Craig Norgate
The absence of industry consolidation in tandem with
PGG-Wrightson's $220 million stake in Silver Fern Farms, has
prompted one broker to downgrade from hold to reduce shares in
the rural serving company.
Forsyth Barr researchers were sceptical meat company Silver
Fern Farms (SFF) would be able to capture all the synergies
from the partnership without industry consolidation and were
also concerned at the extra debt PGG Wrightson (PGG-W) was
incurring to fund the investment.
Without additional industry consolidation, the PGG-W
partnership with SFF was viewed as simply recapitalising
SFF's balance sheet.
"The existing industry procurement model will ensure the
processors continue to bear a disproportionate share of the
commodity price risk and consequently heightened earnings
volatility," Forsyth Barr said.
There was uncertainty the anticipated savings from synergies
of $59 million a year in the short term and $111 in the long
term could be achieved, and there was also risk whether they
would be achieved from the value chain.
"Apart from the uncertainty of actually achieving the full
projected synergies, there is considerable risk as to where
the synergies accrue in the value chain. Without industry
consolidation, there is every chance any benefits will be
competed away."
PGG-W has raised $115 million in equity and $125 million of
debt, which increased its gearing from 39.4% to $42.3%.
Two cornerstone shareholders, Rural Portfolio Investments and
Pyne Gould Corporation, own 51.6% of PGG-W and the report
speculates any capital raising would involve new equity
partners.
The PGG-W partnership with SFF was sold to SFF shareholders
on the basis of shifting the meat company from being
production driven - processing as many animals as possible to
keep fixed costs low - to year-round production of product to
consumer requirements.
PGG-W would procure livestock to SFF's specification and
provide farmers with advice on animal genetics, nutrition,
agronomy, finance and farm supplies, while SFF would provide
processing and technology, logistics, marketing and branding.
Before shareholders voted, PGG-W chairman Craig Norgate said
its return on investment was having profitable sheep and beef
farmer clients enjoying higher product prices created by the
new marketing and processing model.
Mr Norgate has also supported industry consolidation, but
previous attempts have failed and there appears little desire
for a new attempt.
The report acknowledged PGG-W reported a
stronger-than-expected ebita (earnings before income tax and
amortisation) operating profit for the 2007-08 financial year
of $83.8 million, ahead of Forsyth Barr's expectation of
$78.1 million.
It also said trading conditions were improving for the rural
servicing company, with better prices expected for beef and
lamb, a "robust" outlook for dairying and continued
efficiencies from within the company.
"We believe the full-year 2008 performance indicates that the
long-awaited benefits of the Pyne Gould Guinness and
Wrightson merger are beginning to be captured by PGG-W," the
Forsyth Barr report said.
PGG-W chief financial officer Mike Sang said the company
tightened credit markets meant that what was acceptable
gearing 18 months ago was considered leveraged today.
The company's banks were comfortable and he said PGG-W would
rebalance its balance sheet in the next year, but it would
take time to implement.
Forsyth Barr sharebrokers' financial disclosures are
available on request.
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