerous position. PGW is investing in the markets to meet their contracted 'defined benefit' cashflow obligations. But should any of their investment decisions prove sub-optimal, PGW is required to make up any defined benefit plan shortfall in cash from their own coffers.
SNOOPY
I put it to you that statement is an assumption. Before Kiwisaver, there was no expectation that employers would contribute to your retirement scheme. Instead you would 'do it yourself' by joining AMP or some other such provider. If we go to AR2022 p69, we see in table A that the 'Defined benefit obligation' shows a zero input from the employer. If there was such a 'regular employer contribution', as you suggest, that was hidden as part of the wage bill in the rest of the accounts, would you not expect to find it there separated out in that table?
The employer contribution of $567k is under a different header 'fair value of plan assets'. Could that be a 'lump sum' correction? I don't think so because under the lump sum correction header in the cashflow statement there is a nil entry for FY2022. So by a process of elimination I believe this 'non cash' fair value contribution of $567k represents the increase in value of the underlying investments that are used to fund the defined scheme.
Yes but over FY2022, there weren't any (refer to cashflow statement)
I am not so sure about that. While the company pays the ESCT tax, they also pay PAYE income tax on behalf of the employee, If you look at the ESCT tax table, the tax deducted closely mirrors PAYE deduction rates. It looks to me as though ESCT is structured as though ESCT payments and any associated defined plan contributions are equivalent a 'salary sacrifice' for the employee. IOW, although ESCT is paid by the company, it is in fact an individual tax obligation, and not a company one. And if that is true, it means there is no increase in value of the fund due to ESCT.
Agreed
Yes
Current Service Cost / Fund Balance = $489k / 0.5x($56.483m + $53.725m) = 1%
Sounds like it could be a fund managers fee? If that is the case it will have been taken off the funds invested, so it would not be a cash outflow.
SNOOPY
Argh!
Now I remember why I don't try and help.
I am out of the apartment while the world's noisiest workmen rip the spouting off the roof and doing the editing to break this mess down into the different bits tin order to answer them is just to hard to do on a handphone.
I may go through it later or then again I might just keep quiet for another four and a half years.
Some years ago, 'defined benefit schemes' became an issue overseas. I recall some local reporter doing an article on whether any NZ shareholders should be concerned about the existence of such schemes in NZ companies, and one name stood out: Wrightson. I cannot remember whether it was still Wrightson then, or whether it was the merged 'PGG Wrightson'. But I am not as worried as I was. If we go back to FY2016, the year before the Seeds Division de-merger you can see why:
FY2016 FY2022 Defined Benefit Plan Deficit ($25.729m) ($2.126m) Net Profit Declared $39.678m $24.286m
Back in 2016 the pension scheme deficit was about half the net profit for the year, whereas by 2022 it was only one tenth. So while it is annoying for shareholders that PGW seems to have to keep topping up the defined benefit scheme with one off payments, they appear to be in a much stronger financial position today to be able to do so today. Furthermore those payments are getting smaller in absolute terms too (see my post 5362).
I also know that the actuarial models used to forecast future deficits in the 'defined benefit pension scheme' are not aligned to IFRS reporting rules. This explains why despite the scheme being apparently in surplus at EOFY2021, PGW nevertheless put a $567k payment into the fund over the subsequent year. The IFRS reporting where discount rates were linked to NZ ten year bond rates magnified any future liabilities in 'present day terms', as the ten year bond rate dropped below 1%. However, as ten year bond rates rise again, that 'shadow' should recede. Working against that 'bank rate effect' is the value of the underlying investments used to fund the defined benefit scheme going down as sharemarkets fell. In this circumstance I find myself agreeing with the Snow Leopard. Knowing the position of your 'pension plan market investments' as at 30-06-2022, may not be all that helpful in figuring out the composition of the funding engine now. However, the guys and gals at PGW running the scheme know all about this. So rather than try and 'second guess' what those fund managers should be doing (based on our out of date historical information), I think it is more useful to look at what they did do, while knowing more information than shareholders are privy to.
Again, if we refer back to post 5362, the PGW contributions are well down in the latest three years, compared to the previous three before that. It looks to me that PGW staff do not have an issue with their defined benefit plan as it sits today. And if they are not worried about it, then neither am I!
SNOOPY
Snoopy …..that Pension Plan getting smaller by the year probably because pensioners and their wives are dying off. No new members força while.
Many such defined benefit schemes were essentially wound up by offering a lump sum payment and hoping enough would accept and bugger off
I suppose PGG considered that ….bit surprised they didn’t proceed.
Sounds like a good idea:
https://snowleopardconservancy.org/w...ture-photo.jpg
The Snow Leopard Conservancy
There has been some rationalisation of the PGW defined benefit plan(s) Winner.
From AR2017 p62
"During the period the assets and liabilities of the Wrightson Retirement Plan were transferred to the PGG Wrightson Employee Benefits Plan. This resulted in the Wrightson Retirement Plan having no liability as at 31st December 2016. The remaining defined benefit plan is not open to new members"
In fact neither plan has been open to new members for some time.
From AR2013 p75
"The two defined benefit plans are open by invitation, however the group has not invited new members to the schemes since June 1995 and November 2000 respectively."
Details of the defined benefit plan(s) were first reported in detail in AR2008. Page 59 of that report shows a total defined benefit obligation of $68.705m when discounted back to a present value. At that point the value of the plan assets was $69.528m - so the plan(s) were in surplus. Go forward one year and the plans' assets had collapsed in value by more than 30% to just $48.183m. No doubt the GFC had something to do with that.
Fast forward thirteen years all the way forwards to FY2022 and the Defined Benefit obligation is still $49.165m. Those oldies are doing a good job of 'hanging on'. The $2.126m unfunded portion of that is 4.3% of the total. So it is significant but in total dollar terms in relation to group profit, a capturable obligation, should further capital injection by PGW be required.
Of course we have to remember that if some up and coming your manager was offered to join the scheme at age 30 in November 2000, they would only be aged 52 now. That PGW defined benefit scheme still has a few decades to run I think.
SNOOPY
https://www.nzx.com/announcements/407033
PGG Wrightson Limited1 (PGW) today announced its results for the first half of FY23.
Key highlights of the first six months to 31 December 2022 included:
❖ Operating EBITDA2 of $47.8 million (up $0.4 million or 0.9%)
❖ Revenue of $585.8 million (up $33.4 million or 6.0%)
❖ Net profit after tax of $21.2 million (down $1.3 million or 6.0%)
❖ Interim dividend of 12 cents per share
❖ Total Shareholder Return3 (TSR) of +3.4%
Updated Operating EBITDA guidance of around $57 million for financial year to 30 June 2023
Loooks good Bob but includes a profit downgrade
Last year operating profit $67m and then a few months ago they said F23 will be about $62m
And now they say it’s going to be about $57m
Hey Snoops … FCF looks a bit sad eh and the trend over the last year or so not too healthy (my view)
Love companies thar borrow to keep the divies coming
It is the same every year.
Nature of the beast.
Negative cash flow first half as they stock up on farmers' requirements.
Second half cash flow positive as farmers' pay for purchases.
What is known as "seasonal demand".
With PGW, you have to remember that much of the borrowing will be going to support the 'GOlivestock 'let's not call it a finance company' business. So those increasing borrowed funds are being lent out at higher rates, and earning more profit for PGW.
"During the period GO-STOCK celebrated two significant milestones with two million lambs purchased. on GO-LAMB contracts, and three hundred thousand cattle procured through GO-BEEF since launch."
Note 3 in HYR2023 shows GOlivestock receivables up to $43.0m, up from $35.8m the previous corresponding period. So this 'livestock rental business', (which is not a finance business as Heartland bought 'PGW Finance' a few years back, so don't call it that) looks to be growing very well.
What heartens me is that all of the business elements that PGW can control (retail and water) seem to be doing well. We knew that real estate would be dire in a rising interest rate environment. So no surprise it has probably tipped into a loss making situation - for now. And wool is doing what wool has done for a while now unfortunately. Interim dividend is down a couple of cents, but the share is still trading at a healthy yield.
So I am actually quite heartened by this result, as I think the underlying result is better than the headline figures would have you believe.
SNOOPY
So FY23 ebitda likely to be $57m
Heck that's about the same as they achieved in FY21
What's going on down on the farm .... profits not increasing
Not good enough
Still trying to keep on liking PGW but finding it harder and harder to do so.
So this year ebitda going to be 57m ……H1 reported 47.8m and H2 forecast 9.2m
Last year H1 was 47.4m and H2 was 19.8m (FY 67.2m)
So next 6 months ebitda going to be down the 50% on pcp ….that’s huge …and trend may continue into F24
Ah, seasonality you say …just like the horrific first half FCF. Methinks you stretch the seasonality excuse so far
Looking for some good bits
Done some suns …PGW worth $2.90 to $3.20 at moment
You might find it getting harder these days to like any company - if their growth rates are the only thing which determine how much you like them.
The days of cheap money seem to be over - its getting harder to make it ... and maybe at some stage we need to learn liking companies which just have a sustainable income - without trying to achieve endless and unsustainable growthrates.
I have a wider 'valuation band' than you Winner. But it looks like we are pretty much in agreement on where the value of PGW should sit. Of course where it 'should sit' and where the market sees it sitting are not always the same thing. I admit I put a 'sell down' order in advance of the profit announcement though to my broker at, given where PGW trades today, was an embarrassingly high price. At this stage I will hold and enjoy the dividend and think about enjoying some of those reconstruction order profits. Not sure about forward orders for irrigation systems in the Hawkes Bay though......
SNOOPY
Fonterra has cut its forecast farmgate milk price will cut farmers income by $900m they say
Will that hurt PGW prospects this year
PGG Wrightson Seeds are no longer owned by PGG Wrightson, the business unit being sold on 1st May 2019. But having opposed the demerger, I can't help asking myself the 'what if' question.
Buyer DLF Seeds A/S of Denmark are a privately owned co-operative and so there is no public annual reporting. They do issue regular newsletters though, and here are some of the comments about New Zealand since the takeover.
-----------------------
https://www.dlf.com/about-dlf/news-a...=News&PID=1905
Strong half-year result in DLF 25-02-2022
"The Danish seed harvest was above normal in 2021, whereas other seed producing countries in Europe did not reach their normal yields. The New Zealand seed harvest is impacted by rain and looks to be lower than standard. This is also the case in South America where the crop has suffered greatly from dry conditions"
------------------------
https://www.dlf.com/customer-support...5market-update
Global pressures keep grass and clover prices high 10-05-2022
"Global issues are affecting production costs for grass and clover seeds."
"More recently, the New Zealand harvest experienced a huge failure, especially in perennial ryegrass and white clover.
-----------------------------
https://www.dlf.com/customer-support...e-driving-seat
Inflation and production costs are in the driving seat 18-10-2022
"A tough economic situation coupled with increased costs for energy, wages, fertilisers, packaging and logistics are pushing up prices for grass and clover seed. In addition, good production prices for other ag-commodities, such as wheat and rapeseed, are making it harder to contract the planned multiplication acreage for grass and clover seed at a competitive price."
"In the southern hemisphere, the January to March harvest was below average, especially in New Zealand where perennial ryegrass and white clover yields were low."
"We’re finding it difficult and expensive to contract new seed production fields for this species. For similar reasons, the usual third-party production from New Zealand also appears to be quite challenging."
"Clovers are short in general. White clover harvested well in Denmark, but increased demand for European mixtures coupled with a continuing shortage in supplies from New Zealand have lifted prices to an all-time high."
"In this era of economic pressures – increasing cost prices and inflation driven by energy and food prices – it’s vital to work with secure and reliable production partners. Since agricultural commodity prices are competing at farm level with grass and clover production, it’s becoming harder to maintain the balance between farmer production prices and an acreage that will cover future demand. Climate change doesn’t help. Dry springs, summer droughts and periods of heavy rainfall make future demand more unpredictable."
"Contracting of new production for the 2024 harvest remains difficult. We expect to see a drop in European acreage for the harvest years 2023 and 2024 caused by production costs and the lure of alternative crops. That means we see firm or further firming prices ahead of us."
---------------------------------
https://www.dlf.com/about-dlf/news-a...bar-in-oceania
New forage grass raises the bar in Oceania 27-02-2023
"Our latest tetraploid perennial ryegrass, Vast, distinguished itself with a high yield in the last part of the season. This variety is ready for launch in spring 2023 and is the first extremely late-heading perennial ryegrass on the market in Oceania. Vast has genetics from the Southwest and Northern Europe as well as New Zealand and stands out due to its fine and dense plant density, strong winter production, good disease tolerance and extremely low aftermath seed head production. These characteristics mean that it continues to produce quality forage even when the quality of most other ryegrasses is declining. This adds significant value for farmers, as late grass production helps to slow the decline in post-peak milk production in dairy systems, and the timing of Vast’s forage production is also ideal for flushing and mating ewes and for beef and lamb finishing."
-------------------------------
It looks like after a tough year in 2022 (ryegrass and clover prices are good, but if you don't have the production you can't get those prices) all that R&D that we PGG Wrightson shareholders paid for in the past might be rising to fruition? A "Vast" improvement coming through?
SNOOPY
Snoops - DLF Seeds file Anual Accounts with NZ Companies Office if interested
Go back many years so if you keen you might be able to work out how sales have grown since they acquired PGW Seeds
https://app.companiesoffice.govt.nz/...F80BA56D212AB5
June 21 accounts - June 22 to be filed soon?
DLF NZ sales were about $15m in June 15 year - June 21 year they were $427m
What was PGW seeds doing?
Prior to the takeover, DLF NZ had their own much smaller seeds operation, which is what the $15m in sales will be related to. As to what PGW seeds were doing, it gets a little complicated.....
If we look at AR2019, the last year that PGW seeds was under PGW control, then the seeds business, listed as a 'discontinued operation' turned over $434m. But that was for the period 1st July 2018 to 30th April 2019, not for a full twelve months (the seed business changed hands on 1st May 2019).
If we instead go back to the 'independent appraisal report' issued by Korda Mentha in October 2018, then p39 of that document shows projected seed division revenue of $536m for the full FY2019 year. Annualising the actual figure for FY2019 over 12 months not 10, gives a projected annual revenue of $434m x 12/10 = $521m. But annualizing is probably not the best method to use when you know that seed division revenues over the year are not uniform but lumpy.
The next complicating factor comes when you look at DLF's Australian website: https://www.dlfseeds.com.au/
"DLF Seeds represents the coming together of PGG Wrightson Seeds, AusWest and Stephen Pasture Seeds."
"These three respected Australian forage seed brands joined forces to ......."
So after pinching Crowded House and Russell Crowe, those Aussies have pinched PGG Wrightson as their own as well! The significance of this, in the context of this discussion, is that it looks like DLF have carved out the Australian arm of PGW Seeds and reinstalled that under their own Australian division management. Australia was always a 'poor cousin' in the PGW seed portfolio. The Korda Mentha report on p30 forecasts, over FY2019, the geographical split between EBITDA in the three markets the seed division operated in to be:
PGW Seed Division Forecast EBITDA 2019 Percentage Apportioned Revenue (1) New Zealand $33.1m 77.5% $415m Australia $4.8m 11.2% $60m Uruguay $4.8m 11.2% $60m Total $42.7m 100% $536m
Notes
1/ This column is my own apportioning, where I have allocated the revenue between each geographic region relative to EBITDA earned in that market. This revenue splitting exercise assumes equal profitability, in EBITDA terms, across each geographic region. In practice that assumption is likely inaccurate.
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I believe that NZ was a lot more profitable than those other two markets. That would in turn mean that NZ would have required less revenue to earn their proportion of EBITDA earnings. So that $415m revenue figure that I put down for NZ seed turnover in FY2019 is probably an 'upper bound' estimate of what the NZ seed revenue really was.
Just an an exercise in face value though, adding the already existing 'beachhead' DLF seeds operation to my $415m PGW NZ seed revenue estimate I get total revenue for DLF Seeds New Zealand over 2019 to be:
$415m + $15m = $430m
If two years later, combined revenue was $427m, it doesn't like too many growth synergies with the global DLF seeds business have been exploited.
SNOOPY
Brad Olsen says ‘ New Zealand's exports weren't performing as well they were at the end of 2022, with meat and dairy exports falling "quite heavily" from the previous quarter. “
Does less exports and farmers claiming poverty impact Wrightsons performance
https://www.newshub.co.nz/home/money...+28+March+2023
Animals tend to cost the same to keep no matter what the price you receive for the end product. Since PGW are a supplier of animal inputs, I guess it doesn't matter too much what price the farmer receives for their milk or meat. You still have to fence the paddock, buy the milking equipment and buy the supplementary feed.
There would be a downstream growth effects no doubt. Less sales in the rural real estate arm. Less money at the price sold end, means less money to develop the business. But in the end, farmers have to spend as a cost of staying in business. You can't kill your herd off while you wait for prices to improve. As far as PGW is concerned maybe a bit down but definitely not out. I would say the amount of rain we get would be a bigger mover of profit than falling prices for commodities overseas. That's how I see things anyway.
SNOOPY
Snoopy, I feel you are being optimistic. Rural real estate is well down. Any drop in income always goes back to your expenditure budget so farmers will spend less. Any drop in the price of sheep and beef will be reflected in commissions earned. The companies own expenses will rise, those agents do like their santa fe's up to date for the weekends towing, wage rises etc. The last result was a little underwhelming, I expect more of the same. That said at some point it will be a buying op and there is always the chance of a TO out of the "left field". Looking at the buy side I think I'm not alone in my thinking.
Hi mike2020,
I am not saying you are wrong. I guess what I am saying is that there is a certain amount of essential farm spending that never goes away. Farmer's might postpone upgrading their ute. But they still need to look after their animals, fruit trees and crop fields. It will be interesting to see how the GoLivestock animal financing goes in any downturn. This is the scheme where PGW owns the livestock and rents it out to farmers to do what they do best - raise animals - but at no capital cost to the farmer. So a farmer can still use his/her skill and knowledge to bring an animal product to market, without putting up the capital to do so. That is a formula that sounds like it might work in a 'down' market.
Contrast that to the fortunes of other human based customer retailers and the consumer, who might well be able to get through the coming winter using last years coat.
As for your other comment on market depth, how the market perceives a business and the underlying mechanics of running a business on a day to day basis are entirely different things. In terms of a value perspective I agree with you. Now is not the time to be buying PGW shares.
SNOOPY