Rural servicing company PGG Wrightson (PGG-W) appears to have reached the bottom of the earnings cycle, and structural changes should put it on a stronger footing, according to an optimistic assessment of the company.
Craigs Investment Partners had a buy recommendation on the stock which it values at 76c, well above its recent trading range of around 55c, which it based on a 66c per share valuation of its core business and 10c a share for PGG Wrightson Finance, broker Peter McIntyre said.
The report said that having restructured its balance sheet, PGGW had now restructured the operational side of the business to capitalise on medium-term opportunities.
It said the AgriTech division contained businesses with the potential to generate the highest returns.
"These operations will understandably be the focus for incremental investment going forward."
The report makes much of PGG-W seeds, which accounts for 45% of earnings before interest, tax, depreciation and amortisation (EBITDA), its international reputation and opportunities to grow in Australia and South America, he said.
There were also opportunities to grow its New Zealand business, with farmers only renewing between 4% and 5% of pasture each year, but changes to farm ownership structure could increase that further.
"The increasing corporatisation of the dairy industry in New Zealand seems likely to create a favourable backdrop for such a selling opportunity."
The AgriServices division contains businesses which generate "less attractive returns", and where fortunes were aligned to the domestic agricultural cycle.
"The focus here will be primarily on improving internal efficiency via various business process improvements."
PGG-W's financial position had improved and was expected to continue to do so after this year, Mr McIntyre said.
Forecast sales for the year to June 30 were expected to be down from $1.2 billion in 2008-09 to $1.1 billion in the last financial year.
Earnings before interest, tax, depreciation and amortisation were expected to fall from $81 million to $72 million in the year under review, and net profit from $30 million to $23 million.
But, improvement was expected from 2011 on, with sales to reach $1.145 billion, EBITDA $77 and net profit $39 million.
Investing in the agriculture sector was considered risky and earnings volatile, but the report said the medium term outlook appeared bright given a global imbalance of demand and supply of agricultural produce.
