Split Beginnings: History Repeats Pt4
Parts 2 and 3 concentrated on 'what happened'. Now we move onto the important part of the analysis. 'What is going to happen ' in FY2025. And as a reference for this, we are going to look 'what did happen' leading out of the FY2013 slump, into FY2014
EBITDA |
HY2013 |
2HY2013 |
FY2013 |
HY2014 |
2HY2014 |
FY2014 |
Δ FY2013 to FY2014 |
LIvestock |
$0.607m |
$11.575m |
$12.182m |
$1.026m |
$12.363m |
$13.389m |
+9.91% |
Back Office |
($13.648m) |
($11.479m) |
($25.127m) |
($15.456m) |
($12.750m) |
($28.206m) |
+12.2% |
Revenues |
|
|
|
|
|
|
LIvestock |
$51.033m |
$47.467m |
$98.500m |
$29.494m |
$47.356m |
$76.850m |
0% (1) |
Table Notes
1/ Revenue decline was judged minimal if you account for the fact there were minimal live animal exports over 2014 (see AR2014 quotes below).
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What was the story behind these 'recovery numbers'? From AR2014 p18
"A strong market for both dairy and beef cattle, along with better prices in the sheep meat market drove an increase in earnings for the livestock business."
"Cattle prices and tallies were up on last year with farmers enjoying good returns from international markets. Sheep number across the country continue to decline as land is converted into dairying or dairy support. Overall sheep numbers were further down this year as farmers rebuild flocks following last years North Island drought. However, with sheep prices almost 20% higher than last year (after falling 37% between FY2012 and FY2013) , overall earnings from sheep trading were up."
"Our livestock export business had a relatively quiet year with only one significant shipment during the year. This largely accounts for the difference in revenues when drawing comparison between periods."
That kind of outlook might resonate into FY2025. Yet a big change I think is that there is no longer pressure to convert sheep farms into dairy farms. The incentive today, if anything, is to convert such land into forestry blocks for 'carbon farming'.
A rise in sheep prices of 20% sounds credible, given that markets tend to overshoot 'on the downside' when confronted with unexpected shocks. But a rise of 20% would not compensate for a fall of 28% in the previous year (FY2024): (1-0.28)x1.2 = 0.86. IOW we would still be looking at a fall in sheep prices for FY2025 of 14% over FY2023 levels.
There has been some talk of resuming livestock shipments overseas from NZ. But I believe this will require suitable ships to be sourced. And I doubt if we will see a return to this trade by June 2025 (EOFY2025 for PGW).
A thing I find encouraging about this 'reflected view from the past' is that despite the lamb price crashing by 38% going into FY2013, then recovering by 20% over 2014, implying a price index change of 0.62x1.2= 0.74 (i.e. a two year drop of 26%), Livestock EBITDA managed to grow by 9.91% 'from the bottom of the trough'. This may be a result of more animals going through the stockyards, better control of stockyard costs, or a combination of both.
If we assume a flat year for the combination of wool and real estate over FY2025, and livestock represents about 50% of the now called 'agency division' (as it did in FY2013, post 5745), then Agency EBITDA should be able to grow 0.5x9.91%=5.0% over FY2025. That kind of growth would put Agency EBITDA for FY2005 at: 1.05 x $9.068m = $9.521m (refer post 5747). This is an increase of ($9.521m-$9.068m=)$0.453m
I want to say something on those 'back office charges', which seemed to have ballooned over FY2014. You would think that coming out of a bad year, PGW would seriously look at keeping these under control. Yet they ballooned by $3m or more than 10%! A possible explanation is that during FY2014, 'PGG Wrightson Irrigation & Pumping' acquired 'Water Dynamics' and 'Aquaspec' to create PGG Wrightson water. That may have increased the number of 'back office bods' within the company. However, I wouldn't expect to see an analogous increase over FY2025, as PGW are not looking to acquire other complementary businesses at this time.
SNOOPY