KEY POINTS:
Deputy chairman Craig Norgate says PGG Wrightson will have to hit its full-year profit target before doubters are convinced the merger that created the rural services giant is a success.
The comments - from the former Fonterra boss who drove the merger - came after the company posted a 20 per cent lift in half-year operating profit yesterday, despite tough conditions.
But PGG Wrightson acknowledged that even if profit targets are hit, the net profit could end up being between $24 million and $30 million, raising the prospect of it dipping below last year's $27 million.
Last August, the company said it had missed its annual $30 million profit forecast for 2005-06 by $3 million due to a rural downturn - the result would have been even worse if the firm had not made unbudgeted net gains of $7 million from property and business sales.
The company's results yesterday showed an operating profit of $16.8 million for the six months to December 31. That figure, excluding one-off gains and losses or amortisation, compared with an operating profit of $13.9 million in the half year to December 2005. The lift came despite tough conditions faced by the rural sector.
On whether the latest result would be enough to help silence merger benefit doubters, Norgate said: "I think the jury will start coming in. We've still got to deliver what we're saying about the full year first."
PGG Wrightson said if there was a continuation of current operating conditions it expected net profit after tax and before amortisation (NPATA) - including one-off gains of $8 million - to be $39 million to $45 million.
Norgate said PGG Wrightson was in "bloody good shape" and getting NPATA of $39 million to $45 million would make him "very happy" in current conditions.
One analyst said amortisation for the full year could be as high as $15 million, suggesting net profit after amortisation in the $24 million-$30 million range and raising the possibility it would be less than last year's $27 million.
The company yesterday agreed $15 million amortisation was about right and that the $24 million-$30 million net profit scenario was realistic. However, it pointed out last year's result only included nine months' amortisation.
Shares in PGG Wrightson fell 2c to $1.54 yesterday.
Forsyth Barr analyst John Cairns said the result was reasonable in the tough conditions.
The results revealed extra profits from technology services such as seeds, animal nutrition and South American operations were significant in getting the 20 per cent half-year operating growth.
A divisional breakdown showed earnings before interest, tax and amortisation (ebita) were ahead $6 million overall. Of three new-look divisions, technology services was ahead $8.6 million, or nearly 300 per cent, in ebita, financial services ebita grew by a more modest 7.5 per cent or $600,000, while rural services went backwards by $2.4 million and overheads increased $900,000.
Norgate said those results underlined the merits of the merger. "What the merger did is give us the critical mass in that rural services area. It gave us the relationship with customers we were looking for which we can then convert into sales in terms of financial services and technology."
The finance loan book grew by $38 million or 12 per cent.
Net profit was 156 per cent better at $12.9 million, against $5 million the year before. Revenue - not directly comparable - was $523.8 million or 40 per cent ahead of the previous performance of $374 million. An unchanged 4c dividend was declared.
Chairman Bill Baylis said the result was encouraging given the tough operating environment for the rural sector.
"In general terms the rural sector has lost confidence as the 2006-07 year has unfolded and the strengthening dollar has reduced product prices at the farm gate."
The tough conditions had put "real pressure" on margins and this meant the improved operating profit was particularly pleasing, Baylis said.
