Significant Shareholder Update FY2023
SHAREHOLDER, NUMBER OF SHARES HELD
|
Holder |
as at 1st August 2022 |
as at 1st August 2023 |
|
1/ |
Agria (Singapore) Pte Limited |
33,463,399 |
33,463,399 |
2/ |
BCA New Continent Agri Hldg. Limited (BCA) |
8,993,305 |
2/ |
Elders Limited |
|
9,026,128 |
3/ |
HSBC Nominees (New Zealand) Limited |
1,489,589 |
1,345.634 |
4/ |
New Zealand Depository Nominee Limited |
936,608 |
1,111,351 |
5/ |
FNZ Custodians Limited |
973,536 |
952,601 |
6/ |
Custodial Services Limited |
508,379 |
662,491 |
7/ |
Forsyth Barr Custodians Limited |
689,547 |
662,437 |
7/ |
Accident Compensation Corporation |
579,446 |
|
8/ |
Nicolaas Johannes Kaptein |
500,962 |
500,962 |
9/ |
JBWERE (NZ) Nominees Limited |
470,443 |
442,909 |
10/ |
Citibank Nominees (New Zealand) Limited |
493,956 |
407,550 |
11/ |
Elizabeth Beatty Benjamin & Michael Murray Benjamin (Michael Benjamin Family a/c) |
300,000 |
300,000 |
12/ |
H&G Limited |
295,000 |
295,000 |
13/ |
Ian David McIlraith |
230,000 |
230,000 |
14/ |
GMH 38 Investments Limited |
200,000 |
229,217 |
15/ |
Robert Vincent Cottrell & Lesley Maureen Cottrell |
202,898 |
202,898 |
16/ |
Leveraged Equities Finance Limited |
204,217 |
192,417 |
17/ |
Totara Grove Investments Limited |
280,000 |
180,000 |
18/ |
David Mitchell Odlin |
214,400 |
178,700 |
19/ |
Colin Hugh Notley & Jan Marie Notley |
175,000 |
175,000 |
Bullet Points
a/ The exit of the Chinese government from the share registry and the arrival of Elders has been well documented during the year. The ACC departure somewhat less so.
b/ Former substantial shareholders H&G, a vehicle controlled by the Cushing family, maintain their interest in a small way (well small for them, 295,000 shares is still quite a lot!)
c/ GMH 38 Investments looks like a private investment vehicle based in Auckland with one 'Graeme John Hitch' being the 75% shareholder.
d/ Totara Grove is a private investment vehicle of Colin Robert Beaven, who owns 100% of the shares.
e/ Leveraged Equities is a fully owned subsidiary of the Forsyth Barr Group.
My final observation is that the 'top twenty' shareholder list in AR2023 is really only a 'top 19', because the shareholder numbering system jumped from 5 straight to 7' But apart from the 20th largest shareholder missing out on their moment of fame, I don't think the omission will do much damage. It may look like the same happened in AR2022 as well if you look at my table. But if you look carefully you will see that the list from AR2022 contains two number 7s, which is a quirk of the way I decided to present the table.
SNOOPY
The 'cash lifeboat' at PGW
I remain a bit concerned about ability of PGW to generate cash in tough times. So I have raided my collection of past reports to conduct my own figurative 'searching down the back of the sofa' exercise. My rationale for creating the table below is as follows:
a/ There will always be bills to pay and accounts to collect. My view is that it is useful to look at the difference between those two totals . That way we can discern that if 'refusing to pay bills' is being used as a tool to artificially reduce debt. If the 'net receivables' is positive at any balance date (first part of the table), then it is possible that this is going on. Adding on any 'net receivables' provides a truer company debt picture.
b/ I think of inventory as an asset, which is, subject to the desires of management - to convert it into cash. As a 'PGW store owner', this would ideally happen in the oncoming season after balance date. In this sense, I think of inventory as 'always on the cusp of being converted to cash'.
c/ I am valuing this inventory 'at cost' in the table, because in tough times, it may be necessary to sell it at cost (when you have to make an assumption on profit margins, make it conservative).
d/ I am not considering cash generation from 'services' where there is no company owned inventory to sell. As an example, in tough times real estate may be difficult to sell, so we cannot guarantee profits from this division.
I am not exactly sure what CFO Peter Scott, following questioning at the AGM meant where he mentioned that the banks were looking at "Clean down of our working capital (short term debt) on an annual basis." as an area to report on. But I think the general idea of keeping tabs on the lending from year to year and how the profits ebb and flow around that loan balance are similar to the kind of picture I was attempting to illustrate in the table below.
Reference Date |
31/12/2021 |
30/06/2022 |
31/12/2022 |
30/06/2023 |
Reference Period Named |
HY2022 |
FY2022 |
HY2023 |
FY2023 |
Trade and Other receivables |
($296.772m) |
($170.336m) |
($321.851m) |
($154.656m) |
less Accounts payable & accruals |
$269.311m |
$189.290m |
$273.959m |
$164.107m |
|
Cash balance generating position
equals Net Receivables................! |
($27.461m) |
$18.884m |
($47.892m) |
$9.451m |
add Inventory |
($111.939m) |
($102,048m) |
($129.717m) |
($107.533m) |
add Cash & Cash Equivalents |
($1.113m) |
($4.676m) |
($2.484m) |
($4.643m) |
add Short Term Debt |
$18.000m |
$7.500m |
$48.000m |
$19.960m |
add Long Term Debt |
$30,000m |
$30.000m |
$50.000m |
$50.000m |
equals Total Net Debt |
($92.513m) |
($50.340m) |
($82.093m) |
($32.765m) |
Discussion
The table above is four snapshots in time of an edited down version the PGW balance sheet. That means the table doesn't say anything about earnings directly. But it is earnings that have indirectly resulted in those balance sheet movements over time. When you have a service business that is facing macro-environment headwinds, preparing for a severe downturn is relatively easy - sack a few staff. However, such a strategy would likely backfire in an specialised inventory heavy retail business, because products don't select themselves, order themselves and walk themselves out to the customer's ute. I regard another way of looking at 'tabulated inventory' as an 'emergency cash fund'.
At any time inventory can be converted to cash. After the passage of enough time, hopefully all of it will be converted to cash. Furthermore, as long as the inventory is sold at a profit, the company will pick up some incremental shareholder funds as well. But of particular interest today is what happens in tough times. A useful thing about customers of rural suppliers is that in order to keep their animals and/or crops in top, saleable, condition -no matter what is going on in the wider economy-, some money will have to be spent. And if - worst case - the farmer is so poor they cannot even do that, then PGW clips the ticket anyway as the 'must be sold' stock go through their sale-yards. Then the new animal owner becomes the PGW retail customer! This table could be interpreted as working on a 'worst case' scenario, showing what would happen where the inventory must be quit at cost. Of course such a scenario - quitting all your inventory stock at cost, because the banks demand you instantly must pay off all of your debt - is very unlikely to occur in practice. So the real value in such a table is to examine the relative size of the 'liquidity rescue lifeboat (the inventory) to see how well prepared the PGW company is for, if not a full sinking, a repairable gash in the side of the hull.
The last line for all four of the timestamp periods, which can be thought of as the size of the emergency lifeboat, is negative for all periods examined. But a negative debt is an asset, which is a good thing. Yet looked at in the light of the previous paragraph, and based around the normal trading conditions of 2HY2023 our 'lifeboat' has halved in size (by $50.340m - $32.765m = $17.575m). The next question is, how significant is that $17.575m?
SNOOPY
A business re-size recipe for FY2024
Quote:
Originally Posted by
Snoopy
Senior Debt Coverage Ratio" (SDCR) ="Senior Debt"/EBITDA < 3.00
The "Senior Debt"/EBITDA hurdle was set up in pre IFRS 16 days. IFRS 16 mandates the transfer of rent from what was an operating expense to a finance expense, an operation that inflates the EBITDA figure accordingly. That means if we make the adjustment to a comparable pre IFRS 16 figure, by removing the 'interest paid on lease liabilities' and 'repayment of principal portion of of lease liabilities' (both figures may be found in the cashflow statement), then the comparable EBITDA figure reduces to this:
$61.194m - ( $3.800m + $19.532m ) = $37.862m
This is not the end of the adjustment exercise, unfortunately. This is because the the EBITDA figure quoted includes income from the 'GoLivestock' financing operation, the liabilities of which I have not included in the debt picture. It follows then that if I am not including 'GoLivestock' debt in this exercise, I must also exclude any income associated with that debt. So what is the interest revenue associated with 'GoLivestock'? $6.573m (AR2023 p71). That has to come off the EBITDA figure as well.
$37.862m - $6.573m = $31.289m
That means the adjusted Senior Debt Coverage Ratio calculation becomes:
=( -$4.643m + $19.960m + $50.000m ) / $31.289m = 2.09 < 3.00 (good, but no longer very good)
Looking out into FY2024, investors might want to consider what might happen if EBITDA reduces further in FY2024, while debt remains at today's levels. But that couldn't happen, could it?
Quote:
Originally Posted by
Snoopy
The last line for all four of the timestamp periods, which can be thought of as the size of the emergency lifeboat, is negative for all periods examined. But a negative debt is an asset, which is a good thing. Yet looked at in the light of the previous paragraph, and based around the normal trading conditions of 2HY2023 our 'lifeboat' has halved in size (by $50.340m - $32.765m = $17.575m). The next question is, how significant is that $17.575m?
Let's do a forecasting exercise based on the projected EBITDA for FY2024, superimposed over the debt structure of FY2023.
EBITDA for bank covenant purposes = $52.000m - ( $3.800m + $19.532m ) -$6.573m = $22.095m
Now senior debt cannot exceed 3x this value or: 3 x $22.095m = $66.285m
But balance date debt @30th June 2023 was: -$4.683m + $19.960m + $50.000m = $69.955m (too much to be set off against the new downsized EBITDA forecast)
We still have a good sized inventory lifeboat on board at balance date, with a capacity of $32.765m dollars. Cutting inventory by one tenth of that value, which equates to a $3.2765m/$107.533m = 3.05% of the total inventory value looks do-able. But it is now clear that satisfying these banking covenants, in particular relating to the Senior Debt Ratio, will not be the same 'walk in the park' in FY2024, as it was in FY2023.
SNOOPY
Fixed Cost Coverage ratio (FCCR): FY2023 Perspective (Attempt 2)
Quote:
Originally Posted by
Snoopy
The above quote is a 'forecasted value' for FY2020. This was before the implementation of IFRS16, which changed the definition of EBITDA (lease expenses are now included in EBITDA). Nevertheless it will be necessary to take off the income resulting from the GoLivestock loans. I shall now attempt an up to date version of this covenant calculation.
FCCR= [(EBITDA+Lease Expenses)(1)] / [Total Interest(less interest income in cash)+Lease Expenses]
(1) Under IFRS16, the definition of EBITDA has been rewritten to include lease expenses. So there is no need to add them back as a 'supplementary entry' as before.
= [$61.194m - $6.573m] / [$5.521m + ($3.800m+$19.532m]] = 1.89 < 2.0 (! Oh oh)
It looks like PGW has failed this covenant test. But did I do it right?
To get a better idea what we are talking about with FCCR, from 'Investopedia':
What Is the Fixed-Charge Coverage Ratio?
"The fixed-charge coverage ratio (FCCR) measures a firm's ability to cover its fixed charges, such as debt payments, interest expense, and equipment lease expense. It shows how well a company's earnings can cover its fixed expenses. Banks will often look at this ratio when evaluating whether to lend money to a business."
Investopedia then goes on to show us a slightly different formula for calculating FCCR than the one used to evaluate the FCCR number for PGW in the past. That is annoying, so I will revert back to the PGW definition of FCCR used in the past, and use the 'guiding principle' expressed in the Investopedia opening paragraph (as quoted above) to keep myself straight on why we are doing this calculation in the first place.
Since PGW were not censured by their banking syndicate for their FY2023 result (publicly anyway), this is an indication that my calculation, as quoted above, may not be right.
The total interest figure of $5.521m (Note 6 AR2023) is made up of 'bank interest on loans and overdrafts' of $4.565m and a 'bank facility fee' of $0.956m. Now the bank facility fee is a fixed charge imposed by the banking syndicate. It is not part of the normal monthly operating free flow of cash in and out of the business. So it would be a little bizarre if the bank asked for an FCCR covenant test to be done, but then imposed a hefty one off charge to ensure that their customer, PGW, failed the bank's own 'FCCR test'! I don't see the benefit in a banking syndicate firing 'foot shots' into their own client base.
If I leave the bank facility fee out of the FCCR covenant equation, (while still subtracting GoIncome Interest Revenue of $6.573m from the top line, AR2023 p71) it changes to to this:
FCCR= [(EBITDA - 'GoLivestock Interest Income'] / [Total Interest(less interest income in cash)+Lease Expenses]
= [$61.194m - $6.573m] / [$4.465m + ($3.800m+$19.532m)] = 2.0 (That just scrapes in over our 'target margin of 2 or more'). Phew!
SNOOPY