Mark Peart: PGG profit fails to deliver extra value

Analysis of PGG-Wrightson's maiden financial result has justifiably focused on the bottom line, with the consensus being that the company's full-year performance to June has been less than spectacular.

An after-tax profit of $27 million wouldn't have given chairman Bill Baylis, director Craig Norgate and fellow board members cause for breaking out the champagne and caviar. (In any case, shareholders probably wouldn't approve such luxury in an era where cost-cutting and overhead management is king - they might consider meat pies and a few Tuis more appropriate.)

The directors and senior management are clearly disappointed with a profit result that, under a best-case scenario, is $3 million below the $30 million figure they predicted in October when PGG and Wrightson merged.

The rose-tinted glasses one might use become foggier when it becomes apparent the profit is inflated by $7 million in one-off gains. This serves up the worst-case scenario on a plate.

It's also effectively a double whammy. It makes the result even harder to defend when the revenue contribution to the pure bottom-line profit, so to speak, is only about 75 per cent.

However, Baylis - a wily and experienced company chairman and director - does so with a reasonable degree of dexterity. He points to PGG Wrightson as being now fully established following a rapid, but comprehensive, merger programme. As if to say, yes, the profit result is a dog, but look at the big picture.

A new senior management team and a single set of administrative and IT systems were created, as was a new corporate office in Christchurch. One hundred and fifty properties were rebranded in four months, 17 stores in the rural supplies network were merged in the South Island and the former Wrightson corporate office in Wellington was closed.

Baylis says the closures and mergers contributed significantly to synergy gains.

Further synergies were achieved through improved terms of trade negotiated with suppliers and a reduction in management and corporate overheads.

The full effect of synergies would flow through into the 2006-07 year.

It gives the company some breathing space to deliver a result at the next full-year mark which the market might receive more enthusiastically.

Of course, while the numbers are important, the whole process of consolidation of the rural servicing sector, led by Norgate and his fellow financiers in Rural Portfolio Investments, Dunedin's McConnon family, is about deep-rooted philosophy.

It wasn't that long ago ago that Norgate was in a bloody, pitched battle for control of Wrightson with that company's former board of directors. Norgate to a large degree - and the McConnons to a lesser degree - have staked their reputations on making industry consolidation work.

The farming community, by and large, bought into the consolidation mantra. But as shareholders, and customers in many cases, they will want to see the fruits of that consolidation flow through to their back pockets.

The company, which now includes Williams and Kettle as a constituent member of the PGG Wrightson family, can cite external factors like winter storms, and low beef and lamb prices as intruding on its bottom line and affecting performance.

But the proponents of consolidation made much of the additional value that could be created out of a leaner, meaner rationalised sector. They now want to see firm evidence that this exists.

* Mark Peart is a Dunedin-based freelance writer