Forsyth Barr has downgraded PGG Wrigthson shares from hold to reduce because they are not convinced about the returns from its $220 million investment in Silver Fern farms..
Forsyth Barr researchers were sceptical meat company Silver Fern Farms (SFF) would be able to capture all the synergies from the partnership without industry consolidation and were also concerned at the extra debt PGG Wrightson (PGG-W) was incurring to fund the investment.
Without additional industry consolidation, the PGG-W partnership with SFF was viewed as simply recapitalising SFF’s balance sheet.
There are 9 million fewer sheep and lambs to be killed this year and global demand for protein is growing. That means it’s a sellers market.
Farmers are expecting at least $80 a head for lambs in the coming season and if they can’t get that from one company they’ll be confident of getting it from another. This competition which will help farmers’ balance sheets will also make it much tougher for meat companies so Forsyth Barr is right to be concerned about PGW’s share price.