PGW - PGG Wrightson

[Snoopy]

HY2024	Retail & Water	Agency	Back Office Total
Revenue	$478.301m (85.4%)	$81.589m (14.6%)
EBITDA	$39.962m	$1.431m	($4.775m)
less Back Office EBITDA ReAllocation	($4.078m)	($0.697m)
less Net Interest Allocation	($2.019m)	($1.035m)	($1.666m)
less Back Office Interest ReAllocation	($1.423m)	($0.243m)
less Depreciation & Amortisation	($8.214m)	($4.771m)	($1.537m)
less Back OfficeDA Reallocation	($1.299m)	($0.238m)
less Income Tax Benefit (Expense)	($8.412m)	$1.154m	$2.469m
add Back Office Tax ReAllocation	$2.109m	$0.360m
equals NPAT	$16.626m	($4.039m)
Net Profit Margin	3.48%	-4.95%

Notes

1/ Reallocation apportioning is on the basis of divisional revenue.

The first half produced a NPAT of: $16,626m-$4.039m = $12.587m

How bad did it really get in that second half year?
This is a 'subtraction exercise', because we know the 'divisional profitability of FY2024' and the 'divisional profitability of HY2024'.

2HY2024	Retail & Water	Agency
Revenue	$255.275m	$99.110m
EBITDA	$1.080m	$10.883m
less Back Office EBITDA ReAllocation	($3.289m)	($1.122m)
less Net Interest Allocation	($1.380m)	($2.589m)
less Back Office Interest ReAllocation	($0.985m)	($0.382m)
less Depreciation & Amortisation	($8.895m)	($3.781m)
less Back OfficeDA Reallocation	($1.249m)	($0.391m)
less Income Tax Benefit (Expense)	$2.808m	($1.248m)
add Back Office Tax ReAllocation	$0.644m	$0.320m
equals NPAT	(-$11.266m)	$1.690m
Net Profit Margin	-4.41%	1.71%

Notes

1/ Reallocation apportioning is on the basis of divisional revenue.

Total loss figures for the second half after tax were: -$11.266m+$1.690m=-$9.576m, with livestock auctions lightly 'saving the day'. No wonder PGW do not publish their second half results stand alone to highlight such things! But having said that, Rural Supplies, where farmers are buying their farm input goods at the start of the growing season are always weighted to the first half. And Agency, dominated as it is by livestock auctions is always going to be weighted to the second half as fattened up animals are sold for good process. That means the pattern of these second half results are not unusual and it does not mean the company is 'going to the pack'. But the 2HY2024 result does represent a negative tinge on the more usual seasonal result pattern.

SNOOPY

[Snoopy]

To calculate the 'cost of sales' from the 'sales revenue' you have to know the net profit margin. You won't find that figure in any PGW report. However, it is possible to work in out. And this is an exercise that I have now done (posts 5774, 5775 and 5776). So I can now redo these stock turnover calculations as per Ferg's suggestion.

Period Stock Turn = (Cost of Period Revenue)/(Snapshot of Inventory value)

Average Inventory FY2023 = ($107.533m+$129.717m+$102.048m)/3 = $113.099m
Cost of Retail and Water Revenue = (1/1.0213)x$765.661m = $749.693m
=>FY2023 Annual Stock Turn = $749.613m/$113.099m= 6.6 times

Average Inventory HY2023 = ($129.717m+$102.048m)/2 = $115.883m
Cost of Retail and Water Revenue = (1/1.0454)x$487.909m = $466.720m
=>HY2023 Stock Turn = $466.720m/$115.883m= 4.0 times (equivalent to 8.0 times annual rate)

Average Inventory HY2024 = ($130.769m+$107.533m)/2 = $119.151m
Cost of Retail and Water Revenue = (1/1.0348)x$471.471m = $455.616m
=>HY2024 Stock Turn = $455.616m/$119.151m= 3.8 times (equivalent to 7.6 times annual rate)

The result of the correction is a little bit of a drop in the stock turn rate. But the basic narrative remains unchanged. That being that stock turns over faster in the first half than the full year, and that the stock turnover rate over HY2024 is a little behind that over HY2023, although it is not alarmingly lower. That is pretty much what you would expect in a rural downturn. This is of course not what shareholders would like to see. But I don't see a sign of mismanagement here. To improve the stock turnover you would have to reduce inventory even more, which may not provide farmers with the choices that they need or want.

To calculate the 'cost of sales' from the 'sales revenue' you have to know the net profit margin. You won't find that figure in any PGW report. However, it is possible to work in out. And this is an exercise that I have now done (post 5841). So I can now do the stock turnover calculation.

Declared 'retail and water' revenue over FY2024 was $719.961m
Declared 'retail and water' revenue over HY2024 was $471.471m
=> Calculated retail and water' revenue over 2HY2024 was $248.490m

Period Stock Turn = (Cost of Period Revenue)/(Snapshot of Inventory value)

Average Inventory 2HY2024 = ($130.769m+$95.192m)/2 = $112.981m
Cost of Retail and Water Revenue = (1/(1-0.0441)x$248.490m = $259.954m
=>2HY2024 Stock Turn = $259.954m/$112.981m= 2.3 times (equivalent to 4.6 times annual rate)

The basic narrative remains unchanged. That being that stock turns over faster in the first half than the full year. The stock turnover rate over HY2024 is a new recent low and behind HY2024, which does cause me concern. But that is what you would expect in a rural downturn. Yet to improve the stock turnover you would have to reduce inventory even more, which may not provide farmers with the choices that they need or want (as per Toddy's experience today).

SNOOPY

[Snoopy]

I am not going through the full 'Buffett' analysis for PGW this year, because I know not enough has changed to allow the company to gain an overall pass. But I will update the quantitative statistics for 'other discussion purposes'.

Profit Normalisation table	FY2023	FY2022	FY2021	FY2020	FY2019	Reference
Declared Profit	$17.518m	$24.286m	$22.720m	$7.133m	$4.510m
less (add) Fair Value Gains (Losses) net of Impairments	0.72x($0.051m)	0.72x$2.182m	0.72x($1.832m)	0.72x$0.807m	0.72x$3.187m	AR Note 5
less (add) Foreign Exchange Gains (Losses)	0.72x$0.737m	0.72x($0.430m)	0.72x$0.094m	0.72x($0.178m)	0.72x($0.812m)	AR Note 6
less (add) IFRS16 adjustment	0.72x($0.613m)	0.72x($0.613m)	0.72x($0.613m)	0.72x($0.027m)		Post 5347
less (add) Non operating gains (losses)	0.72x($0.327m)	0.72x($0.699m)	0.72x($4.456m)	0.72x($0.132m)	0.72x$2.170m	AR Note 4
equals Normalised Profit	$17.335m	$24.603m	$17.819m	$7.471m	$7.782m

Notes

1/ I don't believe there is sufficient disclosure in AR2022 or AR2023 to allow us to calculate an IFRS16 profit adjustment for FY2022. In the absence of this, I have rolled forward the IFRS16 adjustment for FY2021 into FY2022 and FY2023, assuming it to be the same.
2/ Earnings per share calculations (below) have been adjusted to take into account the 9th August 2019 10:1 share consolidation, reducing the number of shares on issue to 75.484 million.
3/ FY2019 figures are those referred to from AR2020 and some of those figures have been restated


Earnings Per Share Calculations

FY2019: $7.782m / 75.484m = 10.3c
FY2020: $7.471m / 75.484m = 9.9c
FY2021: $17.819m / 75.484m = 23.6c
FY2022: $24.603m / 75.484m = 32.6c
FY2023: $17.335m / 75.484m = 23.0c

The extraordinary drop in profits between FY2018 and FY2019 had me diving back to my FY2019 annual report to see what went wrong.

From AR2019 p5.
"Reflecting on FY2019, we believe it was one of the most operationally challenging of recent years. Farmer confidence in parts of the agriculture sector remains subdued, constraining farm spending and therefore our revenue for the year. This has also been evident in recent months with a discernible tightening of the credit environment"

From AR2019 p6:
"The impact of mycoplasma bovis (present in NZ since mid-2017) was felt across the livestock and rural supplies business. Most particularly with reduced dairy herd settlements, a reduction in tallies, a softening in demand for dairy beef and and a more cautious approach to spending in the dairy sector across a range of farm inputs."
"Market conditions continued to challenge both our Real Estate and Wool businesses with results down on last year."

That all seems like a reasonable 'excuse'. But I guess it reflects the view that when the dairy industry catches a cold, it is hard for the rest of the farmers in NZ in other sectors to make up the lost income. Tougher market conditions for meat and milk especially have once more emerged over 2023, disrupting any overall upwards earnings trend once again.

Conclusion: Fail Test

I am not going through the full 'Buffett' analysis for PGW this year, because I know not enough has changed to allow the company to gain an overall pass. But I will update the quantitative statistics for 'other discussion purposes'.

Profit Normalisation table	FY2024	FY2023	FY2022	FY2021	FY2020	Reference
Declared Profit	$3.064m	$17.518m	$24.286m	$22.720m	$7.133m
less (add) Fair Value Gains (Losses) net of Impairments		0.72x($0.051m)	0.72x$2.182m	0.72x($1.832m)	0.72x$0.807m	AR Note 5
less (add) Foreign Exchange Gains (Losses)	0.72x($0.734m)	0.72x$0.737m	0.72x($0.430m)	0.72x$0.094m	0.72x($0.178m)	AR Note 6
less (add) IFRS16 adjustment	0.72x($0.613m)	0.72x($0.613m)	0.72x($0.613m)	0.72x($0.613m)	0.72x($0.027m)	Post 5347
less (add) Non operating gains (losses)	0.72x$0.067m	0.72x($0.327m)	0.72x($0.699m)	0.72x($4.456m)	0.72x($0.132m)	AR Note 4
add back Building Depreciation Tax change one-off	$0.915m					AR Note 7
equals Normalised Profit	$3.057m	$17.335m	$24.603m	$17.819m	$7.471m

Notes

1/ I don't believe there is sufficient disclosure in AR2022 or AR2023 to allow us to calculate an IFRS16 profit adjustment for FY2022. In the absence of this, I have rolled forward the IFRS16 adjustment for FY2021 into FY2022 and FY2023, assuming it to be the same.
2/ Earnings per share calculations (below) have been adjusted to take into account the 9th August 2019 10:1 share consolidation (during FY2020), reducing the number of shares on issue to 75.484 million.


Earnings Per Share Calculations

FY2020: $7.471m / 75.484m = 9.9c
FY2021: $17.819m / 75.484m = 23.6c
FY2022: $24.603m / 75.484m = 32.6c
FY2023: $17.335m / 75.484m = 23.0c
FY2024: $3.057m / 75.484m = 4.0c

Tougher market conditions for meat and milk especially have once more emerged over 2023, disrupting any overall upwards earnings trend once again. High interest rates contributed to only 27% of all farmers making a profit over FY2024, and 37% just breaking even. Plus, FY2024 was still a cyclone recovery year, with the previous baseline earnings in the Hawkes Bay being reset downwards.

Construction Contract revenue (note 1 in the accounts), provided to customers in the Water business to construct pivots and irrigation systems, was down 33%. PGW do not provide separate disclosure for the 'water' part of the business (it is lumped together as 'Retail and Water'). But we can take it from the revenue decline that this business unit was severely affected and loss making over FY2024.

Conclusion: Fail Test

SNOOPY

[Snoopy]

ROE here is defined as: (Adjusted or Normalised NPAT) / (End of Year Shareholder Equity)

FY2019: $7.782m / ($398.264m-$234.000m) = 4.74%
FY2020: $7.471m / $156.702m = 4.77%
FY2021: $17.819m / $173.538m = 10.3%
FY2022: $24.603m / $172.684m = 14.2%
FY2023: $17.335m/ $169.261m = 10.2%

Notes

1/ The $234m capital return to shareholders from the seed division sale eventually took place in FY2020, on 09/08/2019, following the settlement of the 'seed deal' on 01/05/2019. These two dates straddle the PGW end of year reporting date of 30-06-2019 (FY2019). A capital return was well signalled. So, I believe it would be most representative to remove the capital return from the shareholder equity held on the books at the 30-06-2018 balance date (and hence also the 30-06-2019 balance date) for the purposes of making a 'Return on Equity' calculation.

ROE is consistently below the 15% goal for all years under consideration.

Conclusion: Fail Test

ROE here is defined as: (Adjusted or Normalised NPAT) / (End of Year Shareholder Equity)

FY2020: $7.471m / $156.702m = 4.77%
FY2021: $17.819m / $173.538m = 10.3%
FY2022: $24.603m / $172.684m = 14.2%
FY2023: $17.335m/ $169.261m = 10.2%
FY2024: $3.057m/ $164.733m = 1.86%

Notes

ROE is consistently below the 15% goal for all years under consideration.

Conclusion: Fail Test

SNOOPY

[winner69]

Snoops …. do you think F21 through F23 results were a result of a ‘super cycle’ that won’t be repeated for some years

Several companies have reported this trend and one or two used the term ‘super cycle’ ….usually in context current profit can’t be compared to ‘super cycle’ profits blah blah

If so eps around the 10 cent mark would be the norm.

Thoughts

[Snoopy]

Snoops …. do you think F21 through F23 results were a result of a ‘super cycle’ that won’t be repeated for some years

Several companies have reported this trend and one or two used the term ‘super cycle’ ….usually in context current profit can’t be compared to ‘super cycle’ profits blah blah

If so eps around the 10 cent mark would be the norm.

Thoughts

I haven't thought of the FY2021-FY2023 period in those words before Winner. But I think your observation is spot on. I cannot remember a time period outside of FY2021 to FY2023 when every agricultural commodity (bar logs which is the one thing PGW are not really into) was doing so well all at the same time. Sheep and Beef farmers were getting great prices for their product. Horticulture was doing well. Dairy farmers likewise. It was an incredible confluence of positivity, the likes of which I have not seen before in agriculture. I might have even seen a farmer crack a smile once over that time - something that I thought was an extinct expression of the stoic agricultural type.

I like to invest with the prospect of market conditions returning to the norm. But it could be the 'norm' of FY2021 to FY2023 will never be seen again! I am still looking to increase my shareholding in PGW further. But I feel no urgency to do so. I can afford to wait until Mr Market has another silly session.

SNOOPY