Delivering diversification through prudent debt management

Driving growth to deliver meaningful opportunities for Taranaki Māori means that diversification via the PKW investment portfolio is key to creating a sustainable business.

The last financial year saw the organisation reinforcing its foundations by confirming the investment policy that facilitates the release in equity through the core asset - the whenua as well as improved performance from PKW Farms and effective cost control.

“In order to diversify we need to take advantage of investment opportunities - and in order to do that we need to ensure we have the capital available,” says Joe Hanita, General Manager Finance and Investments. “The allocation of debt and equity ratios for each of our five significant investment areas and further consolidation of PKW Farms means we will have headroom within our debt caps to advance our strategic approach.”

Currently, PKW holds $48m worth of debt (as at 30 June 2019) which sits within the PKW Farms business as a result of the purchase of whenua, both leasehold interests and freehold, over time.

With a total of $320m in assets, the debt to asset ratio across the Incorporation stands at just 16%.

“This is a very low ratio, and well under the debt cap of 25% across the group set by the PKW Board - which in itself is low compared to the industry norm of anywhere between 30-40%,” says Joe. “We also have a formal debt policy which has seen us reduce our debt level from $60m to its current level via equity realisation, through the sale of some freehold and nonstrategic leasehold whenua.”

“What this means in real terms is that we have put in the mahi to free up capital for our diversification programme in a way that maintains our conservative approach to how we incur and carry debt. Self-funding growth requires a business to build up cash reserves, which takes time. By using both options, we are ready and able to take advantage of opportunities as they become available.”

The organisation now has $20m worth of debt headroom available with which to make investment decisions. Those decisions will be made very carefully, based not just on profitability but on the broader intent and objectives laid down in the PKW core values and mission kōrero.

“Any opportunity or proposal needs to stand up to the robust metrics of the Kaupapa Evaluation Tool (KET), which ensures we create a balanced investment portfolio over time,” says Joe. “We are taking a conservative and balanced approach and are happy to wait for the right opportunity to come along.”

“Growth assets normally cost more, so we are expecting to make investments of around $5m-$10m in order to realise the benefits we want for our shareholders.”

Having confidence in this strategic approach, a confidence also held by the PKW debt provider Rabobank, means PKW is now entering a 3-year focused period of diversification and growth across the business that will deliver long-term, sustainable prosperity for Taranaki Māori and achieve the strategic goals the business aspires to.

(See pg.15 for the 'Debt to total assets' graph)