Supermarket margins in a cyclical business environment.
Is the way I see it.
Timing for a recovery in the farming sector will be key. But will it be key for PGW? They have a nice inventory overhang from lower than expected 3rd and 4th quarter sales which they wont be able to unload till next winter given the nature of the products (winter feed etc).
Farmers have really tightened their belts, not just because of lower payouts but because of their sentiment. How would you feel when your asset base had fallen by almost 50% in a year? Not good I'd suspect. This is shown in PGW's variance report vs 2008 for both revenue and ebitda.
What about when the recovery happens? I think you'll see banks being a little more cautious with lending to the rural sector as I'd imagine they have been relatively burnt from this fall out recently... 0.8 EBIT coverage was the talk for dairy farmers with 80% debt a few months back. They may be just covering their opex now with increase in dairy payments, but then again, they will have to fork out for fonterra's new capital structure requirements wont they? Or would you expect all fonterra's farmers to buying through RD1?
Interesting times for PGW, especially re capital raising. I'd think it will be relatively dilutionary given PGC have left no mention of PGW in their intended spend up from their equity raising. RPI is no state to participate. Then a 20% cornerstone will raise how much given their market cap? 50 million at current price. But lets be realistic....40 cents? That will give them ~30 million. They need $200 million. 50% of the share register is in doubt. Maybe a 3-1 at 30 cents would entice retail investors. Thats the sort of discount PGC and NPX had...and they've the same investment bankers! Only hope is if they go like FPA and get a decent price. But really, we've already seen what has happened there and the cornerstone will know about it. Ie they will be seeking a good deal, and why not? They have the bargaining power!
Heaps more to say...but I feel I'd get shot down for bagging!