New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2>PGG Wrightson<br>FY20 Result&nbsp;— Livestock Activity Limited</h2>
<div></div>
<p><strong>UNDERPERFORM</strong></p>
<p>PGG Wrightson (PGW) reported a soft FY20 result as higher Alert Levels significantly limited activity within its Agency business, weighing on earnings. PGW has a renewed focus on its rural services core, investing in technology, with the aim to improve its ability to serve and gain market share. Whilst we view digital initiatives positively, we expect meaningful growth, beyond a normalisation of recent headwinds, to be difficult to achieve. In addition, we view the near-term outlook as challenging. Regulatory and economic uncertainty, ongoing COVID-19 impacts, and a tightening in the credit environment continue to create a difficult operating environment which we struggle to see reversing in the near-term. At 12.0x forward PE, PGW is trading ahead of its historic range. ​​​​​​​We view the current share price as not offering sufficient value to compensate for low growth opportunities and a challenging backdrop. We reinstate coverage from our Research Insights series with an UNDERPERFORM rating.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/153/443/original/image_11545904351597796155480.png?1597796157" class="editor-image img-responsive" data-smartkarma-image-id="153443"></figure>
<div>
<h3>Soft result, challenging year</h3>
</div>
<div>
<p>PGW&nbsp;reported FY20 Operating&nbsp;EBITDA&nbsp;(pre-IFRS&nbsp;16) of NZ$23.4m,&nbsp;marginally down on the prior year. It was a challenging period for&nbsp;PGW,&nbsp;with drought and&nbsp;COVID-19 restrictions weighing on operating activity. After adjusting for the NZ$3.2m of wage subsidy received, we estimate the FY20&nbsp;COVID-19&nbsp;EBITDA&nbsp;headwind to have been c. NZ$10m.&nbsp;Unsurprisingly,&nbsp;PGW&nbsp;<wbr>decided not pay a final dividend given 1) the weak result, and 2) an uncertain outlook. We assume dividends are reinstated at 1H21.</p>
</div>
<div>
<h3>Story of two halves</h3>
</div>
<div>
<p>Seasonality is a strong feature in PGW earnings, with the first half all about its Retail and Water business and the second half driven by its Agency business. Retail EBITDA increased +14% on the prior year, led by growth in its Fruitfed Supplies business and supported by a recovery in its refocused Water division. A buoyant horticulture sector underpinned performance with anecdotal evidence suggesting market share gains. COVID-19 restrictions effectively halted sale yard activity through Alert Levels 3 and 4, materially weighing on Agency performance (EBITDA down -47%). Providing some offset was continued growth in demand for its Go Receivables product, with revenue up +9% on the prior year. Providing some offset, PGW also delivered on corporate cost out initiatives following the sale of its Seed &amp; Grain business. We expect the annualised benefit to be c. NZ$3m. Going forward we forecast Agency performance to normalise although view material organic growth as difficult to achieve.&nbsp;</p>
</div>
<div>
<h3>Outlook uncertain but tracking well early days</h3>
</div>
<div>
<p>The general outlook in a COVID-19 world is uncertain, with the possibility of additional lockdowns and a clearer economic picture having the ability to weigh on agriculture trade flows and on farm activity. However, PGW has started the year well with trading in its retail business showing a return to 'normal' levels, led by the horticulture sector.</p>
</div>
<div>
<div>
<div>
<div><strong>Guy Hooper</strong></div>
<div><a href="mailto:guy.hooper@forsythbarr.co.nz" target="_blank" rel="noopener">guy.hooper@forsythbarr.co.nz</a></div>
<div>+64 4 495 5255</div>
</div>
</div>
</div>

PGG Wrightson FY20 Result&nbsp;— Livestock Activity Limited

UNDERPERFORM
PGG Wrightson (PGW) reported a soft FY20 result as higher Alert Levels significantly limited activity within its Agency business, weighing on earnings. PGW has a renewed focus on its rural services core, investing in technology, with the aim to improve its ability to serve and gain market share. Whilst we view digital initiatives positively, we expect meaningful growth, beyond a normalisation of recent headwinds, to be difficult to achieve. In addition, we view the near-term outlook as challenging. Regulatory and economic uncertainty, ongoing COVID-19 impacts, and a tightening in the credit environment continue to create a difficult operating environment which we struggle to see reversing in the near-term. At 12.0x forward PE, PGW is trading ahead of its historic range. ​​​​​​​We view the current share price as not offering sufficient value to compensate for low growth opportunities and a challenging backdrop. We reinstate coverage from our Research Insights series with an UNDERPERFORM rating.


Soft result, challenging year


PGW&nbsp;reported FY20 Operating&nbsp;EBITDA&nbsp;(pre-IFRS&nbsp;16) of NZ$23.4m,&nbsp;marginally down on the prior year. It was a challenging period for&nbsp;PGW,&nbsp;with drought and&nbsp;COVID-19 restrictions weighing on operating activity. After adjusting for the NZ$3.2m of wage subsidy received, we estimate the FY20&nbsp;COVID-19&nbsp;EBITDA&nbsp;headwind to have been c. NZ$10m.&nbsp;Unsurprisingly,&nbsp;PGW&nbsp;decided not pay a final dividend given 1) the weak result, and 2) an uncertain outlook. We assume dividends are reinstated at 1H21.


Story of two halves


Seasonality is a strong feature in PGW earnings, with the first half all about its Retail and Water business and the second half driven by its Agency business. Retail EBITDA increased +14% on the prior year, led by growth in its Fruitfed Supplies business and supported by a recovery in its refocused Water division. A buoyant horticulture sector underpinned performance with anecdotal evidence suggesting market share gains. COVID-19 restrictions effectively halted sale yard activity through Alert Levels 3 and 4, materially weighing on Agency performance (EBITDA down -47%). Providing some offset was continued growth in demand for its Go Receivables product, with revenue up +9% on the prior year. Providing some offset, PGW also delivered on corporate cost out initiatives following the sale of its Seed &amp; Grain business. We expect the annualised benefit to be c. NZ$3m. Going forward we forecast Agency performance to normalise although view material organic growth as difficult to achieve.&nbsp;


Outlook uncertain but tracking well early days


The general outlook in a COVID-19 world is uncertain, with the possibility of additional lockdowns and a clearer economic picture having the ability to weigh on agriculture trade flows and on farm activity. However, PGW has started the year well with trading in its retail business showing a return to 'normal' levels, led by the horticulture sector.




Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255




PGG Wrightson: FY20 Result — Livestock Activity Limited

<h2>PGG Wrightson (PGW)</h2>
<p><strong>FY20 Result Initial Impressions — Soft Result, Challenging Times</strong></p>
<p>PGW reported a soft FY20 result with Operating EBITDA of NZ$23.4m (pre-IFRS 16). The key earnings drag was its Agency business, where COVID-19 restrictions effectively halted activity through Alert Levels 3 and 4. After removing the NZ$4.1m wage subsidy benefit, PGW reported a ~NZ$4.4m EBITDA loss in the second half. PGW’s balance sheet appears healthy with FY20 net debt of NZ$33.1m, net debt/Op EBITDA of 1.4x on a supressed result.</p>
<p>Unsurprisingly PGW has decided not pay a final dividend given 1) the weak result and 2) an uncertain outlook. Dividend payments are expected to resume when the market “stabilises.”</p>
<p><strong>Division analysis</strong></p>
<ul>
<li><strong>Retail &amp; Water</strong> &nbsp;— Operating EBITDA pre IFRS-16 NZ$22.0m, up +14% on the prior period. The Fruitfed Supplies business continues to be a bright spot in the group, underpinned by a strong horticulture sector.</li>
<li><strong>Agency</strong> — Operating EBITDA pre IFRS-16 of NZ$8.4m, down -47% on the prior period. The Agency business is second half weighted, accentuating the impact COVID-19 restrictions had on trading.</li>
<li><strong>Corporate costs</strong> —&nbsp;&nbsp;NZ$6.9m, down NZ$3.3m: NZ$2.5m of cost savings achieved through a restructure of the corporate costs following the divestment of its Seed &amp; Grain business.</li>
</ul>
<p><strong>Outlook appears challenging</strong></p>
<p>We view the near-term outlook for PGW as challenging. Regulatory and economic uncertainty, ongoing COVID-19 impacts, and a tightening in the credit environment continue to create a difficult operating environment which we struggle to see reversing in the near-term.</p>
<p><strong>Conference call details — 10am NZST</strong></p>
<p><strong>NZ:</strong>&nbsp;0800 444 845 (Overseas +61 283 733 550)</p>
<p><strong>Conference ID:</strong>&nbsp;1094704</p>
<p><strong>FY20 result summary (NZ$M)</strong></p>
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.1&amp;permmsgid=msg-f:1675310910839501618&amp;th=173fe665b0ecb332&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ-zjFgYXxfVLzKnmgZiUDCG-qjJNmBxDL0W1nPH3U3x39yn_y48d6WzD2Xhp07_QGuNSKCMz4r40Ngb8F8kfjI52TJlimuYvC2IbmQp0ZC5WNSt5F57WtxlSLc&amp;disp=emb" width="446" height="463" class="editor-image img-responsive" data-image-whitelisted=""></figure>
<p>Source: Company reports, Forsyth Barr analysis</p>
<p><strong>Guy Hooper&nbsp;</strong><br>Analyst, Equities</p>
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.2&amp;permmsgid=msg-f:1675310910839501618&amp;th=173fe665b0ecb332&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ94YZ2Ir4bFDlKzz5XHiJnNmx---zyzllcimeMOnqxKKtbEadrQnNS_lhP8tX9BUnOZ_aXXaif8qWPECkBJHBSj39tiW243S27_kxdHS52tj7TqRUcrVXvkYOA&amp;disp=emb" class="editor-image img-responsive"></figure>
<p>P: +64 4 495 5255 | TF: 0800 367 227&nbsp;<br>Level 22, NTT Tower, 157 Lambton Quay, Wellington</p>

PGG Wrightson (PGW)
FY20 Result Initial Impressions — Soft Result, Challenging Times
PGW reported a soft FY20 result with Operating EBITDA of NZ$23.4m (pre-IFRS 16). The key earnings drag was its Agency business, where COVID-19 restrictions effectively halted activity through Alert Levels 3 and 4. After removing the NZ$4.1m wage subsidy benefit, PGW reported a ~NZ$4.4m EBITDA loss in the second half. PGW’s balance sheet appears healthy with FY20 net debt of NZ$33.1m, net debt/Op EBITDA of 1.4x on a supressed result.
Unsurprisingly PGW has decided not pay a final dividend given 1) the weak result and 2) an uncertain outlook. Dividend payments are expected to resume when the market “stabilises.”
Division analysis

Retail &amp; Water &nbsp;— Operating EBITDA pre IFRS-16 NZ$22.0m, up +14% on the prior period. The Fruitfed Supplies business continues to be a bright spot in the group, underpinned by a strong horticulture sector.
Agency — Operating EBITDA pre IFRS-16 of NZ$8.4m, down -47% on the prior period. The Agency business is second half weighted, accentuating the impact COVID-19 restrictions had on trading.
Corporate costs —&nbsp;&nbsp;NZ$6.9m, down NZ$3.3m: NZ$2.5m of cost savings achieved through a restructure of the corporate costs following the divestment of its Seed &amp; Grain business.

Outlook appears challenging
We view the near-term outlook for PGW as challenging. Regulatory and economic uncertainty, ongoing COVID-19 impacts, and a tightening in the credit environment continue to create a difficult operating environment which we struggle to see reversing in the near-term.
Conference call details — 10am NZST
NZ:&nbsp;0800 444 845 (Overseas +61 283 733 550)
Conference ID:&nbsp;1094704
FY20 result summary (NZ$M)

Source: Company reports, Forsyth Barr analysis
Guy Hooper&nbsp; Analyst, Equities

P: +64 4 495 5255 | TF: 0800 367 227&nbsp; Level 22, NTT Tower, 157 Lambton Quay, Wellington

PGG Wrightson (PGW): FY20 Result Initial Impressions — Soft Result, Challenging Times

<h2>PGG Wrightson</h2>
<p><strong>1H20 Result&nbsp;— Beefed Up</strong></p>
<p><strong>Guy Hooper<br></strong>guy.hooper@forsythbarr.co.nz<br>+64 4 495 5255</p>
<p><strong>RESEARCH&nbsp;INSIGHTS</strong></p>
<p>PGG Wrightson (PGW) delivered a good 1H20 result, ahead of expectations, as it benefitted from strong commodity prices, horticulture activity, and delivery on cost-out following recent divestments. Despite a good first half, outlook commentary has softened on the back of coronavirus uncertainty and its impact on agricultural trade flows. PGW has pockets of growth opportunities across both its Retail and Agency businesses, and is starting to deliver on initiatives; however, we continue to see macro-challenges across the medium-term, coupled with with subdued farmer confidence, Government regulation uncertainty, and Mycoplasma bovis concerns.</p>
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">PGW</td>
<td style="width: 48pt;">Financials:Jun/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$2.27</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">9.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">14.3</td>
<td style="text-align: left; width: 43.2pt;">17.3&nbsp;</td>
<td style="text-align: left; width: 48pt;">18.2&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">5.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">2.8</td>
<td style="text-align: left; width: 48pt;">58.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">5.5&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">75.5m</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">12.4&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">18.9&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">22.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">24.1&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">9.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.9</td>
<td style="text-align: left; width: 48pt;">8.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">7.6&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$171m</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">-45.3</td>
<td style="text-align: left; width: 42.6pt;">52.7</td>
<td style="text-align: left; width: 43.2pt;">21.1&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.0&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">18.3&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">9.9&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">9.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">54.6k (NZ$127k)</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">15.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">16.0&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">18.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">20.0&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">0.4</td>
<td style="text-align: left; width: 42.6pt;">1.1</td>
<td style="text-align: left; width: 48pt;">1.1</td>
<td style="text-align: left; width: 42.6pt;">1.0&nbsp;</td>
</tr>
<tr>
<td></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">6.6</td>
<td style="text-align: left; width: 42.6pt;">7.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">7.9</td>
<td style="text-align: left; width: 42.6pt;">8.8</td>
</tr>
<tr>
<td></td>
<td style="width: 48pt;"></td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">9.2</td>
<td style="text-align: left; width: 42.6pt;">9.8</td>
<td style="text-align: left; width: 48pt;">11.0&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.2</td>
</tr>
</tbody>
</table>
<p>Result highlights</p>
<p>PGW&nbsp;reported group Operating&nbsp;EBITDA&nbsp;(pre-IFRS&nbsp;16) of NZ$23.7m, up +33% on the prior comparable period and ahead of expectations. Performance was bolstered by favourable trading conditions as well as a reduction in head office costs.</p>
<ul type="disc">
<li><strong>Retail</strong> — Fruitfed Supplies continues to outperform with in the business, with it benefitting from ongoing orchard redevelopment and use of land changes in Northland.</li>
<li><strong>Water</strong> — 1H20 was another difficult period with revenue declining -34% on the prior comparable period, led by a drop in development of irrigation systems. With Government policy changes and increasing environmental pressure, we do not expect to see a recovery in this sales, although note cost-out is occurring through a reduction in headcount and footprint.</li>
<li><strong>Agency&nbsp;</strong>—&nbsp;A combination of favourable farming conditions and strong commodity prices helped lift Agency&nbsp;EBITDA&nbsp;in 1H20. In addition,&nbsp;PGW&nbsp;continues to enjoy robust demand for its livestock&nbsp;receivables&nbsp;<wbr>business, Go livestock, lifting lending relating to Go products +25%.</li>
<li><strong>Corporate</strong>&nbsp;—&nbsp;Following the sale of its Seed &amp; Grain business,&nbsp;PGW&nbsp;has executed on its corporate cost-out programme.</li>
</ul>
<p>PGW&nbsp;announced a fully imputed interim dividend of 9.0cps.</p>
<p><strong>Outlook and earnings changes</strong></p>
<p>PGW issued revised guidance, expecting FY20E Operating EBITDA "around NZ$30m" (pre-IFRS 16), softening prior commentary of "in excess of NZ$30m". Second half earnings are weighted to performance of the Livestock division. Recent weakness in key commodity prices in combination with&nbsp;&nbsp;coronavirus uncertainty has dampened the outlook for the Livestock business. We have, therefore, lowered our FY20E Operating EBITDA forecasts -4.5% to NZ$30.0m on a pre-IFRS 16 basis to reflect increased risk of earnings volatility.&nbsp;&nbsp;</p>

PGG Wrightson
1H20 Result&nbsp;— Beefed Up
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255
RESEARCH&nbsp;INSIGHTS
PGG Wrightson (PGW) delivered a good 1H20 result, ahead of expectations, as it benefitted from strong commodity prices, horticulture activity, and delivery on cost-out following recent divestments. Despite a good first half, outlook commentary has softened on the back of coronavirus uncertainty and its impact on agricultural trade flows. PGW has pockets of growth opportunities across both its Retail and Agency businesses, and is starting to deliver on initiatives; however, we continue to see macro-challenges across the medium-term, coupled with with subdued farmer confidence, Government regulation uncertainty, and Mycoplasma bovis concerns.
         


NZX Code
PGW
Financials:Jun/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$2.27
NPAT* (NZ$m)
9.4&nbsp;
14.3
17.3&nbsp;
18.2&nbsp;
EV/EBITDA
5.9&nbsp;
2.8
58.0&nbsp;
5.5&nbsp;


Issued shares
75.5m
EPS* (NZc)
12.4&nbsp;
18.9&nbsp;
22.9&nbsp;
24.1&nbsp;
EV/EBIT
9.6&nbsp;
3.9
8.0&nbsp;
7.6&nbsp;


Market cap
NZ$171m
EPS growth* (%)
-45.3
52.7
21.1&nbsp;
5.0&nbsp;
PE
18.3&nbsp;
12.0&nbsp;
9.9&nbsp;
9.4&nbsp;


Avg daily turnover
54.6k (NZ$127k)
DPS (NZc)
15.0&nbsp;
16.0&nbsp;
18.0&nbsp;
20.0&nbsp;
Price/NTA
0.4
1.1
1.1
1.0&nbsp;




Imputation (%)
100
100
100
100
Cash div yld (%)
6.6
7.0&nbsp;
7.9
8.8




*Based on normalised profits


Gross div yld (%)
9.2
9.8
11.0&nbsp;
12.2



Result highlights
PGW&nbsp;reported group Operating&nbsp;EBITDA&nbsp;(pre-IFRS&nbsp;16) of NZ$23.7m, up +33% on the prior comparable period and ahead of expectations. Performance was bolstered by favourable trading conditions as well as a reduction in head office costs.

Retail — Fruitfed Supplies continues to outperform with in the business, with it benefitting from ongoing orchard redevelopment and use of land changes in Northland.
Water — 1H20 was another difficult period with revenue declining -34% on the prior comparable period, led by a drop in development of irrigation systems. With Government policy changes and increasing environmental pressure, we do not expect to see a recovery in this sales, although note cost-out is occurring through a reduction in headcount and footprint.
Agency&nbsp;—&nbsp;A combination of favourable farming conditions and strong commodity prices helped lift Agency&nbsp;EBITDA&nbsp;in 1H20. In addition,&nbsp;PGW&nbsp;continues to enjoy robust demand for its livestock&nbsp;receivables&nbsp;business, Go livestock, lifting lending relating to Go products +25%.
Corporate&nbsp;—&nbsp;Following the sale of its Seed &amp; Grain business,&nbsp;PGW&nbsp;has executed on its corporate cost-out programme.

PGW&nbsp;announced a fully imputed interim dividend of 9.0cps.
Outlook and earnings changes
PGW issued revised guidance, expecting FY20E Operating EBITDA "around NZ$30m" (pre-IFRS 16), softening prior commentary of "in excess of NZ$30m". Second half earnings are weighted to performance of the Livestock division. Recent weakness in key commodity prices in combination with&nbsp;&nbsp;coronavirus uncertainty has dampened the outlook for the Livestock business. We have, therefore, lowered our FY20E Operating EBITDA forecasts -4.5% to NZ$30.0m on a pre-IFRS 16 basis to reflect increased risk of earnings volatility.&nbsp;&nbsp;

<h2><a target="_blank">Food for Thought</a></h2>
<p><strong>What’s in Store for the Primary Industry this Summer?</strong></p>
<p>Weather variability in recent years has led to some adverse outcomes for the New Zealand listed Food, Beverage and Agriculture sector — while we are not out of the woods, recent outlook has normalised for key areas and indicators, hence, risks have reduced. Forecasts are now for ‘average’ conditions over the key Summer harvest period, with movements over recent weeks lowering weather risk. Industry anecdotes we have gathered are also predominantly positive, although it is still early days. We have a positive bias to the sector, with stock preferences (in order): The a2 Milk Company (ATM), New Zealand King Salmon (NZK), and Sanford (SAN).</p>
<figure class="editor-figure mceNonEditable"><img src="https://mail.google.com/mail/u/0?ui=2&amp;ik=f57c39853c&amp;attid=0.0.1&amp;permmsgid=msg-f:1655842314579063897&amp;th=16fabbcfe48bb459&amp;view=fimg&amp;sz=s0-l75-ft&amp;attbid=ANGjdJ_Fybp0ihSzH5NWnF7RzNgQBa7vUjTSCtIeGrFMpvUvpAPzAgkR5E_eHn_g14YheeUNNRPhcBKmniyMTKIMKOWLs0sjDqt3KTUdSZWmyEPyg33JZgsggLdn1mg&amp;disp=emb" width="401" height="186" class="editor-image img-responsive" data-image-whitelisted=""></figure>
<p><strong>Climate outlook snapshot — average conditions with pockets of dry</strong></p>
<p>NIWA’s seasonal outlook for the key Summer period (January to March 2020) is for average temperatures and rainfall, with indicators pointing to neutral weather patterns. History suggests this is favourable for the sector. The current weather outlook for key horticulture/viticulture periods should see Scales (SCL), Delegat (DGL) and Seeka (SEK) navigate summer unscathed.</p>
<p>Key areas of risk are: (1) localised dry spells in the upper North Island — with Fonterra (FSF) and Skellerup (SKL) most exposed, and (2) warmer waters — although temperatures are below last year and forecasts have improved in recent weeks, lowering the risk to NZK and SAN.</p>
<p><strong>Other key data of interest in this edition</strong></p>
<ul>
<li>Recent Kantar data trends positive for growing consumption of ATM’s key Infant Formula products in China. December was particularly strong, with market share in the survey of 7.5%.</li>
<li>Dairy sector health indicators mixed. Positives: demand, milk price and confidence; key risks: negative farm prices, dry weather in some areas of NZ and elevated gearing.</li>
</ul>
<div class="content-highlight">
<p><strong>Investment View</strong></p>
<p>We summarise our sector stock ratings as follows:</p>
<ul>
<li>OUTPERFORM: The a2 Milk Company (ATM), Sanford (SAN), NZ King Salmon (NZK)</li>
<li>NEUTRAL: Scales (SCL), Synlait Milk (SML), Delegat Group (DGL),&nbsp; PGG Wrightson (PGW)</li>
<li>UNDERPERFORM: n/a</li>
<li>Not rated: Comvita (CVT), Fonterra (FSF), Skellerup (SKL)</li>
</ul>
</div>
<p><strong>Chelsea Leadbetter, CFA</strong><br><em>chelsea.leadbetter@forsythbarr.co.nz</em><br>+64 4 495 5262</p>
<p><strong>Guy Hooper</strong><br><em>guy.hooper@forsythbarr.co.nz</em><br>+64 4 495 5255</p>

Food for Thought
What’s in Store for the Primary Industry this Summer?
Weather variability in recent years has led to some adverse outcomes for the New Zealand listed Food, Beverage and Agriculture sector — while we are not out of the woods, recent outlook has normalised for key areas and indicators, hence, risks have reduced. Forecasts are now for ‘average’ conditions over the key Summer harvest period, with movements over recent weeks lowering weather risk. Industry anecdotes we have gathered are also predominantly positive, although it is still early days. We have a positive bias to the sector, with stock preferences (in order): The a2 Milk Company (ATM), New Zealand King Salmon (NZK), and Sanford (SAN).

Climate outlook snapshot — average conditions with pockets of dry
NIWA’s seasonal outlook for the key Summer period (January to March 2020) is for average temperatures and rainfall, with indicators pointing to neutral weather patterns. History suggests this is favourable for the sector. The current weather outlook for key horticulture/viticulture periods should see Scales (SCL), Delegat (DGL) and Seeka (SEK) navigate summer unscathed.
Key areas of risk are: (1) localised dry spells in the upper North Island — with Fonterra (FSF) and Skellerup (SKL) most exposed, and (2) warmer waters — although temperatures are below last year and forecasts have improved in recent weeks, lowering the risk to NZK and SAN.
Other key data of interest in this edition

Recent Kantar data trends positive for growing consumption of ATM’s key Infant Formula products in China. December was particularly strong, with market share in the survey of 7.5%.
Dairy sector health indicators mixed. Positives: demand, milk price and confidence; key risks: negative farm prices, dry weather in some areas of NZ and elevated gearing.


Investment View
We summarise our sector stock ratings as follows:

OUTPERFORM: The a2 Milk Company (ATM), Sanford (SAN), NZ King Salmon (NZK)
NEUTRAL: Scales (SCL), Synlait Milk (SML), Delegat Group (DGL),&nbsp; PGG Wrightson (PGW)
UNDERPERFORM: n/a
Not rated: Comvita (CVT), Fonterra (FSF), Skellerup (SKL)


Chelsea Leadbetter, CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262
Guy Hooper guy.hooper@forsythbarr.co.nz +64 4 495 5255

Food for Thought: What’s in Store for the Primary Industry This Summer?

<h2>PGG Wrightson</h2>
<p><strong>Farmer Activity Subdued</strong></p>
<p>PGG Wrightson (PGW) reaffirmed its FY20 earnings outlook at its Annual Meeting signalling operating EBITDA in excess of NZ$30m, assuming normal trading conditions, which is consistent with our forecasts. However, ‘normal trading conditions’ may be optimistic given (1) subdued farmer confidence levels and (2) a tighter credit backdrop are both likely to weigh on farm investment. There are pockets of growth such as Fruitfed and expansion of its livestock receivables product but we believe the risk to our earnings estimates is to the downside.</p>
<p><strong>Trading update</strong></p>
<p>PGW has reiterated earlier commentary, guiding to operating EBITDA in a normal year in excess of NZ$30m (FY20E NZ$31m). Given the importance of the Spring trading period and the second half weighting of the Agency business, it remains too early to provide firm guidance. An update is expected at its half year result in February. We currently view risks as weighted to the downside, with headwinds from low farmer confidence, tighter lending requirements, and Government policy uncertainty.</p>
<p>Following the sale of the Seed &amp; Grain business, PGW’s Board continues to review its strategy. In the meantime a number of growth opportunities have been highlighted which centre on technology implementation, such as expanding its ecommerce offering, its online livestock trading platform&nbsp;<em>bidr</em>, and its&nbsp;Go&nbsp;products.</p>
<p><strong>Divisional outlook</strong></p>
<ul>
<li><strong>Retail</strong> — It’s a mixed outlook for the Retail business with subdued farmer confidence likely to weigh on farm investment, however, commodity prices are largely robust and ongoing orchard development should continue to be a positive tailwind for its Fruitfed business. We forecast limited growth in the Retail business.</li>
<li><strong>Water</strong> — The Water business remains challenged, in our opinion, given depressed on farm irrigation spend. However, PGW has recently undertaken cost measures, reducing headcount and footprint, with the benefits to accrue in FY20. Additionally, its Advanced Irrigation Systems has a healthy pipeline of landscape irrigation projects.</li>
<li><strong>Agency</strong> — Mycoplasma Bovis concerns are likely to continue to weigh on livestock trading activity. Commodity prices remain mixed with high red meat prices offset by low wool prices. We expect to see a slight recovery in activity, assuming normal seasonal trends, with growth to be driven by PGW’s livestock receivables product, Go. Additional balance sheet headroom provides capacity to increase investment in this business.</li>
</ul>
<p><strong>Dividend policy reaffirmed</strong></p>
<p>Following a review of its dividend policy, which has been left unchanged, PGW’s board expects to pay a 1H20 dividend of “no less than 8cps”, in line with our 1H20E forecast (FY20E 16cps).</p>
<div class="content-highlight">
<p><strong>Investment View</strong></p>
<p>PGW offers investors leverage to New Zealand agri-business markets, with a particular focus on rural services. Low farmer confidence driven by a combination of political and operating uncertainty, in addition to a tightening credit outlook, is likely to weigh on sector investment in the near-term.&nbsp;</p>
</div>
<p><a target="_blank"></a><a target="_blank">Guy Hooper</a></p>
<p><a target="_blank">guy.hooper@forsythbarr.co.nz</a></p>
<p><a target="_blank">+64 4 495 5255</a></p>

PGG Wrightson
Farmer Activity Subdued
PGG Wrightson (PGW) reaffirmed its FY20 earnings outlook at its Annual Meeting signalling operating EBITDA in excess of NZ$30m, assuming normal trading conditions, which is consistent with our forecasts. However, ‘normal trading conditions’ may be optimistic given (1) subdued farmer confidence levels and (2) a tighter credit backdrop are both likely to weigh on farm investment. There are pockets of growth such as Fruitfed and expansion of its livestock receivables product but we believe the risk to our earnings estimates is to the downside.
Trading update
PGW has reiterated earlier commentary, guiding to operating EBITDA in a normal year in excess of NZ$30m (FY20E NZ$31m). Given the importance of the Spring trading period and the second half weighting of the Agency business, it remains too early to provide firm guidance. An update is expected at its half year result in February. We currently view risks as weighted to the downside, with headwinds from low farmer confidence, tighter lending requirements, and Government policy uncertainty.
Following the sale of the Seed &amp; Grain business, PGW’s Board continues to review its strategy. In the meantime a number of growth opportunities have been highlighted which centre on technology implementation, such as expanding its ecommerce offering, its online livestock trading platform&nbsp;bidr, and its&nbsp;Go&nbsp;products.
Divisional outlook

Retail — It’s a mixed outlook for the Retail business with subdued farmer confidence likely to weigh on farm investment, however, commodity prices are largely robust and ongoing orchard development should continue to be a positive tailwind for its Fruitfed business. We forecast limited growth in the Retail business.
Water — The Water business remains challenged, in our opinion, given depressed on farm irrigation spend. However, PGW has recently undertaken cost measures, reducing headcount and footprint, with the benefits to accrue in FY20. Additionally, its Advanced Irrigation Systems has a healthy pipeline of landscape irrigation projects.
Agency — Mycoplasma Bovis concerns are likely to continue to weigh on livestock trading activity. Commodity prices remain mixed with high red meat prices offset by low wool prices. We expect to see a slight recovery in activity, assuming normal seasonal trends, with growth to be driven by PGW’s livestock receivables product, Go. Additional balance sheet headroom provides capacity to increase investment in this business.

Dividend policy reaffirmed
Following a review of its dividend policy, which has been left unchanged, PGW’s board expects to pay a 1H20 dividend of “no less than 8cps”, in line with our 1H20E forecast (FY20E 16cps).

Investment View
PGW offers investors leverage to New Zealand agri-business markets, with a particular focus on rural services. Low farmer confidence driven by a combination of political and operating uncertainty, in addition to a tightening credit outlook, is likely to weigh on sector investment in the near-term.&nbsp;

Guy Hooper
guy.hooper@forsythbarr.co.nz
+64 4 495 5255

New Zealand

PGG Wrightson Limited is a farm service organization on the South Island, operating in Otago and parts of Southland. The Company's operations include wool scouring and dumping, wool and livestock trading, farming financial services, residential real estate and retail farming merchandising, which includes animal health and nutrition and pasture improvements.

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