Hi Trickspen You make two important points. RG ran a very...

Hi Trickspen

You make two important points.

RG ran a very aggressive bid campaign and sometimes sailed very close to the wind in being misleading. However, re the accounts, there is little that RG could do to fudge the profit, beyond reasonable differences of judgment. Also the AR gives good commentary on the preferred measure of “underlying NPAT” ie is fairly transparent. The accounts must be signed off by the whole board as true and fair, and certified thus by the CEO and CFO, and audited. The financiers would also take a very keen interest. M Wachtel is a former senior partner of EY and wouldn’t risk his reputation, or ASIC penalties, on accounting malpractice, nor would the auditors. In any case the accounts were issued two months after the bid expired, so couldn’t influence the bid. I note your opinion but think it’s highly likely that most of the 12% minority holders are commercial, experienced investors who would be more sceptical than most- especially the TIC founders who have 6.5% and are suing RG for in effect dubious (internal management) accounting re their earn out payment.

I have based my analysis on underlying NPAT and eps not statutory. The AR gives a good explanation of what adjustments were made to reach “underlying” profit, e.g. on pages ii and v. I agree with your point on capex for improvements etc, though it's surprising that p iii says that capex was only $27m above the level of reinvesting for depreciation, plus $97m on Marquis Holdco. If one allows a very bullish 25% pre-tax return on this net new capex investment of $124m that would be a boost of $30m pa in a full year. The underlying ebit margin on continuing businesses was 137/1804 in FY24 v 120/1829 in FY23 = 7.6% v 6.7%. The intro section to the 24 AR showed that all 3 remaining divisions made significant improvements in ebit margins in FY24 so it’s hard to see that these were understated.

My bullish guess above would – if achieved- increase the ebit margin by 1.7% (assuming for simplicity no change to turnover -more likely to be smaller ebit change and some turnover uplift ) and would deliver an extra $20mpa to underlying NPAT of $44.9m v $44.8m. Say to $65m = underlying eps of 19c v 13c in FY24 and FY23. This is not impossible but it’s very ambitious to achieve a 1.7% increase to ebit margin, especially after inevitable cost inflation pressures. In its favour, PGH is very highly geared so relatively small improvements in ebit margins have a bigger effect on the bottom line. In contrast, most of the debt is fixed rate (including in leases): p47 and 51 show that a reduction in general interest rates of 1% would not have a large affect on PGH’s profit.

Based on the above (admittedly very broad-brush), and barring macro economic problems, I think there’s a reasonable chance that underlying eps for FY25 could reach 15c, and longer term might reach 18c. Depending on how quickly such improvement may become apparent, and how “clean” the 1H25 results are, a price of $1.50 (or more) might be justifiable by this time next year.

Not advice. DYOR