PGW - PGG Wrightson

[Balance]

https://www.nzherald.co.nz/bay-of-pl...CDOHVS3YB7YZA/


Why farmers make good investors.

Actually not a bad summary and very topical these days as we see farming cashflows spread across other income streams.

Any good experienced farmer will tell you that they expect and prepare for at least 1 bad year out of 4. The ones feeling the pressure tend to be highly leveraged or inexperienced.

The market however prices farming assets in a bad year like it is going to last forever and in the good years, like that is going to last forever too!

Hence, the opportunity for the strong and experienced players to pick up farms cycle after cycle.

One Indian family (Waikato farmers) I socialise with always keep their powder dry and have over the decades, expanded their farming operations with each downturn. They also get their farms upgraded during the downturns - no hassles getting contractors and services. Quietly and low profile, they now are one of the biggest players n the industry.

[Snoopy]

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).


-----------------------------------

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

[Snoopy]

It means the loan balance must be fully repaid at least once during a financial year such that the balance at a point in time during the FY is zero.

Yikes! If we go back to post 5740 and the multi balance date banking loan position, we see that there was sufficient headroom in the Term Debt Facility to pay off the balance in the Working Capital Facility EXCEPT at the latest Half Year declared position, where the amount drawn on the Working Capital Facility of $65m is well in excess of the $44.81m headroom in the Term Debt Facility. Gulp! This isn't necessarily a disaster, because December is still a 'high stock month' and we can expect further sales of stock will reduce working capital debt to zero at some unspecified date in FY2024, before stock is built up again for the Spring. But it does mean that the 'annual clean down' of working capital debt is looking a lot tighter than the previous year. This looks to me to be another reason to hit the pause button on putting more money into PGW shares myself right now.

At some point EBITDA must increase or debt must decrease to keep that banking syndicate happy. The bankers have given PGW a bit more rope as from January 24th 2024 the term debt facilities have been raised by $10m to $100m (HYR2024 p26).

Free cashflow from operations over FY2023 was $25.509m. But take away the 'repayment of the principal portion of lease liabilities' (part of the old rent) and operational free cashflow reduces to: $25.509m-$19.532m=$5.977m. Now take another $18m off that (the EBITDA downgrade for FY2024) and you get a deeply negative number.

If IFRS16 corrected EBITDA is negative to the tune of $12m, how are PGW even going to start to reduce their debt burden? Wind up 'GoLivestock' or sell 'Fruitfed' are my two previous suggestions. But neither of those actions will do any favour to the earnings profile of PGW going forwards. The AGM is starting to sound like a 'must attend'.

SNOOPY

[Ferg]

Snoopy - do we know if PGW did their annual clean during the first half year? Also, given the nature of working capital facilities, they can be repaid pretty quickly using the timing of monthly cashflows to one's advantage. I'm not sure you can borrow from a term facility to repay the working capital facility given that is not the intention of the annual clean down. If the facility is too high and cannot be repaid, then better IMO to transfer some of the balance to a term loan and rebalance the 2 headrooms instead.

[Snoopy]

Snoopy - do we know if PGW did their annual clean during the first half year? Also, given the nature of working capital facilities, they can be repaid pretty quickly using the timing of monthly cashflows to one's advantage.

No we don't know when the annual working capital facility 'clean' happens, except it is not on the 30th June or the 31st December each financial year (the two reporting dates).

Below is the table of annual banking facilities repeated from post 5740, except I have updated the banking facility limits on 31st December 2023, to the new limits granted from 19/01/2024. Oh, and I have indicated the Working Capital facilities drawn in red.

	EOHY2024	EOFY2023	EOFY2022	EOFY2021	EOFY2020
PGG Wrightson Cash Balance	$13.307m	$4.643m	$4.676m	$3.367m	$16.868m
Term Debt Facility (Amount Drawn)	$100m($45.19m)	$90m($50m)	$60m($30m)	$60m($0m)	$50m($20m)
Working Capital Facility (Amount Drawn)	$85m($65m)	$70m($19.96m)	$70m($7.50m)	$70m($9.90m)	$70m($30m)
Overdraft Facility (Amount Drawn)	$3.0m($0m)	$3.0m($0m)	$3.0m($0m)	$3.0m($0m)	$3.0m($0m)
Letter of Credit (Amount Drawn)	$NAm($3.77mm)	$NAm($3.77m)	$NAm($3.58m)	$NAm($3,53m)	$NAm($3.58m)
Total Facility Limit (Amount Drawn)	$163m($114m)	$163m($74m)	$133m($41m)	$133m($13m)	$123m($54m)
Banking Syndicate Loans (Balance Sheet)	$110.190m	$69.960m	$37.500m	$9.900m	$50.000m

Now you could argue that the comparison table is not really fair, because the most recent date is the half year date, when more stock tends to be on the shelves. Whereas all other dates are end of year dates at 30th June (which obviously has not occurred yet for FY2024 as I write this post). But the mountain of Working Capital Debt drawn that must be 'cleaned down' as at 31st December is substantial compared to all previous periods, whatever light you shine on it.

I would argue the 'cleaned down' period is most likely at the end of the selling season, as that is the time most of the 'shop stock' will have moved off the shelves, the fattened up GoLivestock animals will have been sold off the farms, which means as many assets as possible will have been transformed into cash. Perhaps early to mid April? If that is so, that 'clean down date' is in the second half of PGW's financial year. But I guess this whole discussion is in the context of PGW's inventory levels, which are substantial: $107.553m at FY2023 balance date, $130.769m at the most recent half year date. So even with $65m or working capital owing, only half the store stock is 'on tick'.

SNOOPY

[Snoopy]

I'm not sure you can borrow from a term facility to repay the working capital facility given that is not the intention of the annual clean down. If the facility is too high and cannot be repaid, then better IMO to transfer some of the balance to a term loan and rebalance the 2 headrooms instead.

Hmmm, I am not sure if those two quoted sentences are logically consistent. Wouldn't transferring a 'too high' working capital balance to a term loan balance be exactly the thing you are hinting at which you suggest would not be allowed?

SNOOPY

[Ferg]

I am referring to swapping one facility for another on a permanent basis as part of capital management*. What you suggested was temporarily borrowing on one to repay the other which would not be allowed.

*per re-negotiated agreements with the banking syndicate.

On reflection 'headroom' was the incorrect word - it should have been 'limit'.

[Ferg]

Readers will notice that the 'Amount drawn against total facilities' and the banking syndicate total loans as measured on the balance sheet do not exactly match. The difference is the 'Letter of Credit' guarantee which is effectively an off balance sheet debt that may be called in should circumstances determine there be a need to do that.

https://www.investopedia.com/terms/l/letterofcredit.asp
I suggest you read up on the definition of a letter of credit. If in doubt refer to that definition.

Assuming we are not using invented definitions for words, the second half of the following interpretation is not correct:

"the 'Letter of Credit' ... is effectively an off balance sheet debt that may be called in should circumstances determine there be a need to do that."

The gist is that you shouldn't be including letters of credit in your total liability calculations. I get the sense you won't change your analyses in future but it doesn't belong in the debt calculations you are doing. It is effectively a promise to pay an overseas supplier for goods that have been ordered that have not yet arrived. Such commitments to purchase have also been made to local suppliers for the supply of goods at a point after the reporting date, and no such "LOC" or "debt" exists in the accounts for such transactions. The only difference between the two is the location of the supplier. A LOC is not a loan nor a debt, rather it provides the overseas supplier surety they will be paid and as such it is a commitment that will crystallise into an amount payable once the supplier has performed their half of the transaction.

The very rough life cycle for overseas sourced purchases is : purchase order created and sent -> supplier sends invoice -> LOC created -> supplier ships goods -> supplier paid [for simplicity purposes] from the working capital facility -> goods arrive -> working capital facility repaid from sale proceeds.

P.S. I forgot to mention LOC's are not needed in some situations where there is a long standing relationship and mutual trust between the overseas supplier and local customer, whereby normal credit terms can be negotiated without involving bank LOCs. In addition, there are different types of LOCs and I provided an example for a transactional LOC rather than a revolving or standby LOC.

[kiora]

Just to add to the mix.I suspect ?

Like most rural businesses the stock levels/liabilities will likely be effected by delayed charging whereby the wholesaler will supply the product for spring/summer/autumn/winter promotions and delay charge or extend credit for up to 3 months in some cases or until stock levels on the effected items are reduced to "Off Season" levels

[kiora]

https://businessdesk.co.nz/article/e...s-xero-reports

"Agriculture leads the decline by output with 12.1 % less output"