PGG Wrightson still sowing good seeds

Company: PGG Wrightson Ltd Sector: Agriculture Overview: The share price of PGG Wrightson finally sprouted on Tuesday with the company’s release of its full-year results. PGW, the rural services provider and seed and grain developer, enjoyed the benefits of record milk prices and good growing conditions to produce its ‘‘strongest result for several years’’. Pros: PGW offers investors rare exposure to New Zealand’s agricultural heartland. Along with the Christchurch rebuild, rural New Zealand has been the engine room of the economy’s very strong growth of late.

PGW has made the most of this growth, reporting increased operating earnings across all of its divisions. While its rural services division is the current driver of profits, it is the seed and grain division that offers the most long-term growth potential. PGW is also targeting market share growth from all of its business units as a way to grow earnings. Cons: While the recent result was impressive, it has been achieved on the back of record milk prices and very strong commodity prices across the board.

Commodity prices are cyclical, however, with milk prices already coming back considerably. The recent drop in the farmgate milk price is forecast to reduce farmers incomes by as much as $4.3 billion in the 2014-15 season. This will certainly impact PGW.

Weather can also have a large bearing on PGW’s earnings. Droughts in Australia in 2013 forced PGW into an earnings downgrade, while the excellent growing conditions this season allowed PGW to beat expectations. With Niwa reporting a 70 per cent chance of El Nino conditions this summer, there is a good chance of dry conditions on this side of the Pacific. Price performance: The share price is up 13 per cent this week, recently trading at 43.5 cents a share. Investment outlook: The company certainly made hay while the sun shone. The question is whether it can back it up in slightly less perfect conditions in this cyclical industry.

A Broker’s View is written by Grant Davies, authorised financial adviser at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, which may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.