Friday, March 29, 2024

PGW invests for farm spending reboot

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PGG Wrightson is confident of further growth for its Fruitfed business in an expanding horticulture sector and is planning expansion of its Go funding product for sheep and cattle farmers.
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After what the rural services group calls a challenging and transformational year, the directors and management are taking a positive but cautious approach, chief executive Stephen Guerin said.

Though the new financial year is just a few weeks old they expect to achieve operating Ebitda of more than $30 million, up from $24.4m in the June year just completed.

The outlook encouraged the directors to pay a fully-imputed final dividend of 7.5c a share on the $4m of ordinary after-tax earnings in the latest year, which provided earnings a share of just 5c. The profit was down from $9m a year earlier.

The Ebitda forecast is based on a more normal trading year, expected continued strong world demand for protein leading to good sheep meat and beef prices and better confidence in the ability to manage the Mycoplasma bovis issues flowing through into improved trading, chairman Rodger Findlay said.

The group is buoyed by ongoing horticulture confidence, believing Fruitfed will go from strength to strength.

PGW is building its business for a recovery in farm spending, continuing to invest in IT, notably e-commerce activity.

The agency and retail and water divisions had lower Ebitda, the group’s favoured measure of operating performance, in the latest year but in the latter division Fruitfed increased its earnings despite a $1.8m net cost over a defective product supplied to it to sell to customers, Guerin said.

Fruitfed has a national market share well above 50% in its business and is benefiting especially from the crops planted in the last couple of years coming into production. That is expected to continue in the kiwifruit, apple and avocado sectors with some developments also likely with vegetable crops on the Canterbury Plains.

Fruitfed makes up about 30% to 40% of the retail and water earnings. Water is a difficult sector because of curtailed irrigation development so about 20 staff have been put off as it was downsized.

The Go funding business increased its lending to farmers to $47.7m from $39.4m a year earlier, Guerin said. 

Expansion is planned but was put on hold as the company dealt with the sale of the seeds and grain business as well as executive and board changes.

“We’ve got an internal cap on how much we lend and after doing some preliminary work we will be picking up on it again soon to decide what level we can go to.”

Go is a good business with a quite rapid turnover period of nine to 12 months for cattle and shorter for sheep, for which most lending is done. PGW retains title to the livestock while they are finished on-farm, gets a margins on the holding costs over that time and receives the buy-and-sell commissions.

The year just gone provided the most challenging operating conditions in recent times, cutting into revenues and profits, Findlay said. It coincided with the sale of the seeds and grain business to Danish group DLF Seeds.

Lower confidence in some sectors reduced farm spending. Doubts caused by M bovis affected the livestock  business with dairy-related activity lower. A tightening in the credit environment also influenced farm spending.

At $24.4m, the operating  Ebitda was down from $34.5m a year earlier and slightly lower than guidance in May. That was caused by on-farm conditions, Guerin said.

Revenue was steady at $809m. An operating cash outflow of $49m, including the seeds business, was recorded compared to positive cashflow of $5.76m previously. About $12m of the outflow related to the seeds business and the group also made a $10.3m pension fund payment.

The agency business profit was also back on the prior year because of market conditions. Livestock earnings were lower at the half-year and did not recover to the extent expected despite strong sheep and beef prices and demand. Some sheep and beef finishing was delayed.

In the dairy sector M bovis reduced herd settlements and dairy beef trading.

PGW will continue to work with DLF, distributing seeds to it clients.

PGW paid down its borrowings after the sale of the seeds business. At the June 30 balance date, it had total assets of $565.5m and an equity ratio of 70%. 

The profit on the seeds sale was $134m. PGW had booked  a $6.4m loss on the division before the sale, leaving a net gain of $127.8m. That left a bottom line profit of $131.8m.

PGW paid out $234m in a return of capital to shareholders after the sale.

In July the company set-up new core banking facilities of $50m, plus a working capital facility of $70m, both on competitive terms, Guerin said.

Findlay said the group will provide earnings guidance at the annual meeting in October, once the busy spring trading period has started. A smaller corporate model following the seeds sale is expected to produce $2.5m in savings this financial year.

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