Sharebroke Forsyth Barr is forecasting a recovery in the performance of rural servicing company PGG Wrightson.
The broker has retained its full-year financial forecast of earnings before interest, tax and amortisation (ebita) of $89.7 million on the back of aggressive debt reduction plans, but has tempered that because of a mixed trading environment.
It described trading conditions as mixed, commodity prices being generally favourable but partly offset by a stronger exchange rate and weakening farmer confidence.
In an analysis, the broker has also tempered its forecast with concern about the calibre of corporate governance, given the failure to complete the proposed partnership with meat company Silver Fern Farms (SFF).
Forsyth Barr valued PGG Wrightson (PGGW) at $1.67 a share, which assumed a $10 million non-tax deductable settlement with SFF.
The share value of the country's largest rural servicing company has fluctuated wildly on the back of issues such as the collapse of the proposed partnership with Silver Fern Farms, refinancing delays by cornerstone shareholder Rural Portfolio Investments and a lacklustre performance of New Zealand Farming Systems Uruguay (NZFSU) in which it has a 10.6% stake.
Its share price fell from $1.96 early last year to 40c last February.
It traded at $1.06 yesterday.
PGGW announced at its half-year result that it had secured a new $475 million banking arrangement which required a $125 million reduction in core debt by December next year.
It also announced plans to reduce its debt by revamping its non-cash dividend distribution policy, working capital initiatives and the sale of non-core assets.
The $475 million in debt consisted of $275 million in core debt, $125 million of amortising debt and $75 million of seasonal debt.
Key to its debt-reduction plan was settling an outstanding $18 million performance fee from NZFSU, which was dependent on the South American dairy-farm developer securing debt-funding finance from Uruguayan banks.
Working capital initiatives revolved around better debtor and inventory management, while debtors included $20 million in interest-bearing debt which would shift to PGGW Finance.
PGGW was reviewing terms of trade with suppliers and the number of product lines carried to reduce inventory.
The revised dividend policy would enable the full retention of earnings, but the broker warned this could result in ongoing increases in issued capital which was likely to increase share price volatility.
Another unknown was the extent of liability after the collapse of the proposed partnership with SFF.
The two parties were in mediation after SFF rejected PGGW's offer of $10 million as a full settlement.
Mediation was due to end on April 18.
Forsyth Barr has calculated $126 million in debt amortisation, made up of $10 million from the sale of property, the $18 million performance fee from NZFSU, $40 million in reduced working capital, an $8 million tax refund, $4 million term loan repayment, $41 million from retained profits for the 2008-09 year and $15 million from the 2010 half-year profit.
The calculation also allowed for $10 million payment settlement with SFF.
Forsyth Barr expected a new procurement agreement between the two companies which could result in livestock now handled by PGGW being directed to SFF plants.
It has calculated that every $10 million change in that settlement would affect Forsyth Barr's share valuation by about 3.5c.
"There is a risk that any settlement could destabilise the revamped banking facilities. However, this is unlikely to occur in the short term."
