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 No wonder PGW do not publish their second half results stand alone to highlight such things!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

The link to a previous version of 'Buffett test 1', which is still current in FY2024 is here
https://www.sharetrader.co.nz/showth...l=1#post988229

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 in 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

[Snoopy]

This test does not mean that PGW will always be able to raise margins above the rate of inflation. But it does mean that under certain market conditions it can, thus avoiding an eventual commodity price spiral to the bottom. FY2021 net profit margin of 2.10% and adjusted that by 7%: 2.10% x 1.07 = 2.25%? Actual net profit margin for FY2022 was 2.58%.

Margin here is defined as: (Adjusted NPAT)/(Sales)

FY2019: $7.782m / $798.834m = 0.974%
FY2020: $7.471m / $788.036m = 0.948%
FY2021: $17.819m / $847.815m = 2.10%
FY2022: $24.603m / $953.700m = 2.58%
FY2023: $17.335m / $975.692m = 1.78%


Notes

1/ AR2020 p35 states "The 2019 comparatives have been restated to represent the 'Standardbred' business as a discontinued operation. Now we know that in AR2019 overall revenue was listed as $809.965m. The restated comparative figure for FY2019 was $798.834m. So I am making the assumption that the comparative difference:

$809.965m - $798.834m = $10.431m

represents the turnover of the now closed 'Standardbed' operation over FY2019. The turnover for 'Standardbred' over FY2018 has not been revealed. But as a best guess I am assuming it was the same as over FY2019.

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

If we assume inflation was 7% over FY2022, then:
a/ The revenue growth we might expect between FY2021 and FY2022 would be from $847.815m to 1.07 x $847.815m = $907.162m (a difference of $59.347m). The actual revenue growth was greater than this ($953.007m-$907.162m=$45.845m), which means revenue has grown faster than inflation.
b/ If profits has grown to match inflation, the profits would have grown to: $17.819m x 1.07 = $19.066m (a difference of $1.247m). The actual profit growth was greater than this ($24.603m-$19.066m=$5.537m) which means profits have grown faster than inflation.

We can remove the targetted effect of inflation from the net profit margin from the FY2022 calculation as follows:
($24.603m-$1.247m) / ($953.700m-$59.347m) = 2.61%

This means that taking inflation of 7% into account over that high inflation year of FY2022, the increase in profit margins was a little better than the raw figures unadjusted for inflation would suggest. Three years of improving margins from FY2020 to FY2022 inclusive shows that sustained NPAT margin improvement is possible, even though we took a step backwards over FY2023..

Edit: An alternative way to see if net profit margin has increased at a rate faster than inflation (refer post 5595)
FY2021 net profit margin of 2.10% and adjusted that by 7%: 2.10% x 1.07 = 2.25%? Actual net profit margin for FY2022 was 2.58%.


Conclusion: Pass Test

SNOOPY

This test does not mean that PGW will always be able to raise margins above the rate of inflation. But it does mean that under certain market conditions it can, thus avoiding an eventual commodity price spiral to the bottom. Margin here is defined as: (Adjusted NPAT)/(Sales)

Year	FY Inflation	Net Profit Margin (A)	Net Profit Margin to match Inflation (B)	(A)>(B)?
FY2020:	1.5%	$7.471m / $788.036m = 0.948%
FY2021:	3.3%	$17.819m / $847.815m = 2.10%	0.979%	Yes
FY2022:	7.3%	$24.603m / $953.700m = 2.58%	2.25%	Yes
FY2023:	6.0%	$17.335m / $975.692m = 1.78%	2.77%	No
FY2024:	3.3%	$3.057m / $915.946m = 0.334%	1.89%	No

Notes

1/ Sample net profit margin matching inflation for FY2024 is as follows: 1.76% x 1.06 = 1.89%

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

PGW were able to increase their net profit margins at above the rate of inflation in good rural times. But unfortunately, it all went backwards when rural times got tougher. Nevertheless, PGW has shown us that increasing their net profit at above the rate of inflation is possible.

Conclusion: Pass Test

SNOOPY

[Snoopy]

Management were a little concerned at the half year reporting date on the propensity of company debt to blow out, as interest rates remain high. So concerned that they canned the interim dividend, with no promise of a final dividend either. Have things really got that bad? Time to take a closer look.

My first task is to look at how the Go Livestock 'don't call it a finance division Trev' loans, err I mean 'advances' are going.

Looking at HYR2024, this 'Go Livestock' unit has 'advances' on the books of $40.578m+$0.158m = $40.736m (not accounting for any provisioning which is not separately declared) as at the 31-12-2023 balance date.

Yet $40.736m is an understatement of the loan, ahem I mean 'advance book', on an annual basis. Livestock advances are essentially seasonal. To get a representative 'advances' balance over the half year, it is best to take an average of the two-book ended 'advances' balance data points across HY2024 that we have: 30-06-2023 ($74.023m) and 31-12-2023 ($40.736m):

The averaged Go Livestock balance over HY2024: ($74.023m+$40.736m)/2 = $57.380m

We should note -in passing- that the interest earned on these 'Go Livestock' 'advances' over HY2024 was $4.003m (HYR2024 p20). Based on that averaged 'advances' balance, this represents an annualised gross return to PGW shareholders of:

2x$4.003m/$57.380m = 14.0%

I guess I should have checked with the PGW company usurer before I published that figure, but I do believe it is correct. Blimey, I am starting to feel sorry for our livestock farmers now, but that is a very nice little income stream for we shareholders. YET -and here is my very important learning point- it is not the income on that loan (darn it there is that word I wasn't allowed to use) that is taking the risk out of these loan transactions. It is the value of the livestock, that PGW still own, that is the security on this debt. And according to the auditors (AR2023 p104), the security on that livestock loan portfolio was checked:
"(We) considered beef and sheep meat commodity price movements up to and after balance date to assess whether these changes, which are indicative of changes in the value of livestock security held for Go Receivables, are an indicator of any further credit risk of Go Receivables."

Just as well the auditors weren't sniffing around at the half year date and weren't there to notice the (from HYR2024 p4)
"Softer commodity pricing particularly in sheep and lamb markets where prices were back 28 per cent year-on-year."

isn't it? Thank goodness those auditors never read threads on this forum!

Management was still concerned at the full year reporting date on the propensity of company debt to blow out, as interest rates remain high. As feared, the final dividend was canned

My task here is to look at how the Go Livestock 'don't call it a finance division Trev' loans, err I mean 'advances' are going.

To get a representative 'advances' balance over the full year, it is best to take an average of the three declared 'advances' balance date data points across FY2024 that we have: 30-06-2023, 31-12-2023 and 30-06-2024.

Looking at 'Go Livestock' unit has the following 'advances' on the books (not accounting for any provisioning which is not separately declared):
i/ FY2023, '$71.433m+$2.570m = $74.303m' as at the 30-06-2023.
ii/ HYR2024, '$40.578m+$0.158m = $40.736m' as at the 31-12-2023.
iii/ FY2024 '$50.215m + $2.336m = $52.551m' as at 30-06-2024

The averaged Go Livestock balance over FY2024: ($71.433m+$40.736m+$52.551m)/3 = $54.907m

We should note -in passing- that the interest earned on these 'Go Livestock' 'advances' over FY2024 was $7.294m. Based on that averaged 'advances' balance, this represents an annualised gross return to PGW shareholders of:

$7.294m/$54.907m = 13.3%

I guess I should have checked with the PGW company usurer before I published that figure, but I do believe it is correct. Blimey, I am starting to feel sorry for our livestock farmers now, but that is a very nice little income stream for we shareholders. YET -and here is my very important learning point- it is not the income on that loan (darn it there is that word I wasn't allowed to use) that is taking the risk out of these loan transactions. It is the value of the livestock, that PGW still own, that is the security on this debt. And according to the auditors (AR2024 Auditors report), the security on that livestock loan portfolio was checked:
"(We) considered beef and sheep meat commodity price movements up to and after balance date to assess whether these changes, which are indicative of changes in the value of livestock security held for Go Receivables, are an indicator of any further credit risk of Go Receivables."

Just as well the auditors weren't sniffing around at the half year date and weren't there to notice the (from HYR2024 p4)
"Softer commodity pricing particularly in sheep and lamb markets where prices were back 28 per cent year-on-year."

isn't it? Thank goodness those auditors never read threads on this forum!

SNOOPY

[Snoopy]

We have established that the 'Go Livestock' receivables should not be considered as part of PGW company debt. So how does the underlying debt position of PGW stack up to scrutiny?

Debt Position PGW	EOHY2024
Cash On Hand	($13.307m)
add Short Term Bank Loans	$65.000m
add Long Term Bank Loans	$45.190m
add Net Defined Benefit Liability (Pension Plan deficit)	$2.132m
add Employee Entitlements (1)	$19.944m
Total Bank and Worriesome Liabiliities	$119.259m
less Animal assets (semi-annualised average)	($57.380m)
Total Net Debt	$61.879m

Notes

1/ Not separately declared at the half year. In the absence of up to date information, I have rolled over the full year figure.

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

One tweak I might need to make on the above table is to put a 'fudge discount factor' on the value of PGW's animal assets. The above table is treating animals as 'cash in the bank' which might be a little optimistic. Then again that animal value is the value of the animal as bought at auction - not when it has been fed up six months down the track. So maybe I don't need any fudge factoring? In this case, as long as the weight of the lambs on farm has increased by 39% since being bought at auction for fattening, that is the weight increase needed to compensate for a 'fall per kilo' in the money received of 28%. Could a farmer add that much weight (39%) to a lamb in just a few months? I would love to know.

At first glance that 'blow out' in net debt of: $61.879m - $25.279m = $36.6m over just six months looks alarming. But it is part of a pattern of buying in stock (both 'for the shelf' and literal live animal stock) over the first half of the year and selling it off in the second. So I doubt that the EOFY2024 balance date blowout in debt (if any) will be $36.6m. Yet for wider context, even $25.279m of EOFY2023 net debt is a lot more net debt than the $10.119m that was on the books at EOFY2022, when the outlook for PGW was brighter.

We have established that the 'Go Livestock' receivables should not be considered as part of PGW company debt. That is because GoLivestock assets can always be cashed up by selling the animals for which the loans have been created. So how does the underlying debt position of PGW, with GoLivestock loans removed, stack up to scrutiny?

Debt Position PGW	EOFY2024
Cash On Hand	($3.785m)
add Short Term Bank Loans	$0.0m
add Long Term Bank Loans	$63.000m
add Net Defined Benefit Liability (Pension Plan deficit)	$0.717m
add Employee Entitlements	$14.848m
Total Bank and Worriesome Liabiliities	$74.780m
less Animal assets (annualised average)	($54.907m)
Total Net Debt	$19.873m

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

One tweak I might need to make on the above table is to put a 'fudge discount factor' on the value of PGW's animal assets. The above table is treating animals as 'cash in the bank' which might be a little optimistic. Then again that animal value is the value of the animal as bought at auction - not when it has been fed up six months down the track. So maybe I don't need any fudge factoring? In this case, as long as the weight of the lambs on farm has increased by 39% since being bought at auction for fattening, that is the weight increase needed to compensate for a 'fall per kilo' in the money received of 28%. Could a farmer add that much weight (39%) to a lamb in just a few months? I would love to know.

At first glance that large reduction in net debt of: $61.879m - $19.873m = $42.006m over just six months looks stunning. But it is part of a pattern of holding stock (both 'for the shelf' and literal live animal stock) over the first half of the year and selling it off in the second. The debt for EOHY2025 will need to significantly rise if PGW are to reap the rewards of 'stock sold' over the whole of FY2025.

For wider context, the underlying net debt of $19.873m at EOFY2024 is less than the $25.279m of EOFY2023 net debt. But it is still more net debt than the $10.119m that was on the books at EOFY2022, when the outlook for PGW was brighter.

SNOOPY

[Snoopy]

The next task is to work out what the profit margin is on these GoLivestock loans. To work that out, we need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over HY2024 were: $3.367m + $0.485m = $3.855m (HYR2024 p25). we will use our two-time stamp data points to average the funds borrowed across the half year.

Reference Date	30/06/2023	31/12/2023
Cash & Cash Equivalents	($4.643m)	($13.307m)
Working Capital Debt	$19.960m	$65.000m
Long Term Debt	$50.000m	$45.190m
Total Net Debt	$65.317m	$96.883m

=> Average Debt over Six months = ($65.317m + $96.883m) / 2 = $81.100m

So the annualised interest rate charged by the banks on the funds loaned was: 2x $3.855m / $81.100m = 9.5%. We know from part 1 of this analysis that the return on funds loaned by PGW was estimated at 14.0%. The difference between the borrowed and lent loan rates, multiplied by the average GoLivestock loan balance, is the annualised NPBT earned by PGW from these GoLivestock loans:

(0.140-0.095)x $57.380m = $2.582m.

Of course, it is likely that PGW earns a commission on the buying and selling of this animal stock via its own saleyards as well. But such a commission would likely have been earned whether the animal stock was financed by PGW or not. It is the financing risk we are interested in here. It is only the annualised $2.582m that is directly connected to that.

The $2.582m of annualised profit earned on the funding aspect of the GoLivestock loans, or $1.291m of half year profit, is taxable. The associated after-tax half profit figure was: 0.72 x $1.291m = $0.930m.

Now from the 'Consolidated Statement of Profit and Loss'', the declared profit for HY2024 was $11.949m.
The 'Consolidated Statement of Profit and Loss'', statements for FY2023 and HY2023 allow us to calculate the declared profit for 2HY2023:
$17.518m - $21.158m = ($3.640m), which was a loss

This means the declared consolidated net profit after tax for the twelve months ended 31-12-2023 was just: $11.949m - $3.640m = $8.309m

We can think of this $8.309m as money available to pay down debt, if the banks demanded that debt be fully repaid (in general this is a hypothetical situation).

The next task is to work out what the profit margin is on these GoLivestock loans. To work that out, we need to calculate PGW's bank loan 'borrowing costs' as a percentage of bank funds borrowed. The borrowing costs over HY2024 were: $3.367m + $0.485m = $3.855m (HYR2024 p25). we will use our two-time stamp data points to average the funds borrowed across the half year.

Reference Date	30/06/2023	31/12/2023	30/06/2024
Cash & Cash Equivalents	($4.643m)	($13.307m)	($3.785m)
Working Capital Debt	$19.960m	$65.000m	$0.0m
Long Term Debt	$50.000m	$45.190m	$63.000m
Total Net Debt	$65.317m	$96.883m	$59.215m

=> Average Debt over Twelve months = ($65.317m + $96.883m + $59.215m) / 3 = $73.805m

So, the annual interest rate charged by the banks on the funds loaned was: $7.182m / $73.805m = 9.7%. We know from part 1 of this analysis that the return on funds loaned by PGW was estimated at 13.3%. The difference between the borrowed and lent loan rates, multiplied by the average GoLivestock loan balance, is the annual NPBT earned by PGW from these GoLivestock loans:

(0.133-0.097) x $54.907m = $1.977m.

Of course, it is likely that PGW earns a commission on the buying and selling of this animal stock via its own saleyards as well. But such a commission would likely have been earned whether the animal stock was financed by PGW or not. It is the financing risk we are interested in here. It is only the annual $1.977m that is directly connected to that.

The $1.977m of annual profit earned on the funding aspect of the GoLivestock loans, is taxable. The associated after-tax profit figure was: 0.72 x $1.977m = $1.423m.

Now from the 'Consolidated Statement of Profit and Loss'', the declared profit for FY2024 was $3.235m.
The 'Consolidated Statement of Profit and Loss'', statements for FY2024 and HY2024 allow us to calculate the declared profit for 2HY2024:
$3.235m - $11.949m = ($8.714m), which was a loss.

We could think of this $3.235m as money available to pay down debt, if the banks demanded that debt be fully repaid (in general this is a hypothetical situation).

SNOOPY