Forum Archive Index - December 2002

["tennyson@caverock.net.nz" <tennyson@caverock.net.nz>]

Hi MacDunk,


>
>Snoopy,  I'm baffled by your thoughts on WRI.   
> 
>In October, you agreed with me that the farming sector was
> heading south, I sold out, you were holding, why? 
>


The fact that the ideal farming conditions of low exchange rate, high 
commodity prices and good growing conditions was going to end was not 
news.  Sure I thought that farming was on the way down in October.  
But I also thought farming was on the way down in June, when I bought 
in back then.

I judged that the previous fall from $1.30 in February 2002 to $1 in 
July 2002 had already factored in any expected deterioration of 
farming conditions.  So given that I agreed (again) that farming 
income was on the way down for the coming season in October is no 
reason to change my investment strategy.  I already knew that, so was 
not inclined to sell my WRI as it wasn't new information.


>
>
>At that time, you said WRI was a good lesson,
> that you should never form a love/hate relationship 
>with a company, my question is, .... has the wheel
>turned full circle? 
>
>


Good question.  Full circle implies Wrightson's going back to making 
no money at all and cancelling their dividend.  But a profit 
downgrade is a long way from that.


>
>The next question is, how low are you prepared to go before 
>selling? 
>


The question I ask is not:

"Is the share going up or down?" but 

"Is the share cheap or expensive?"

You are asking me the wrong question MacDunk.  I don't care what 
Mr Market is pricing WRI shares at.  I bought them for the dividend 
yield, and this is still good.  Actually the bit about me not caring 
what the WRI price is isn't quite true.  If Mr Market offers me a 
silly high price for my shares I will sell out.  But I don't believe 
the shares are currently overvalued, so do not plan to do this.  
Contrastingly, if Mr Market offers his shares to me at a ridiculously 
low price I will buy more off him.

So what is ridiculously low, and are we there yet?

I alerted sharechatters in early June to the fact that WRI could be 
bought for $1.04 at a dividend yield near 15%.  Since that time WRI 
took off in price, but has now come back down to earth a bit.   
However, -and this is the important bit-, the dividend yield is now 
near 15% again.  To the income investor this represents another 
window of opportunity for buying in.  Given that the share price 
bounced when it hit this high dividend yield in July, do you think 
WRI will get even cheaper, in yield terms, this time around?



>
>You say that WRI yield is great, the yield might
> drop next year with the profits,
> 



Good point.  Yes the yield might drop.   So what am I going to do?  
Get scared and pull out?   Or do some homework to see if the 
yield *really* will drop, then make my decision? 

I did go through this exercise at the weekend and published it here 
on sharechat, but here are the key points again. 

1/ Half year profit to halve to $3.15m, (including  a $2.5m one off
restructuring )    This gives an underlying half year profitability 
of $5.65m, which is $5.65m/$6.3m or 90% of the profit earned for 
the first half of the previous financial year last year.

2/ Last years second half profit was $14.9m.  If we assume the 
underlying profitability is reduced for the second half year in the 
same ratio as the first half, this gives a net profit of $14.9 x 
(5.65/6.3)= $13.4m.  

3/ Add back in the estimate for the first half year
result, and we get a full year profit estimate of 

$3.15m + $13.4m = $16.5m

4/ $16.5m divided by 134.3m shares on issue, gives an
earnings per share of 12.3c.   Last years dividend was 11.5cps.   
This level of dividend is well covered, even by this years reduced 
earnings.   Therefore there is nothing in Wrightson's press release 
last week that suggests the dividend will be cut.

Conclusion:  Wrightson's priced at $1.15 is on a gross dividend yield 
of 15%  ( 11.5c/ $1.15/0.67= 14.9% ), so no reason to sell.  In 
fact Wrightson's is just as cheap now as it was when it plunged to 
that low of $1 in late July 2002.  If you can find a yield anywhere 
else in the market like this please tell me.  WRI looks like a 
buy at these levels to me.

>
>and in any case won't make up
>for the capital loss. 
>

This is true.  The share dropped some 13c in one hit.  With 
hindsight, I would have been better to sell out.  Even though I would 
have missed out on this years dividend of 11.5cps I would still have 
come out ahead by preserving my capital and selling out. 

BUT, did you see the rider 'with hindsight'?

Let's wind the clock back to last week and put to you another 
scenario.  Suppose that investors wake up to the fact that a 
yield of 13.4% (based on a WRI price of $1.30) was absurdly cheap and 
pushed the price up to $1.50.  This gives a dividend yield of 11.5% 
in line with other rural shares, and a capital gain of 20c per share.

Now ask yourself this question.   WRI trades at $1.29.  Do you sell 
because an earnings downgrade might send the share down to $1.16 or 
so, or hold on until the market recognises the true worth of WRI and 
it rises to $1.50 or maybe more?   To my mind the potential for 
upside still far exceeded the share's downside potential.  Investment 
is a question of balancing the potential upsides and downsides.  If I 
 precieved the upside as greater than the downside, why should 
I have sold?   

>
>I still think WRI is a well run company and I will buy 
>back at a later date. 
> 

Ah, but when to buy back in?  

What did you do with the money you got by selling out of WRI, 
MacDunk?  

Stick it in the bank earning 5.5%?  

Why do that when that same money invested in Wrightsons was already 
yielding you 12.5%?  Of course we can all be smart after the event 
and say that all should have sold out at $1.29.  But the truth is 
that none of us knew that drop in share price was going to happen.

SNOOPY






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