Flagging farmer confidence last year will likely lead to a muted interim half-year result for PGG Wrightson on Thursday.
The rural property market has taken a hit over the last 12 months with sales dropping coupled with an increase in mortgagee sales.
Also last year, the Reserve Bank warned lenders about providing too much debt to the farming sector and many of the rural banks tightened their lending criteria over the last six months as a result.
This was partly because banks are more exposed with farming debt and because of an international push for banks to hold more capital and be less leveraged.
In short, it became more expensive for farm lending.
According to Forsyth Barr analyst John Cairns this contributed to farm confidence hitting a low ebb during the six months to December 31 with difficult trading conditions for the rural services and supplies company.
He said it seemed guidance provided at the time of PGGW’s recapitalisation late last year of earnings before income tax around the low $70 million mark, was probably on track.
An interim ebit around $21 million was forecast by Forsyth Barr.
In the company’s interim results last year, the company posted a $32.8 million loss. This included a $35.2 million writedown of its stake in New Zealand Farming Systems Uruguay; a $9.3 million loss on marking to market its currency and interest rate hedges; and $17 million in costs relating to the failed Silver Fern Farmers takeover.
That all contributed to a $66.4 million net loss for the full year, although ebitda for the year was $76.7 million, down $12.5 million on the previous year’s result.
The full cost of the Silver Fern Farm failure was also realised with a total bill of nearly $50 million.
With those costs behind the company, high interest costs on the back of refinancing its banking facilities early in 2009 would likely take a toll on PGGW’s bottom line this week.
It repaid $200 million to its banking syndicate, three months ahead of schedule, just before Christmas, following completion of its rights issue.
It was a busy second quarter for PGGW, which brought on a new cornerstone shareholder in the form of Chinese company Agria, which now owns nearly a fifth of the company.
A rights issue followed which raised $180.7 million, providing the means to repay debt early.
PGGW managing director Tim Miles said then the injection of new capital and the reduction in debt placed the company’s balance sheet in excellence health.
While the reported profit for the six months will likely be on the low side, the company should have a much stronger second half. Due to the seasonal nature of the farming sector, around 70% of the company’s revenue is earned in the second half.
Good news has come from the company’s stake in New Zealand Farming Systems Uruguay which gave an undertaking during the release of its half year results that it would pay its performance free loan to PGGW – nearly $18 million.
An undertaking was given that the payment would be me made by the end of March, the due date, or shortly afterwards.
Meanwhile, New Zealand climatic conditions are relatively benign, although dry in some areas.
Lamb and wool returns have improved slightly and Fonterra’s milk price improved, pointing to improved performance due to increased farmer spending in the second half.
Wed, 24 Feb 2010