Share price got nailed 10% today.
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PGG Wrightson Limited (PGW) and Silver Fern Farms Limited advise that as a
result of a recent mediation process they have agreed the terms of a full and
final settlement following PGW's default on the equity transaction agreed in
2008.
Under the terms of the agreement, PGW will provide Silver Fern Farms with a
mix of cash and PGW shares, and the two companies will continue to work on
initiatives to integrate the supply chain from 'plate to pasture' to improve
the strategic position of pastoral farmers.
The financial elements of the settlement are:
- $25 million paid today
- $5 million paid previously, of which $3.5 million was for costs incurred by
Silver Fern Farms
- 10 million ordinary shares in PGW (fully-paid and ranking equally with all
other PGW ordinary shares on issue).
The settlement was welcomed by PGW chairman Craig Norgate and Silver Fern
Farms chairman Eoin Garden as a successful resolution with which the boards
of both companies can be well satisfied.
"I am delighted that both companies will now be able to put the
disappointment of last year's events behind them," Mr Norgate said. "For PGG
Wrightson, the settlement provides certainty over the financial exposure
resulting from our inability to complete the transaction approved last year.
The terms of the
settlement have been approved by our banking syndicate and are well within
the company's capacity to manage financially. The settlement also establishes
the basis on which both parties can continue to work in their respective
clients' interests under an integrated supply chain model."
Mr Garden said the settlement provided significant redress to Silver Fern
Farms for the damages arising from PGW's inability to complete the 2008
transaction. "The resolution allows both companies to focus on optimising
outcomes in a challenging economic environment, rather than wasting resources
on protracted
litigation. This is a sensible and pragmatic 'NZ Inc' outcome."
Silver Fern Farms intends to remain a long-term shareholder of PGW.
$40m is a pretty big payout to have to make. Out of a $220m deal it must've almost been worth proceeding with the deal no matter what it took to get it done. I'm surprised a few of the bosses at PGW haven't had to justify keeping their jobs. Is that why the CFO resigned?
Share price seems strong
A fairly large drop today. Must be some insider trading going go. Capital raising announcement this week?
Would you put more of your money into PGW if called upon to do so- not sure I would.
What are the upsides and what are the downsides?:eek:
Yes- has Norgates charismatic dynamism worn thin?:cool:
In today's announcement from PGC, about their upcoming cash issue, there was an update on that company's position with their 20% shareholding in PGW.
"PGC's approximately 20% stake in PGG Wrightson is to be retained and may be considered as a long term seed asset for a significant agri-business fund."
In my fast read haste, I thought the above announcement was the setting up of an 'Aggro' fund, specifically created for investors disenchanted with the managment direction of 'fund manager' Craig Norgate at PGW. Disenchanted investors in this new fund would then get a real chance to vent their spleen, while at the same stroke PGC would rid their balance sheet of a troublesome asset.
However, on further reflection I realised there are so many alternative 'Aggro funds' in the market already, that it would be foolish for PGC to go along this track as a "Johnny Come Lately".
SNOOPY
:D:D:D
Nice one Snoopy!
I thought the removal of the PGC overhang might have given PGW a lift today, but it appears not. Not at all sure about the overall PGC strategy though - is this a securitisation/investment banking model a la AFG, MFS etc? I'm not sure whether their timing is perfect or abysmal?
Your past disclosures are coming back to bite you on the bum SNOOPY. Macdunk will do an analysis of PGW when dairy farms start back into profit again which wont happen in the short trerm.
PGW will be one share that will go much lower before that happens which may see me join you in about twelve months. Macdunk
Madunk, you maybe able to pick up the shares for 1 cents a a years time.
As of last month about 1/3 of PGWs customers are dairy farmers. If rival RDI's interest free loans take off, that could see a number of Dairy Farm customers from other Ag business suppliers move across. In a years time the number of PGW customers who are dairy farmers could become irrelevant.
Just to update, I haven't bought a serious number of PGW shares since February 2007. But I have acquired more through the dividend reinvestment scheme since that time. That means my average holding price is now $1.29. Cash dividends that I have pulled out of the company in the last 14 years amount to around $1.10 per share. That means even at the very bottom of this latest farm trough, I am stilll ahead.
So why if I believe in the direction of this company am I not stocking up on PGW shares while the price is low? Well I don't have an unlimited pile of capital. And in my judgement there are surer bets out there. Notice I said 'surer bets', not 'better bets'. If PGW 'comes right' it is likely to be my biggest winner. But if it doesn't, well I will just have to go to the bottom of the cliff and support a hypothetical PGW cash issue in the future.
You may yet prove me wrong about PGW Macdunk. But that is a gamble I am prepared to take.
SNOOPY
discl: hold PGW
SNOOPY, Unlike you I dont gamble. Unlike you I only buy on an uptrend. Unlike you I take the small loss and get out in a downtrend. Farm service companies are the simplest to understand they follow farm gate prices up and down very similar to mining companies and metal ore prices. I fully expect the big downtrend in the PGW sp to continue which was very forseeable along with NZS which was always a high risk project. Dairy farming will make a come back when it does it will be reflected first of all in farm gate prices followed by a big spend up down at the farm service store. Macdunk
The rural sector will pick up, it is cyclical. The problem with PGW is the huge debt they have and the bank covenants. It also doesnt help that the people that have been supporting PGW have all run out of money and they may have to raise cash soon or go belly up. PGW reminds me of NPX and FPA.
I have to agree with the last two posts: if you tried at the moment to move new goods not normally stocked in the PGW (and other rural) stores nationwide, you'd be out of luck.
They're all getting their stock levels down, clamped by head office. Stores pull customer orders from other branches when they can, not the supplier. Fast-moving stock lines are still OK. Farmers seem to be generally clamped down by their banks. They have all their capital tied up, and could be more efficient, but will have to wait until farm gate prices improve.
-elZorro-
When everyone is jumping out beating on a share, you know it is time to buy. Just like NPX and FPA. :D
Perhaps that's right Bowman, but this share at least, is one where you can do your homework quite easily. Have a look inside one of the stores and see if it's busy. Look at the books and figure out the profit margin for the average sale (it's low).
-elZorro-
The time to buy any share is when demand of the product starts to increase against availability. Farmers demand for the products being sold is at an all time low. This in time will change making PGW amongst others if still around over sold as far as buying position in the market. Dont waste time working out companies in a downtrending sector its almost as stupid holding shares in them. The time to do your home work is when the sector turns as it surely will in its own good time.
PGW jumpted in at the peak of the market taking on huge burdens of debt which might be its undoing but then being an oversold position might make it a really good prospect all being well. My own view is it will survive with the share price downtrending in the short term then be one of the success stories in the long term.
Right now only a fool would be bottom picking this share can go lower than you might think. Macdunk
I can't help but agree with Duncan.
(Good to see you are still around - having been absent for a long time myself, I was wondering as to your "status", i.e. whether you had given up on the rest of us or you had been robbed of all that cash hidden under your mattrass!)
PGG Wrightson Chair Craig Norgate steps down
PGG Wrightson has announced that Craig Norgate has stepped down as Chairman today and has
been succeeded by independent director Keith Smith. Mr Norgate advised of his intention
last month and the Board accepted that decision yesterday and confirmed Mr Smith’s
appointment.
Mr Norgate will remain a director of PGG Wrightson and Managing Director of Rural
Portfolio Investments, which owns a 27.5 percent shareholding in the group.
Mr Smith has been a director of PGG Wrightson since its formation in 2005 through the
merger of Pyne Gould Guinness and Wrightson. He was previously chairman of Wrightson from
2004.
Mr Norgate said his decision to step down reflected the preference for an independent
chair given the listed status of the company and the fact that Managing Director Tim
Miles is now well established after 15 months in his role. "Tim now has a team that is
more than capable of leading the company forward," Mr Norgate said.
Mr Norgate said the change was a natural progression that would allow the company to
identify the governance platform best suited to its next stage of development. This would
be carried out through a formal process to review board composition, currently under way.
"PGG Wrightson is the product of a five-year campaign to revitalise the rural services
industry for the benefit of farmers throughout New Zealand. That process has involved
continuous change – in corporate structures, but more importantly in the way the industry
works with farmers to help them improve their performance and profitability.
"Tremendous progress has been made – in particular, the company has a stronger
operational platform and is therefore better placed to provide the support, advice,
services and products that farmers need. It has a management group with the range of
capabilities needed to build on the progress made to date.”
Mr Norgate was Chairman of PGG Wrightson from October 2007 and was previously Deputy
Chairman. He was a director of Wrightson at the time of the merger with Pyne Gould
Guinness in 2005. He will remain on the board of associated companies NZ Farming Systems
Uruguay and Wool Partners International.
And keep checking livestock prices (livestock commisions), farm sales (real estate commissions) and farm debt (PGW have a very profitable finance division). Store lamb prices have been very strong recently, which helps dampen the impact from dairy. At some point they will be a buy, and you can probably spot it coming.
I'm very glad I only held PGW for a couple weeks (was looking at a short term trade)
an only lost very few $$$ could have been alot worse
Also think my mate that had been hold for years will be happy he sold at an average of 1.31
after I told him what I thought of them...
I think Norgates position as Chairman has been untenable since the failure of the Silver Fern Farms merger deal. I don't see Norgate stepping down from the Chairman's role now as a forerunner of more bad news.
As for the balance sheet, 6 months ago PGGW renegotiated a $475m debt facility through the ANZ,BNZ and Westpac. Now if Norgate had negotiated at $475,000 facility with the banks he might be in trouble. But with potentially $475m in outstanding debt, it is the banks who have the problem. And I don't think ANZ,BNZ or Westpac see themselves as owner operators of a chain of rural supply stores.
We are told from HY Report 2008 that as at February 2009, debt drawn was $410m, down from $425m on the 31st December HY2008 balance sheet date.
If we inspect that balance sheet more closely there is more debt in the form of $213.2m of trade creditors (offset by $342.7m of trade receivables). That represents $130m of net money owed to PGW which is slightly up from the equivalent figures in FY2007 ($286.5m-$159.9m=$126.7m net PGW receivables outstanding). So there is definitely room for recovering some capital here.
Total liabilities are listed at $1.147m, with total equity of $413.7m. So let's say PGW was looking to raise another $413.7m in new capital by September 2011. If that capital was brought in today then earnings per share would halve. But even if total PGW earnings decline to $30m, then that still represents eps of $30m/(2x289.3m)= 5.2cps. Based on a share price of 95c that gives a diluted capital P/E of 18 at the low end of the business cycle.
I am not in the market to buy more PGW shares now (except through the dividend reinvestment scheme). But neither am I prepared to sell at today's prices.
SNOOPY
D.....M... wasnt the low .65 ---wayt2go yet!!!
With Norgate not in control, they can do a capital raising?
The bank debt contract must have a clause if the sp falls to a certain level it will breach covenants?
Sure. A capital raising will probably be easier now that Norgate is no longer in the top seat
We don't know the exact terms of the arrangements PGW have come to with their bankers.Quote:
The bank debt contract must have a clause if the sp falls to a certain level it will breach covenants?
The share price will affect the price PGW can go to the market for capital, if they need to go to the market for new capital, but that is all.
We know that the bankers are happy with PGWs plans to manage the business until September 2011.
We also know that the largest shareholder, Craig Norgates RPI, would be unwilling or unable to put more capital into the company.
We know that PGW are looking to unload some company property to strengthen their balance sheet.
So what is to stop PGW selling off another part of their business if the debt covenants become an issue? That is one way to get around new capital raising.
Generally banking covenants will relate to cash operational performance in the form of EBITDA/I (for example).
SNOOPY
Further downgrade by NUF is a good indication where the NZ and Aust farming sector is cureently. NUF have downgraded its profit by 15% or more.
Snoopy, PGW's debt is more than 6 times EBIDT.
Talk about inter related transactions.
Equity Partners walking away with a lump of cash in an illiquid market for selling assets at over inflated prices too................... yep, PGW shareholders.
From the Herald, Sunday.
Kerr is now involved in a large number of business ventures with John Darby, including property developments and Equity Partners Asset Management. Epam appears to be 50/50 owned by Kerr and Darby who are close neighbours near Lake Hayes, Queenstown.
Pyne Gould will purchase Epam from Kerr and Darby for $18 million.
The $18 million Epam purchase price, which appears to be far too high, will help bridge the gap between what Kerr paid for his Pyne Gould shares and what they are worth now.
It is the 'other' Pyne Gould Corporation (PGC) that has purchased Epam Toddy, Not Pyne Gould Guinness Wrightson (PGW). Nice little stir of the pot though.
Yeah that deal stinks. But we PGW shareholders can take your PGC deal and raise you a worse one.
We wanted to merge with Silver Fern farms. Ended up paying that company $30m in cash plus giving away 10 million PGW shares. And we ended up with nothing! Nyah nyah nyah! Beat that you PGC whiners!
SNOOPY
Perhaps there truly is magic in those PGW executives? This from Craig Norgates closing comments in the PGGW Finance Annual Report for FY2008
"We are pleased to have negotiated a new funding facility with one of the banks, that allows up to 90% of larger terms loans to be taken off balance sheet with no recourse, and ensures each residual on balance sheet amount is ring-fenced. The facility has allowed us to enhance our credit and liquidity risk management, while generating higher return for the company."
Did I read that right? Up to 90% of term loans have *disappeared* off the PGW balance sheet? David Copperfield eat your heart out. How is such a thing possible? Are there any finance types out there who are clever enough to explain what Norgate has done here?
SNOOPY
The most obvious answer is 'Securitisation'
Look here for a simple explanation
http://www.yieldcurve.com/Mktresearc...ationJan03.pdf
I've noticed that the price of PGW has fallen almost 19% over the last month whilst most of the stocks I follow have risen. I sold down after the Siver Fern farms fiasco but unwisely? retained some stock.
It appears that a rights issue is being priced in though some commentators are saying they may squeak through without having to raise more equity. It appears that they are about 63% debt funded which is too high especially in this financial climate!
Chalkie in yesterday's copy of the Independent postulated that a 1 for 1 rights issue at 50c is required despite the probable reluctance of the larger shareholders to stump up with more cash.
Any thoughts on if a rights issue is going to happen within the next 12 months and if so what terms are likely?
Thank's Xerof. That little pdf is the best explanation of Securitization I have yet seen.
Also, on studying the analysts presentation for FY2008, I notice that $100m of PGGW finance company debt is currently being held 'off balance sheet' with the ASB! So it looks like you are 100% right.
I still don't understand why ASB did it though. Wouldn't it be better for ASB if they simply had a secured debt with PGW Finance as per normal? What is the incentive for ASB to take on this risk as some kind of securitized bond?
SNOOPY
Coz they can usually get the SPV rated by S and P or such-like, and flick the risk off as an investment grade bond to investors in that type of paper, even if the Originator is unrated.
Sound familiar? Well it should, as this is what the Wall Street Masters of the Universe had been doing with mortgages....
OK, say the ASB bank is charging PGW 9% as a normal interest rate on their borrowings.
PGW then figuratively wraps up this debt as a 'package' and gives it back to ASB. ASB then puts a new layer of paper on this package. ASB writes 'Sucker Bonds' on the new paper wrapper and 'passes the parcel' to some hapless American investors telling them they will pay them 5% interest to hold these 'brand new' 'Superior Under Close Keeping Earnings Rich' bonds (SUCKER for short). Americans who are used to getting 1% interest at the bank are very happy!
ASB then pockets the difference in the interest rate ( 9%-5%=4% ).
Is that how you see the deal working Xerof?
SNOOPY
Su'mat like that....
The ASB doesn't carry any risk, they probably only charge an arrangement fee, but the concept is that the PGW assets that are being hocked off as a SUCKER bond as you call it have a rating much better than if it was PGW debt, so they get it placed at a lower rate, off their balance sheet with no recourse. PWG benefits partially from the lower rate, but also has the debtors off their books up front
The bond purchasers are relying on the S&P rating as support, on the assumption the 'names' that are behind the debt (originally payable to PWG, but now payable to the SPV) are better credit risks than PWG.
This aspect of course is where it turned to custard in the US - relying on the rating was fatal, as the default rates on the individual debtors rose out of all expected proportion
Ah so I didn't pass the parcel enough. My understanding of getting rid of the debt was along the line of:
PGW ---> ASB ---> Hapless Investor
whereas I should have written
PGW ---> ASB ---> 'Special Purpose Investment Vehicle' ---> Hapless Investor
This way both PGW and ASB get to preserve their reputations. If something goes wrong the hapless investor only has recourse to the new owner of the debt, the SPV - which promptly disappears into a black hole. What a way to do business!
Of course what I didn't mention in my original example was that when the PGW parcel of debt was rewrapped for on-selling, other debt packages were wrapped up with that PGW debt. These other debt pacakges might include some Allied Farmers debt, RDI debt, Elders debt etc. on the presumption that taking debt from different market players then wrapping it up is 'spreading the risk'. But of course if all of those 'different market players' are actually operating in the *same* underlying market, the hoped for 'spreading the risk' effect is just a fallacy. And no nod from the likes of Standard and Poors can change that.
OK so as well as PGW being out of the legal gun if they default on their loan, they are probably also benefitting by paying a lower interest rate.Quote:
but the concept is that the PGW assets that are being hocked off as a SUCKER bond as you call it have a rating much better than if it was PGW debt, so they get it placed at a lower rate, off their balance sheet with no recourse. PWG benefits partially from the lower rate, but also has the debtors off their books up front
The interesting take on this situation is this. If you were PGW and got into debt repayment problems, would you not pay back your on the balance sheet bank debt your bankers first?
That would mean the SPV bonds would not only be paying a lower interest rate than other equivalent debt. They would be higher risk for the end line investor than normal bank debt! It makes you wonder why 'hapless investors' would bother chasing these 'SUCKER' bonds in the first place!
SNOOPY
"63% debt funded" is a debt:equity term. Although financial analysts are often concerned about this figure, the banks are much more concerned about whether a customer company can pay their debts. So the banks use quite different measures to measure a company's solvency. PGW have not told us what these statitisics/covenants are. But we can guess what they might be given the financial ratios that PGW see fit to report to analysts.
The figure that PGGW are concerned about in their reporting to analysts for the FY2008 year were:
Revenue: $1315m (FY2008), $1034m (FY2007)
Operating EBIT to Revenue: 7.7% (FY2008), 5.8% (FY2007)
Operating EBIT to Interest: 4.0 (FY2008), 3.3 (FY2007)
Core Debt (excluding PGGW Finance): $312m, $230m
Operating EBITDA: Core Debt 3.1 (FY2008), 3.8 (FY2007)
The next hurdle for PGW is to pay back the outstanding balance of the debt facility maturing in December 2010, some $NZ65m. Debt repayments up to then are pretty much 'in the bag'. This is enough time to be able to sell assets not as a 'distressed seller'. PGW has 5.2ha up for sale in Napier (the old Williams and Kettle HQ?).Quote:
Chalkie in yesterday's copy of the Independent postulated that a 1 for 1 rights issue at 50c is required despite the probable reluctance of the larger shareholders to stump up with more cash.
Any thoughts on if a rights issue is going to happen within the next 12 months and if so what terms are likely?
As at 30th June 2008 there are $38.158m in 'group disposal assets', such as the above, waiting to be sold If dairy prices rise they may be able to flog off some of their NZS holding. They can probably pay down another $40m or so by retaining earnings within the company, as per the new dividend plan.
A 1:1 issue at 50c would raise $144.5m - similar money to what I have suggested above. But would need to be underwritten to succeed. I predict that if there is a rights issue it won't be announced until February 2010 at the earliest.
SNOOPY
Not an online link. My source was, "The Independent" July 30 2009 page 12.
Snoopy thanks for your thoughts on the question of will there be a rights issue. I'm aware of what bank covenants often consist of and am sure interest cover will be part of it. I like to know the debt:equity figures and a couple of other ratios as their trends can be pointers to looming trouble.
It may be a close call as to whether there will be a rights issue or not! My take/question is does recent price performance indicate that the market is anticipating a rights issue? Agree that an issue would need to be underwritten.
You have to be a bit careful with debt:equity with PGW Glennj. Part of that debt is due to PGG Wrightson Finance. And it isn't the responsibility of PGWs other businesses to keep that finance debt in check. I notice that in more recent news releaseses, PGW have been quoting their debt as a sum of 'core debt' and 'finance company debt'. The figures they quote are as follows:
Core Bank Debt: 2008:$312m, 2007:$230m
Finance Company Bank Debt: 2008:$140m, 2007:$75m
Finance Liabilities: 2008: $312m, 2007: $276m
Other Liabilities: 2008:$201m, 2007:$159m
Total Core Debt: 2008:$513m, 2007:$389m
Total Finance Company Debt: 2008: $452m, 2007: $351m
Sum of All Debt: 2008: $965m, 2007: $740m
Then when working out core PGW assets, you would have to separate out PGW Finance receivables from the company's other assets.
Finance Receivables: 2008:$507m, 2007:$402m
Current Assets: 2008:$471m, 2007:$359m
Non Current Assets: 2008:$467m, 2007:$405m
Total Core Assets: 2008: $938m, 2007: $764m
Total Finance Company Assets: 2008: $507m, 2007: $402m
Sum of All Assets: 2008: $1445m, 2007: $1166m
PGW Core Debt:Equity : 2008:- 55%:45% 2007: - 51%:49%
PGW Finance Debt:Equity : 2008:- 89%:11% 2007:- 87%:13%
If you do the same calculation with the finance and core group figures mixed in together;
PGW Total Debt:Equity : 2008:- 67%:33% 2007:- 63%:37%
As you can see Glennj, depending on how you choose to calculate the debt:equity ratios you can get quite different answers. That in turn can make a mockery of many comparisons
I would say the share price decline reflects the general nervousness at the demotion of Craig Norgate. Perhaps you could argue that indirectly makes PGW more susceptable to the likelihood of a cash issue?Quote:
It may be a close call as to whether there will be a rights issue or not! My take/question is does recent price performance indicate that the market is anticipating a rights issue? Agree that an issue would need to be underwritten.
If 50c was the 1:1 cash issue price and the current share price is 90c (round figures) then you could expect the share price to sink to 70c [ (90c+50c)/2= 70c ] or possibly a bit less if a cash issue at 50c was imminent. By that reasoning, no the sharemarket is not anticipating a 1:1 cash issue at 50c is likely.
SNOOPY
At least SCF didn't convert the $25m loan to PGW into PGW shares
http://www.stuff.co.nz/the-press/bus...n-by-Christmas
Yes you do need to be careful with methadology especially if comparing different companies but if you are consistent with your approach analysing the same company trend info is still useful. A mixed approach similar to yours was used to come up with the debt figure I gave.
You may well be correct that general nervousness following Norgate's departure was the reason for last month's hefty share price decline? In time we will see if a capital raising goes ahead to satisfy the 2010 debt repayment schedule.
Glennj, you speak of "last month's hefty share price decline" as though this was an extraordinary event. It wasn't. PGW is in a nicely linear downtrend and has been dropping about 17% per month, every month, since the peak of early May.
The attached chart shows some interesting features. See how the OBV gave a Sell signal before PGW peaked at $2.95 a year ago? This is what leading indicators are supposed to do. The OBV had stopped rising and had started falling. Market sentiment toward PGW had changed. Prices followed volume and the confirmed trendline was broken giving an exit at around $2.70. PGW then went into a steep downtrend.
See how the uptrend following the March re-entry point was not accompanied by an on-going rise in the OBV? After an initial rise confirming the trendline break Buy signal, the OBV resumed its relentless slide. This uptrend (while profitable) was going nowhere. The confirmed trendline was broken 2 months later giving an exit at around $1.40 and PGW's downtrend resumed.
Very conservative investors often use a 200 day Moving average to keep them on the right side of major trends. See how even this very slow indicator signaled an exit at around $2.30. Note also that this same indicator has not yet signaled any re-entry into PGW.
See where some "big money" was getting out, as signaled by downward "steps" in the OBV. This is never a good sign. "Big money" is not always "smart" money, though - these guys were a bit slow pulling the plug don't you think? Better late than never, I guess!
See how the current downtrend is showing no sign of imminent reversal and of course the OBV is still falling.
http://h1.ripway.com/78963/PGW83.gif
PGW has fallen from $2.95 to just 93 cents. Apart from a single, short, very profitable trade, this has been a wonderful stock to be out of for the last year - regardless of dividends!
PGW is particularly difficult to get to grips with. Each time you blink the company goes off in a new direction. That makes defining the core business difficult, let alone sifting out the 'one off' profits that are obviously not repeatable from year to year.
Ironically the failure of the Silver Fern Farms merger and the cooling off of the credit markets that were fuelling the PGW expansion means that PGW may be entering a period of forced stability. Greatly improved segment disclosure for FY2008 (backdated to FY2007 for comparison purposes) means that I have made some progress at least in sorting out the underlying earnings. I am still refining my model. But according to my calculations and subsequent forecasts made by PGW concerning future years, the underlying profitability trend of PGW looks something like this:
FY2010: $33m to $39m (management forecast)
FY2009: $30m to $32m
FY2008: $34m
FY2007: $31m
Specifically I have not included in my FY2007 and FY2008 operating results the proceeds of any property sales. Nor have I included the $17.8m bonus payment received by PGW in FY2008 for the listing outperformance by New Zealand Farming Systems Uruguay. I have however considered the ongoing managment fees payable on the NZS farms as a legitimate ongoing earnings stream for PGW that are likely to continue. Other profitability changes relating to:
i/'marking to market' of interest rate hedges under International Financial Reporting Standards, and
ii/adjustment of defined benefit superannuation scheme surpluses, and
iii/costs associated with the settlement of the partnership agreement with Silver Fern Farms Limited
have all been omitted.
That means from an 'operating perspective' PGW is currently trading on a projected PE of 7.2 to 8.5 (based on 305.8m shares on issue and a share price of 92c). This is not a demanding PE range. Given the outlook for growth beyond FY2010, I think it is hard to argue much downside from here from a purely fundamentalist earnings perspective. Of course from a capital adequacy prespective, potential shareholders might have a different view of where the share price might be headed.
SNOOPY
discl: hold PGW
'Pulling the plug'? Hardly. Those big investors 'getting out' of PGW were actually Norgate and McConnon, and their investment vehicle Rural Portfolio Investments. Except that they didn't get out at all. Rural Portfolio investments actually needed some money to pay RPI bondholders some interest. That payment would normally be funded by the cash dividend from PGW. But since the cash dividend was cancelled, they had to sell some PGW shares on market instead. That is why RPI's 30% holding of PGW, is now 28.5%. Big deal. There was no 'running for the exits' as you imply Phaedrus.
The initial plunge in share price from $2.30 to around $1.80 was because there had been a share issue book build to institutions at $1.80 in September 2008. September 2008 was when the credit crunch was starting to bite. So it made perfect sense for institutions to book a profit on their newly acquired PGW shares. I don't think you can argue that the share sell off was necessarily a reflection on the prospects of PGW at that time.Quote:
Very conservative investors often use a 200 day Moving average to keep them on the right side of major trends. See how even this very slow indicator signaled an exit at around $2.30. Note also that this same indicator has not yet signaled any re-entry into PGW.
SNOOPY
Good stuff Snoopy. Yes the forward PE's look undemanding at 92 cents especially considering the much higher PE's that PGW traded at for much of 2007 & 2008. These projected PE's are subject to forecasts being met of course.
Your work tends to reinforce my views that capital adequacy concerns may be playing a part in the current share price weakness.
Careful Bowman. There is another option if you don't see any good value shares out there. And that is don't buy anything!
The statistic I don't like with PGW is what I term their 'minimum debt repayment time'. This is the answer to the hypothetical question:
"If PGW put all of their profit into paying off their debt, then how long would it take?"
If we take their 'core debt' of $513m as at 30th June 2008 and the normalised profit of $34m I get a minimum debt repayment time of 15.1 years. That is uncomfortably high. Since that time there has been a further blow out with $30m paid over to Silver Fern Farms as a result of the failed merger deal. And short term at least, PGW profitability has deteriorated.
To cut a long story short, I am not buying into PGW at the moment. But then again neither am I selling. PGW has become a 'wait and see' proposition for me.
SNOOPY
P.S. I have just topped up my shares in New Zealand Farming Systems Uruguay though. At the moment they are not as indebted as PGW (although that may change as they complete their fencing, irrigation and milk shed construction program). Of course they are not producing *any* profit and probably won't for a few years yet. Nevertheless I believe the reasons for setting up NZS are more relevent then ever today. IMO the primary reason the market has marked down these shares so heavily is because any projects that are not immediate cash generators are simply no longer fashionable in the current investment climate.
Superficially things look bad for NZS. They are coming off a drought in Uruguay. Milk prices are much lower than a year or so ago. And the threat of PGW dumping their NZS shareholding to raise some cash - not to mention their association with 'yesterday's hero' Craig Norgate - are all weighing on the share price. But experience has taught me that when things look their bleakest and there is no news in the market that would possibly make a company seem a good buy prospect, then that is usually the best time to move. Nevertheless the market for NZS could easily turn down from here. If it does I will be increasing my holding.
Thanks Snoopy for the advice. I think PGW is doomed if their profit remains at the current level with the amount of debt they have got. I am interested because I wonder weather their profit can get a lift off like everything else during this recovery? US and EU won't subsidise their farmers forever. Dairy product price keeps drifting lower but like Oil, it will go back up again I think. I think I'll now wait for a clearer picture about the debt reduction.
Why dont PGW do a capital raising now? What are they waiting for, the sp to go to 50 cents before they announce a rights issue? It concerns me greatly that a large number of companies dont plan for the bad times when history clearly shows the good times dont last forever.
I would be interested in participating if they have a large enough capital raising to cover their debt. Too much debt = bad news in any market.
It is so obvious from looking at their books they need capital urgently.
DR if it did the raising that would IMHO bomb as that would signal to the market that things just were no quite right at "head office" .
PGG Wrightson is not a company that is entirely straightforward to understand. By their own admission they have:
a/ A Rural Services Division: comprising Livestock trading, Wool and Rural Supplies, Fruitfed Supplies and Irrigation & Pumping.
b/ Financial Services: comprising the operations of wholly owned subsidiary PGGW Finance, Real Estate, Insurance and Funds Management (the setting up of NZ Farming Systems Uruguay for farmer customers looking to invest).
c/ Technology Services: Seeds & Grain, Animal Nutrition and Training and Consultancy
d/ South America: Farm management, seeds, livestock and real estate.
From 2008 PGGW have significantly improved their segment reporting. So I have taken it one step further. I have allocated the costs of the head office (in PGW terms Corporate Services) amongst the cash generating divisions in proportion to the revenue of those divisions. We are given the segment liabilities. So I have allocated the funding costs (interest paid) among the four cash generating divisions in proportion to those liabilities.
The result is the table below:
http://img.villagephotos.com/p/2005-...7/PGWbit08.gif
The tables consist of black figures and blue figures. The black figures are taken directly from the FY2008 PGG Wrightson Annual Report and the FY2008 PGG Wrightson Financial Annual Report. The blue figures are those that I have calculated.
If you are reading this thread on or near 5th August 2009 when it was posted you will see two charts, the 'raw' version and the 'adjusted' version that are identical. There are some problems with the 'raw' version that I will enlarge on later which I hope to fix in the 'adjusted' version. I hope to get some inspiration from this group as to how to fix it up. When I have done that I will alter the adjusted version so readers can see both versions side by side. More details to follow
SNOOPY
Snoopy - somebody mention an article in The Independent the other day
In that Chalkie restated the PGW balance sheet post the SFF settlement and only shows the finance company as a one line deconsolidated amount (looking at from an owners perspective?)
Equity................................ 389
Net debt ......................... 435
Pension Liability .....................21
Fianancial derivatives/other...... 1
Total liabilities ..................... 852
Net assets finance business .....53
Other investments ................. 90
Working capital ................... 268
Plant / biological assets............86
Other................................... 26
Goodwill / intangibles .............329
Total assets ........................852
Interestingly she pointed out that the finance business and other investments of 143 are tied up in investments that have their own gearing ... pork on pig she calls
Her main point is that PGW has 256 of free equity to support 435 of debt ... far too much
She was also concerned how PGW booked $15m of profit when they sold off wool operations to Wool Growers .... when PGW is the only one to have injested any capital into the new company
Thought you would be interested
I want to answer the question, what use is a table like I have published? In a word, it is to put things into perspective.
Suppose you hear that profits have doubled in South America (largely Uruguay). That sounds good until you see that profits from Uruguay in FY2008 were only $1m after tax. That means 'doubling profits' will only add $1m or 2% to the overall PGW after tax profit. We can see from this that what happens in South America is largely irrelevent to the overall profitability of PGW. When the media is full of sensationalised stories about PGW 'getting in wrong' in South America, something like this is very useful to know.
Probably the most important information in this table is the 'check figure' column. That is where we can check how the assumptions of my model stack up to reality.
If we start with 'Operating Earnings' or EBIT, this is listed as $101.6m on page 5 of AR2008. However on page 42 the 'Total Segment Net Profit Before Tax' is $96.4m. I don't know why this difference exists. Hopefully some bright reader can figure out why the difference. As far as I can figure this 'error' is not caused by me.
Next we go down to the tax figure. My calculated figure is $22.3m verses the actual figure of $23.2m. My tax paid figure is unlikely to exactly match the tax actually paid. One reason is that a real company will pay provisional tax and terminal tax in a year that does not necessarily correspond to when the income is earned. So in this instance I would deem the agreement between my model and reality satisfactory.
Finally go to the net profit figures. My calculated figure is $45.5m verses the actual figure of $73.2m. This should ring some alarm bells. So what has gone wrong? For the answer you have to look at the consolidated Income Statement on page 26. There you will find a net gain on property sale of $6.3m and a 'fair value adjustment' (mainly the on paper gain in value of NZS shares from $1 to $1.60) of $17.5m. Then there is $3.4m of what is termed 'finance income' which is mostly 'interest earned on interest swaps'. None of these sophisticated financial tools are used for gambling by PGW. They are used to manage real interest rate and exchange rate risks. When let run to maturity, these financial instruments should not put at risk the profits of PGW. Yet along the way to their destiny these instruments on paper can lose or make money. New accounting standards force these multi year transient effects onto the annual bottom line as a declared profit or loss. These are not part of any particular divisional earnings though, which is why they are not generally reported in the divisional results. Lastly the segment results do not include the results of PGW's discontinued wool operations $3.1m. So that is a total of $30.3m in unsegmented earnings. That goes a long way to explaining the difference between the $73.2m declared profit and my $45.5m calculated figure.
So taking everything into account, I think my table is close to painting a true picture. There are still problems though, which I shall expand on later.
SNOOPY
I appreciate the information Winner. I am not an "Independent" subscriber. But when I saw the reference at sharetrader I thought I might go out and get a copy. The problem was I couldn't find one anywhere! Had a look around a few stores in Christchurch and couldn't see one copy for sale. Went to the library but they only had the previous week's issue. The 30th July issue either sold out really quickly, or there was some distribution problem In Christchurch last week.
You know how the creation of new combination companies (such as Wool Growers) works Winner. I would imagine there was some independent valuation of what the new combined entity would be worth, assuming certain founding partners contributed certain things. The different contributors put what they had to offer the new company on the table. Then after the merger PGW took their share of that value in proportion to their ownership of Wool Growers. The fact that PGW ended up put money into what was the old "Wool Equities", -resulting in the new combined entity 'Wool Growers' being 'worth more' to PGW than if they hadn't done so- is what doing business is all about. Isn't it?Quote:
She was concerned how PGW booked $15m of profit when they sold off wool operations to Wool Growers .... when PGW is the only one to have injested any capital into the new company
Or are you Winner/Chalkie arguing that the independent valuers were wrong. So therefore PGW shouldn't not have booked a profit on the formation of Wool Growers?
Those 'Other Investments' are:Quote:
Chalkie restated the PGW balance sheet post the SFF settlement and only shows the finance company as a one line deconsolidated amount (looking at from an owners perspective?)
Equity................................ 389
Net debt ......................... 435
Pension Liability .....................21
Fianancial derivatives/other...... 1
Total liabilities ..................... 852
Net assets finance business .....53
Other investments ................. 90
Working capital ................... 268
Plant / biological assets............86
Other................................... 26
Goodwill / intangibles .............329
Total assets ........................852
Interestingly she pointed out that the finance business and other investments of $143m are tied up in investments that have their own gearing ... pork on pig she calls
1/ 'Biopacific Ventures', an investment fund established for the investment in food and agricultural life sciences. There is no mention of there being any debt in that and
2/ NZ Farming Systems Uruguay, which is incurring debt as the farms are developed. But NZS is ultimately very definitely designed to be a cash generator, not a cash syphon.
I am not quite sure what Chalkie is saying here. Is it that if you are a subsidiary company, do not borrow to invest in anything?
I have to admit I am not the world's greatest expert on finance businesses. But is collapsing it to a one liner of 'net assets' a fair way to represent PGGW finance?
You saw what I did before Winner, using the 2008 results to determine net debt. Depending on how I ringfenced the PGGW Finance assets and liabilities I was able to calculate quite different answers as to what the debt:equity ratio was. Chalkie may be 100% accurate in what she has calculated. But has she taken an unnecessarily pessimistic view on the way those debts and assets are split betwen PGW Finance and the rest of PGW?
Last year I calculated
PGW Core Debt:Equity : 2008:- 55%:45%
PGW Finance Debt:Equity : 2008:- 89%:11%
Then I did the same calculation with the finance and core group figures mixed in together; and it made the whole group look much worse.
PGW Total Debt:Equity : 2008:- 67%:33%
Perhaps the debt is too much. But are we nevertheless in a better position that FY2008?Quote:
Her main point is that PGW has $256m of free equity to support $435m of debt ... far too much
PGW Total Debt:Equity (Chalkie Estimate) 2009:- 64%:36%
SNOOPY
Snoopy - heres a portion from the article (spelling mistakes are my typing) and hoping Chalkie don't mind me quoting her but seeing you couldn't find a copy she should be pleased with the publicity-
.....PGW sold its wool operations into a joint venture with a farmer owned company called Wool Growers Holdings? (for a gain of $15m). All well and good but Wool Growers Holdings, some 14 months after the announcement, has yet to raise any shareholder capital from farmers. The $37.5m 'paid' by joint venture company Wool Partners International (WPI) has been financed by a $10m equity injection by PGW, a $17.5m preference share issue by PGW and a $10m loan by PGW to Wool Grower Holdings (still a $100 company) which used the money to 'buy' half the the ordinary shares in WPI. No one bar PGW has injected money of substance into WPI, yet PGW has shunted it off the balance sheet and booked a large profit. Nice accounting if you can get away with it.
Press reports have suggested a prospectus from Wool Groer Holdings was due in July but there is nothing on the Companies Office website. Given PGW wool operations made only $3.1m EBIT in 2008 the purchase price should make the targeted farmers shareholders relatively cautious.....
What I think Chalkie has done in that 'deconsolidation' process (a bit like your ring fencing) is to assess what capital PGW has (notionally) put in as capital if that finance business was leveraged 10:1. She did mentioned 10:1 as an OK sort of figure.
In other words the figure of $53m on the restated balance sheet is the 'investment' PGW has in its finance business.
Re that wool business sale chalkie did go on say that if she was the auditor she would insist that PGW reverse that transaction and account for the wool operation as an 'in substance subsidiary' -- thereby reducing shareholders funds by the $15m and putting about $20m of debt on the balance sheet that resides insides WPI.
If what I copied early has happened economically the wool business is all PGWs anyway isn't it so Chalkie does have a point
As an aside FPA are a lot more transparent with their finance arm - their accounts show a balance sheet breakdown (including an equity figure) between the manufacturing arm and the finance arm.
There has also been talk on the street that maybe Marac should buy the PGW finance arm as part of all the shuffling around that PGC is doing at the moment .... maybe it was all too hard and they even couldn't understand the PGW business .... but very probable that may happen one day I would think
Any clearer ... no!
So let me get this straight....
PGW have made up a company hoping that others in the industry will join up so that the industry consolidates (yet no other company has joined and there has been no consolidation). PGW have structured things so farmers can join what is in effect a co-operative. (But no farmers have yet joined.)
So the effective difference between what they had before, the Wool Business Unit and the new "Wool Company Limited" is effectively zilch. Not only does the Emporer who is leading the parade have no clothes. He has no parade following behind him either! And somehow our Emporer has convinced himself that the clothes he is not wearing are magically worth more. So who is pulling the wool over who's eyes here?
If the $3.1m EBIT is indicative and the interest payable (using the company cash interest rate of 8.7%) on those preference shares of $17.5m is $1.52m, and that of the $10m loan is $0.87m then after tax net profit using a 30% tax rate = $0.495m. That means that PGW's $10m equity in the business was bought at a PE ratio of 10/0.495= 20.2. That couldn't be overvalued could it? Good stuff eh!
SNOOPY
So elegantly put it must be true ... good one Snoopy
But PGWs $10m is only half the new company isn't it? ... effectively making the PE higher?
Seems PGW is all about financial wizardry, collecting management fees etc etc instead of actually getting out there day in and day out working hard on making real money ..... no wonder you have trouble trying to work it all out .... just seems to lead yo more and more unanswered questions
Look forward to see what you come up with next Snoopy
Snoopy
Wool Partners International Ltd have an interesting line up of directors
GATTUNG, Theresa Elizabeth 18-JUL-2008
Baypoint Apartments, 2A/172 Oriental Parade, Oriental Bay, Wellington
MCCONNON, Alan Evan 18-JUL-2008
17 Granville Terrace, Belleknowes, Dunedin 9011
NORGATE, Michael Craig 18-JUL-2008
4B/154 St Stephens Ave, Parnell, Auckland 1052
PERRIAM, John Charles 10-JAN-2008
Bendigo Station, R.D. 3, Cromwell
SKILLING, Michael 28-JAN-2009
282 Hurstmere Road, Takapuna, North Shore City
SUTTON, Keith Graham 10-JAN-2008
164 Boom Rock Road, Ohariu Valley, Wellington
WATSON, John Charles
(Quote)Norgate said the $46 million valuation of the wool division had been worked out on the basis of a standard multiple of earnings, but declined to say what those earnings have been.
http://www.nzfarmersweekly.co.nz/article/7394.html
Snoopy -- if you look at the last financial statements for PGW Finance Shareholder Equity or Book Value was $53.892m (June 2008) .... so that figure of Chalkies looks pretty good and sort of confirms that insofar as a balance sheet for PGW she is treating the finance arm as an investment
Nice sleuthing Winner. That article was posted in May 2008. Since that time the Wool Division earnings have been released as part of the PGW 2008 annual report. on page 49.
EBIT was $3.11m. So $46m => 14.8 x EBIT earnings (14.8 is the multiple)
OR based on sales
Revenue = $97.368m. So $46m valuation => 2.1 x sales (2.1 is the multiple)
Do those multiples sound reasonable?
SNOOPY
My sentiments are similar, Biker. I got rid of all my PGW as well as my PGC involvement several months ago. Too much "smoke and mirrors", creative accounting, double-dipping, etc - very reminiscent of what we saw in the 80's. I admire Snoopy's exhaustive analytical research and his tenacity in trying to justify holding onto his ever-diminishing stake but I fear it could end horribly in tears.
I do believe that the agricultural sector in NZ has a bright future, and I also believe that the Government wouldn't stand aside and let PGW go to the wall, as that would shake the confidence of the NZ farming sector mightily, on top of all the other trials and tribulations they are at present experiencing. (If FPA is regarded by our political leaders as too important an NZ icon to allow to fail, PGW would probably be seen in the same light). But I certainly won't be putting any of my hard-earned funds in this direction at this stage.
PGW, who cares right now?. Over burdened with debt in a downtrending sector. The future looks like the downtrend will continue with farm incomes at almost zero. They are showing all the signs of a high risk company, manipulating, and hiding the numbers from the punters. The charts tell it all, no requirement to try and work out the reality of the situation. Incidently, the nickel price is in a steep uptrend, now is the time to jump into MCR which has no debt, and trending up in a steep uptrend. The object of the excercise is to make money, and the only way to do that is when to know when to get rid of downtrending stocks like this before they drag you down with them. I give you MCR which is a share i doubled my money in 2007 and got out, and have now bought back at a cheaper buy price than my first purchase then. PGW if it survives will go much lower than its SP today before it comes right so whats the point of holding?. Macdunk
Hi Macdunk, thanks for the tip on MCR. I'd like a time machine to go back to March 2009 though. If that share rises any steeper it'd be doubling back on itself..
You dont require a time machine all you require is a chart of a rising sector then jump in on a buy signal. The company analysis comes last, which always in any good solid company will follow the sector up and down. Nothing lasts for ever, have a stop loss in a falling sector. The people like me who did that with PGW are the winners I had them at four different stages three being good winners one being a small loss. If they are still around later then the time to buy is when farmers start spending, and the SP shows a buy signal.
Fundamental analysis is as use full as tits on a bull in comparison to market sentiment.
Macdunk
Market sentiment can change any minute. Don't overstate the usefulness of tech analysis. Tech analysis are based on theories and formulas that are public knowledge. If they are as accurate as you are saying, money will be too easy to be made. And the top 100 rich person in the world should be full of share investors.
14 times EBIT really high for most businesses - like even if I = zero it's a PE of 20 eh
But then they prob did some whizz bang DCF with some good assumed growth built in
One thing .... one day farmers are going to have to stump with capital for the Wool Grower Co .... and many prob are going to be the same farmers that are going to be asked for capital in SFF, PGC and maybe PGW itself .... hardly seems the right environment to get cash strapped farmers to open their wallets
Market sentiment shows you what is in or out of favour today. Tech analysis shows you what was leading up to that point with an insight to what might happen in tomorrows market, and further down the track with charting. Fundamental analysis is the accountants view of things, based on truths half truths and down right lies. PGW are in the mist and mirrors league, with figures hard to find which makes for falling market sentiment.
SELL INTO WEAKNESS, BUY INTO STRENGTH. Its a lesson that has taken me many years to learn. I used to find it very hard to make the decision to cut my losses (and let profits run) and there is always the temptation to average down, but I know from experience that it almost invariably pays to cut loose in that situation. One only needs to look back on the FTX thread for some clear object lessons in this regard.
Interesting that you also have latched onto MCR. My original flirtation in 2007 was a bit of a flop - didn't apply the above-outlined approach but rode them down the hill. But my fresh foray a few weeks ago is proving much more rewarding.
I couldn't help notice the pearls of wisdom being passed off over the last day or so on this thread by many of the regulars. But how wise are they with respect to PGW? Perhaps it is time to have a look.
People keep bringing up Feltex when another company looks weak. But there is a huge difference between FTX and PGW. Firstly on a day to day basis PGW is profitable, whereas Feltex wasn't. And PGW has a year and four months to sort out it's banking issues. Not the six months or whatever it was that Feltex had.
The figures aren't that hard to find. Thanks to the sleuthing around by people like Chalkie and Winner the figures *have* been found. That some of the details on the balance sheet are unclear is a reason to do your homework. Not just take the easy route and give up.Quote:
Originally Posted by MacDunk
The share price will move in anticipation of what the farmers are going to do. By the time farmers actually start spending, it will be far too late to get into PGW.Quote:
Originally Posted by MacDunk
Ther are two forces at work here. On a valuation (PE) perspective, PGW is quite modestly valued. Often in a cyclical industry the PE can go very high in the depths of a downturn. At 7 to 9 the PE is not high at all. You could argue from a day to day business perspective the PGW price is already at rock bottom.Quote:
Originally Posted by MacDunk
OTOH from a capital investment perspective, if there really is going to be a 1:1 share issue at 50c you could argue that the share price is too high. Why buy shares now when you night be able to pick them up in a rights issue at 60 or 70 cents? The problem is despite what Chalkie says a share issue is not inevitable. To be successful you will need at least one major shareholder to underwrite it. And I can't see either PGC or RPI doing so.
Personally I think the share price might go lower. But I am not sure about that. And in the short term the upcoming traditionally large end of year dividend should support the share price.
Oh and the survival of PGW is not in doubt. What is in doubt is a potential dilution of equity of the existing shareholders. Companies that are making profits generally do not go bust, no matter what direction the share price is moving.
This is where you need to get things into perspective Biker. Norgate has stepped down from the chair. IMO it is extremely unlikely Norgate will be driving the direction of PGW for quite a while. While waiting for that 'dust to settle', perhaps you might ponder the 'divisional profit chart' that I published on 5th August on this thread. In there you will see that by far the biggest contributor to profits is the seeds business. And Norgate has never had anything to do with that.Quote:
Originally Posted by biker
SNOOPY
But against the herd you must go to make the real bucks. Read 'Slow Day today' to get a blinding example of the herd at work. Instead of taking the opportunity to load up on cheap shares on bargain to sell later, the buggers were moaning and groaning about slow days.
http://www.sharetrader.co.nz/showthr...?t=6964&page=4
FA & TA again
I use both with mainly FA for the buy & a combo for the sell. It is us FA practitioners plus perhaps insiders that give you TA / momentum traders your early signals. I'm happy to be in early before the herd join if a stock is undervalued & pays a sustainable dividend. Likewise if I deem a stock overvalued I'll sometimes sell before a downtrend starts but I'm starting to use TA as an additional sell aid.
With PGW it is a no brainer to recognise it is in a down trend but is the down trend justifiable in FA terms? I sold two parcels in June & July after FA got me concerned
about debt levels & details of some deals. So yes the downward pressure on the price probably was justified. This company, as Snoopy has illustrated, is unlikely to fail. I've concluded high debt is a problem tho & like others are now just waiting to see how things go and if there will be a rights issue.
Like others I think Agricultural stocks will have their day in the sun again. It'll be FA used to try & get in at bargain prices.
[have been investing in ag & other stocks since 1978 with between 60 & 85% of purchases being profitable. managed to retire while in 40's due to investment successes. So FA does work. What suits me about it is you don't need to be following prices all the time, in fact I only record stock prices once a month]
I would like to restate what you said on a subsequent post Winner. If you go to page 9 of the PGGW Finance Report for FY2008 you will see that the total equity of PGGW Finance as at 30th June 2008 was $53.892m. Call that $53m in round figures.
Now look on page 34 of the PGGW parent company's 'Result's Briefing' for the analysts on that same financial year ended 30th June 2008. There you will see the bank debt attributed to PGGW finance as $140m, out if a facility of $180m.
If you go back to the Balance Sheet on page 9 of the PGGW Finance Annual Report, other money that PGGWF can lend comes from PGGWF company issued bonds ($44.751m), secured debentures ($172.928m), and $91.804m of deposits and other borrowings.
That gives the maximum amount of money 'able to be lent' out of current resources at:
$53.892m+$180m+$44.751m+$172.928m+$91.804m= $543.375m
Compare that to shareholders equity at $53.892m and you get a ratio of:
$543.375m/ $53.892m = 10.1 (or 10:1 in round ratio figures).
The way I read that Winner, is that here is nothing 'notional' about these figures. The amount of capital that PGW has committed to PGGW Finance really is $54m (round figures). And the real amount of money they can lend taking into account all avenues of funding is $540m (round figures). The 10:1 figure, far from being made up as 'about right', is the *actual* amount available for loan! Or is what we have here a case of blind luck: That actual amount available for loan just happens to correspond to the figure that is 'about right'?
SNOOPY
Hi Snoopy
When i used the word notional (in brackets you note) I was reading Chalkies mind as to what she was trying to show - PGWs investment in finance.
The I looked at the PGW Finance Balance Sheet which confirmed that number (even though Chalkie was deconsolidating a Dec 08 PGW balance shhet and the PGW Finance financials were June 08)
Then you did your numbers and came up with the same number
A consultancy term is triangulation - if you look at something 3 ways and get the same answer it must be right. Anyway how can the combined brains of Chalkie Winner and Snoopy be wrong - so the conclusion we have come to is right eh
Gets back to Chalkies main point that PGW (exc finance) has $256m of free equity supporting $435m of debt ..... which she says a 1 for 1 at 50 cents is needed to right-size ) a Chalkie term) the balance sheet ... $150m seems a lot of dosh though
In the PGGW half year 2008 report (31st December 2008) under note 6 it says:
"PGG Wrightson entered into a transaction with a new wool growers group co-operative on 1 July 2008 , Wool Grower Holdings Limited, to form The Wool Company Limited (since renamed Wool Partners International Limited). This joint venture will be owned 60% by Wool Grower Holdings Limited and 40% by PGG Wrightson. PGG Wrightson's 40% will dilute as other industry participants join the new venture."
"On 1 July 2008 The Wool Company Limited (now Wool Partners International Limited) purchased PGG Wrightson's wool operations"
At the moment Wool Grower Holdings has not come up with any money for their 60%. In lieu of this farmer shareholder capital my impression was that PGGW put up the $10m loan. I could be wrong about this. But why otherwise would PGW support the new WPI by putting up $17.5m in preference shares AND $10m as a loan? Why not make it $27.5m in preference shares and be done with it?
It looks like when other industry players (eventually?) come on board they will do so by 'buying out' a portion of PGW's 40% stake. Because if new shares/capital were issued that woudl dilute Wool Grower Holdings 60% stake. And there is no mention of this as a possibility.
SNOOPY
Wool Grower Holdings Ltd is a $100 company with Messers Petersen and Shadbolt the joint shareholders
The borrowed from / or PGW lent them the $10m to buy their shares in Wool Partners International
According to the Companies Office the ither 27,5 million odd shares in WPI are owned by PGW
A year has passed and PGW are still essentially the economic owners of the wool operations .... wonder how much money they made or lost ... borad fees alone must be zillions
Snoopy - I don't really understand why I bother be interested in such things with PGW or PGC because I never envisage myself owning shares in them
Probably a long standing inherent morbid fascination I have as to how companies shuffle stuff around and come up with 'innovative' ways of financial engineering .... and what company accounts are really telling us
Is a fascinating study really and one can learn a lot .... and gives some wonderful insights into how comapies thnk and behave.
What conclusion is that Winner?
I wasn't looking for any particular conclusion myself. I was really just trying to understand how the PGGW Finance business works. And unlike you I was using an 'off balance sheet' amount of bank debt in my calculation. To repeat:
That maximum amount of money 'able to be lent' out of current resources at:
$53.892m+$180m+$44.751m+$172.928m+$91.804m= $543.375m
(That includes the $180m bank borrowing ceiling).
BUT the *actual amount of money lent out* on the balance sheet is:
$53.892m+$140m+$44.751m+$172.928m+$91.804m= $503.375m
Take the ratio of $503.375m/$53.892m and you get 9.3:1 (not 10:1)
Chalkie in a different context later in the article used the phrase.
"In practice no company can afford to run this close to its debt security ceiling."
What I am wondering is:
"Can PGGW Finance afford to run this close to its equity facility ceiling?"
I was wondering whether this 10:1 number that Chalkie quotes was in fact a hypothetical ceiling on how much debt any finance company could cope with? With the actual number (in this instance) being 9.3:1.
As I understand it, "in theory" you could run a finance company with no capital at all. All you have to do is find some borrowers who are willing to pay 9% interest. Then find some investors who are keen to receive 7% interest. Then as a reward for matching the willing borrowers and willing investors, you pocket the difference of 2% as your 'finance company profits'.
In practice of course, you could never operate a business like this. Suppose one of your investors needed an urgent operation and wanted to withdraw his investment. OK such an investor would suffer an interest penalty for withdrawing. But the capital to repay that investor would have to be available from somewhere. And in the short term that capital would have to come either from the owner equity capital of the finance company itself (difficult if the owner had not put any equity into the business) or from borrowing facilities that the finance company owner had agreed to with his bank (I would say impossible if the finance company owner had no equity in the business himself). So the question I am posing is, just how much capital does a finance company *need*, in relation to its lending?
I think Chalkie's answer is 10%. But even that amount won't protect the finance company if they get a 'run on funds'. Basically it was only the government's capital guarantee that prevented a run on funds on the remaining finance companies last year. So, how much capital does PGGW Finance need when the government deposit guarantee system runs out? Might it not be rather more than 10% of the loan book ($53m)?
SNOOPY
Colin said in an earlier post on this thread
"I do believe that the agricultural sector in NZ has a bright future."
Well I agree with him. And I think that somewhere in all of this PGW/NZS/Silver Fern Farms/SCT/PGGW Finance/PGC 'mix and mash' there is a buck to be made.
While I to an extent share your fascination with all of the financial engineering that is going on Winner, I am probably less altruistic in my motives. That's because it is (some) of my money that is on the line, albeit by choice.
I am particularly interested in PGGW Finance because I think it may yet go on the block. Possibly to be floated off to the New Zealand public. Those of us with long memories will know that when Wrightson (as it was then) got into debt problems they flogged off their finance division (in a trade sale to Rabobank). And I reckon such a thing could happen again. There is currently a dearth of finance companies on the NZX, so investors may have an appetite for such a share to 'round out their portfolios'. Perhaps PGW could even bury the "cash issue issue" by fully or partially floating off PGGW Finance?
SNOOPY
I don't think it is an ideal time to float a finance company Doc. But then, I don't think it is an ideal time for PGW to raise money in a cash issue either. What I am saying is that where there is necessity (the need to raise cash), then the lesser of two evils will prevail.
And if you as a potential shareholder have the money on hand, you will be able to profit from the distressed circumstances of the seller.
I know the recent history of finance companies in N.Z. So I know that any IPO would have to be very attractive to get interest from the public. You think it sounds unattractive at all costs? Let me try to woo you to the idea then.
5th November 2009 - NZPA
"PGW Today announced the partial float of their subsidiary PGGW Finance today at $1 per share. PGW will retain a 25% stake in the business and 25% will go to Rabobank at AAA rated company with a credit rating higher than the New Zealand government. PGW has a put option on their 25% stake to sell to Rabobank in two years time at $1.25. Under New Zealand's substantial shareholder rules that will trigger a compulsory buy out offer of minority shareholders should this put option be invoked.
The new PGWF company will agree to the covenant of having 20% of the total loans outstanding on hand within the company as shareholders equity. This is twice the level of security as has been the norm in finance companies. Dividends of 7c per share annually are projected. This is twice the return available from bank term deposits since Alan Bollard cut the key cash rate to 1.5% in September 2009. It is anticipated that PGG Finance will have the highest investment grade credit rating of any independent finance company in New Zealand."
What do you think Doc? Interested?
SNOOPY
You forgot to use the word ICONIC .... that'll get a few punters excited ... spose the Pyne and Wrightson names are iconic
[QUOTE
I am particularly interested in PGGW Finance because I think it may yet go on the block. Possibly to be floated off to the New Zealand public. Those of us with long memories will know that when Wrightson (as it was then) got into debt problems they flogged off their finance division (in a trade sale to Rabobank). And I reckon such a thing could happen again. There is currently a dearth of finance companies on the NZX, so investors may have an appetite for such a share to 'round out their portfolios'. Perhaps PGW could even bury the "cash issue issue" by fully or partially floating off PGGW Finance?
SNOOPY[/QUOTE]
This won't happen, Snoopy, for the simple reason that Wrightson soon realised that it had been a mistake to hive off their then finance company. For decades farmers have been accustomed to using their stock and station agency for their seasonal finance requirements - the whole process is interwoven. That's why they didn't waste much time in getting back into the financing business again.
Hey Snoopy, I would not touch any finance company in this market, especially one being floated by PGW with all sort of magic tricks involved. I do recall Robobank involvement in WRI many years back.
I will be very tempted to participate in a rights issue by PGW if they raised enough capital to reduce debt to a sustainable level and give the market a direction and their strategy. PGW was very lucky not to be caught with Silver Ferns.
It is good to see Norgate stand down as chairman. Lets bring on a capital raising soon, I feel one coming.
disc: not a shareholder
Just read your post again Shasta. You probably didn't think about it consciously, but it is interesting to see that reading through a few pages on the PGW thread could lead you to make such a post.
I think it is particularly tellling that you have gained the impression that I am 'going against the herd' by investing in PGW. PGW is one of the few ways the ordinary New Zealander who does not own a farm can invest in the rural sector in this country. The rural sector is responsible for something like 60% of New Zealand's exports. To suggest that someone who invests in the the very largest sector of the economy, and in export receipt terms is the backbone of the economy is somehow in a minority position seems to be patently absurd. Surely it is not possible to take an investment position that is more mainstream than the position I adopt?
I guess my rationale for investing in the rural economy 'right now' is this. Even if you don't think right now that the rural sector is the place to be, because the rural sector is so large it will largely drive other sectors of the NZ economy. If you don't have some 'skin in the game' in the rural sector, how are you going to understand where to make your investments within the rest of the economy?
SNOOPY
$150m would shore up the balance sheet so that the 'free equity':'debt' is approximately 1:1. Traditionally that has been a kind of intersector standard. Even with that $150m level of capital being raised, PGW would still have a high debt burden - given the sector it is in, IMO. I still remember, around the turn of the century, going to an Air New Zealand AGM in Christchurch where Sir Selwyn Cushing proudly stood up and said that Air NZ had more than adequate capital when compared to comparable airlines all around the world. That may have been true. But shortly afterwards Air New Zealand was only saved by a government equity bail out, and most of the strong global airline players that Sir Selwyn was comparing Air NZ to went broke.
While on the subject of industry 'rules of thumb', Chalkie makes the following comment on investing in businesses that are themselves invested in geared industries, the so called 'pork on a pig':
"Pointy-headed analysts have a way of looking at at companies like this by attributing 1:1 an amount of shareholders funds to the geared investments and asking the question, what level of 'free' or residual shareholders funds is left to support the debt on the balance sheet. For PGW this calculation gives $389m of equity, less $143m in geared investments, leaving $256m of free equity supporting $435m of net debt."
That paragraph would suggest that no matter what the level of subsidiary debt, the parent company should provide on the balance sheet a guarantee of capital equal to half the underlying investment value. I don't believe that applying a rule of thumb like this is the best way to decide on the capital adequacy of the parent company. I want to do some more homework on this point.
SNOOPY