Material sector company, Wagners Holdings Company Limited (ASX: WGN) suspends the cement supply to its ASX-listed partner Boral Limited. It is in relation to the Cement Supply Agreement between Wagners and Boral Limited under which BLD is required to purchase a minimum volume of cement from Wagners on an annual basis at a determined price.
The issue brings the ‘Pricing Notice’ into the highlight! Wagners contest the validity of the pricing notice which was issued by Boral Limited, presenting the price quoted by cement supplier within South East Queensland that is much lower than that charged by Wagners.
Wagners believes that this unsigned offer questions the bona fide nature of the market pricing evidence and therefore the company has started the formal process of disputing the validity of the Pricing Notice.
As per the initial terms of Cement Supply Agreement, it was agreed that the Pricing Notice could be issued by BLD which has to be bona fide in nature supported by the third party offer from a supplier of cement as a market pricing evidence. And in the event of Pricing Notice, if the price offered by the third party is lower than currently charged by the company, in accordance with above-stated conditions, Wagners will have to either reduce the prices or suspend the supply.
So, when the company was left with the option to either bring down the price of the cement products supplied to BLD to the price notified in the Pricing Notice or to suspend supply of cement products for a period of up to six months, it elected to suspend the supply.
The news sent the Wagners stock price to crash straight, carving out 23.853% from the stock value on 19 March 2019. This led the WGN to close at $2.490 with the price to earnings multiple of 35.540 x and a market capitalisation of $527.7 million.
The market sentiments were driven by the prospective financial impact of suspension which could wipe out approximately $20 million of the company’s revenue during the maximum suspension period of six months.
However, the suspension may be lifted on the dissolution of dispute subsequent to courts orders or resolution regarding the validity of the Pricing Notice. As of now, both the resolution and determination by the courts remain pending.
The report further confirmed that if the Pricing Notice gets proved not to be bona fide and therefore invalid, the company’s Fiscal 2019 revenue and earnings are expected not be impacted.
To win the trust of shareholders, Wagners stated that as per its belief the election it has taken under the CSA to suspend supply and to dispute the validity of the Pricing Notice is in the best long term interest of its shareholders. It is supported by the fact that if the Pricing Notice gets proved to be valid and accepted it might have long term impact on the company as well as on the entire the cement industry throughout Queensland and New South Wales.