PGG Wrightson's $42 million settlement with Silver Fern Farms is likely to push the rural servicing company's bottom-line profit into the red this financial year.
Investment adviser ABN Amro Craigs has forecast PGG Wrightson (PGG-W) to this year report a $9.22 million loss, as a result of one-off costs associated with the failure to complete the partnership with Silver Fern Farms (SFF), before returning to profitability from 2010 on.
A $9 million loss would equate to an $82 million turnaround on the $73 million reported profit in 2008.
On a normalised basis, with one-off costs and gains removed, the broker has forecast only a slight decline in profit between 2008 and 2009, from $39.2 million to $38.8 million, lifting to $41.2 million in 2010.
Settling the dispute with SFF would be welcomed by investors as it removed a risk overhanging the company, but the broker said they would look for signs the company was trading strongly and debt was declining, before re-rating the stock.
Normalised earnings per share was forecast to fall from 13.7c in 2008 to 12.3c this year and 11.9c in 2010 before recovering.
The forecast dividend was similarly expected to take a hit, with the broker forecasting a dividend this year and next year of 11.3c a share compared with 16c a share last year.
Its forecasts reflected the dilution effect of the SFF settlement of cash and shares, and anticipated working capital reductions as debt was paid down.
Debt remained an issue for PGG-W and would peak at $417 million this year before falling to a forecast $381 million next year.
In 2007, it was $305 million.
Despite that, ABN AMRO Craigs said the share price was trading at a discount to its fair value calculation.
The SFF settlement removed one risk but others remained, such as immediate earnings, with the broker describing trading in the second half of the year as mixed, and saying the balance sheet remained "excessively geared".
"The equity market is likely to require more comfort around the near-term earnings outlook and confirmation that the group is achieving its debt reduction targets before materially re-rating the stock."
Investors appeared to be remaining loyal to the company, with its share price closing on Friday at $1.38, up one cent on its opening for the day and up 18c since the start of trade last week.
Brokers report plenty of buyer support but few sellers.
