Wrightson's first water services loss in five years included $1M irrigation product impairment

Wednesday 9th August 2017

PGG Wrightson recorded the first loss from its water services business in five years after taking a write-down of about $1 million on its irrigation products, says Kar Yue Yeo, an analyst at First NZ Capital.

The company's water business is now grouped with its retail operations and as a group recorded a second-half loss of about $1.5 million on an earnings before interest and tax basis. That was below Yeo's forecast of $500,000 ebit and also reflected weaker-than-expected market conditions and a cool, wet autumn, the analyst wrote in a note.

Wrightson shares fell 1.6 percent to 60 cents on the NZX today. Yeo retained his 'neutral' rating on the stock with a 12-month price target of 62 cents, saying the company's ability to limit its annual decline in earnings before interest, tax, depreciation and amortisation to 8 percent despite a weaker dairy environment and "sub-optimal planting conditions" in Spring and Autumn, was "a testament to the strategic hiring and an improved service culture led by Mark Dewdney", who departs as chief executive at the end of 2017.

Dewdney said the company expected higher earnings for full-year 2018 but won't give a concrete forecast until its annual meeting on Oct. 31.

Based on the results released yesterday, Yeo upgraded his ebitda forecasts for the next two years by 1.4 percent, led by stronger revenue from retail & water. Dewdney said yesterday that he was confident water would be back in profit in the current year but “probably not back to the levels of 2013-14 for a few years.”

For the 2017 year just reported, Yeo singled out as positives a second-half ebit margin of 6.3 percent which beat his 5.1 percent estimate and was an improvement from the 6.1 percent rate it achieved in the year-earlier period. He also noted the improved agency ebit, which was driven by livestock operations. The negatives, including the weaker retail & water result, also included a 12 percent drop in seed and grain ebit and operating cash flow that missed his forecast at $37 million, mainly reflecting the company's 'Go Livestock' deferred payment plan offered to farmers to buy livestock.

"With dairy farmgate return expected to improve significantly in the 2017-18 season from very weak levels in the past three years, our expectation is for PGW to enjoy better earnings in FY18 and beyond," Yeo wrote in his report. "We await the appointment of a replacement CEO who may potentially chart a different course for growth."

(BusinessDesk)

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