AGL - Accordant Group. was previously AWF Madison, Allied...

[Snoopy]

	eps	dps (imputed)
FY2019	6.2	8.2 + 8.0
FY2020	9.4	8.2 + 8.0
FY2021	18.1	0.0 + 0.0
FY2022	10.4	8.2 + 6.5
FY2023	9.6	5.6 + 6.5
FY2024	?	3.0 + ?
Total	53.7	54.0
5 year Average		10.8

Note

1/ Implied Acceptable Share Price = (Gross Dividend) / (Acceptable Yield)

=> (10.8c / 0.72) / 0.08 = $1.875

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Higher historical dividends roll off the historical calculation feed, to be replaced by today's lower dividends. This is why the capitalised dividend valuation of the company has reduced by 17.5c from six months ago. The closing price of $1.70 today is a chart resistance point. With a shortage of job applicants in AbsoluteIT and AWF, I don't see the shares going much higher until members of that 'Double A' team shows signs of life.

The shares closed today at $1.70 and even with the slashed final dividend, the share price is still flirting in that band of keeping Accordant in the 8% yield club (actual historical gross yield 7.8%).

The share price was largely sinking for six months to date, but recovered sharply just before results day . The support line kissed $1.50 a couple of times. But that looked like Shaz trading on near zero volume, so not really real.

Cashflow from operating activities ($4.715m, 13.7cps) exceeded adjusted profit ($3.297m, 9.6cps), even if it was only the cashflow that exceeded the dividend paid during the financial year twelve months totalling 12.1cps.

Long term debt has blown out from $15m at the half year to $23.5m today But $5.87m of that is the cash paid out for acquisition Hobson Leavy. Add in the $0.835m to sort out the ACC medical account balance and you have most of the explanation.

The little game of cashflows exceeding profits has been extended with the purchase of Hobson Leavy. This purchase has fed the 'historical customer relationships' intangible asset pot to the tune of $1.072m. Amortisation of this balance will produce future cashflow ahead of earnings to the tune of a few hundred thousand dollars a year at least.

AGL has in the past paid out 100% of their underlying earnings as dividends over time. So if dividends are to be restored or even increase above historical high levels, then so must earnings.

An ominous close to my equivalent report from six months ago. With the March 2024 profit downgrade, I would say there is no chance of earnings bouncing back to pre-Covid levels for the foreseeable future. But my capitalised dividend valuation technique relies entirely on figures, not feelings. So what do the (albeit historical) figures say?

	eps	dps (imputed)
FY2020	9.4	8.2 + 8.0
FY2021	18.1	0.0 + 0.0
FY2022	10.4	8.2 + 6.5
FY2023	9.6	5.6 + 6.5
FY2024	loss?	3.0 + 3.0
Total	47.5-?	49.0
5 year Average		9.8

Note

1/ Implied Acceptable Share Price = (Gross Dividend) / (Acceptable Yield)

=> (9.8c / 0.72) / 0.08 = $1.70

-------------

Higher historical dividends roll off the historical calculation feed, to be replaced by today's lower dividends. This is why the capitalised dividend valuation of the company has reduced by another 17.5c from six months ago. The closing price of just 58c on minuscule volume is uncharted territory for AGL shares since they listed. AGL have not yet admitted their banking covenants are going to be reported as 'broken'. But at a share price 58c, I believe that Mr Market has already made that judgement.

I don't like to speculate using this technique. But if the banks (actually ASB bank) were to decree 'no dividend payments over FY2025') to shore up that balance sheet, then the five year dividend sum would drop to 32.8cps, or an annual average of 6.56cps. Curiously this is not too far removed from the actual FY2024 dividend payment rate of 6.0cps.

=> (6.56c / 0.72) / 0.08 = $1.14

I think we have to forget the days when the share price was over $2 now. That is ancient history. But dependent on exactly what sort of straight jacket the ASB banks chooses to impose on Accordant, and we find that out at the end of May, there could be a good money making opportunity going forwards. But buying at 58c today I believe is a gamble, because IMO the threat of a heavily discounted capital raising, as an alternative to to shoring up the balance sheet, remains.

SNOOPY

[winner69]

Snoops …’acceptable yield’ of 8% pretty low …doesn’t seem to reflect perceived risks

I’d want 12% which would give target of 76 cents

Take of the safety margin of 20% you often use buy around 60 cents …not far from current price ….spooky eh …maybe market thinks like me lol

[Snoopy]

Snoops …’acceptable yield’ of 8% pretty low …doesn’t seem to reflect perceived risks

I’d want 12% which would give target of 76 cents

Take of the safety margin of 20% you often use buy around 60 cents …not far from current price ….spooky eh …maybe market thinks like me lol

Thanks for the feedback Winner. Your post is certainly dogfood for thought. I raised eyebrows at your required return of 12%. But it is easy to kick the dog when he is down isn't it? I guess I am influenced the other way. When I bought into AGL way back in 2015, he was a fine looking hound with a shiny coat. And as you know, once a dog joins the family an awful lot can be forgiven! Your effective comment when you saw me walking my dog Accordant that he is actually a 'flea ridden mangy mutt' has taken me aback! So perhaps I can walk you back those years to when I bought what is now Accordant as a pup all those years ago, so you can see the attraction?

Accordant was very good at playing 'fetch'. I used to say 'fetch' and in that first year he brought me back a dividends of 7.2cps and 8.0cps. I was very happy with that. And he even brought back slightly bigger dividends in the following years. He was also a very efficient hound having a high ROE or 'Return on Energy'. It was consistently nudging or above 15% between 2014 and 2018. I only had to feed him 2 or 3 pedigree dog biscuits a day and it was amazing what he was able to do on that. Granted I did catch him sniffing around the trash cans at the bank down the road. He may have got an energy boost by cleaning up leftover employees lunches. But if he can use the bank's output to substantially 'fuel his chores' rather than my own 'equity biscuits', then who is complaining?

The games of fetch dried up over those Covid years. During that time he even got a government food parcel which fattened him up no end. We got back to our walks and games after that. But all the fetching and foraging wasn't quite as good. He only retrieved 6.5c and 5.6c dividends for that year. Oh well I thought. Covid was a real disturbance. Accordant is just taking time to stretch back to his foraging peak. A new vet came to town, a chap called Jason Cherrington. I took my Accordant in to see him and Jason promised to keep my dog under his watch. Jason was beaming and bullish. He saw a bright future for Accordant! One thing I did notice though was that I was having to feed Accordant more of those gourmet dog biscuits. An early warning sign?

Instead of a 'fetching recovery' Accordants fetching got a lot worse. He was down to two 3cps dividends last year. Then in early March I got a shock call from vet Jason. He had just given Accordant the once over and wasn't happy. He even hinted that Accordant might have to give up these fetching games completely! What, as a dog guy, do you reckon Winner? How can we get Accordant out of his rut? And please take those jack boots off!

SNOOPY

[Snoopy]

Snoops …’acceptable yield’ of 8% pretty low …doesn’t seem to reflect perceived risks

I’d want 12% which would give target of 76 cents

Take of the safety margin of 20% you often use buy around 60 cents …not far from current price ….spooky eh …maybe market thinks like me lol

After telling you my 'dog tail' of how Accordant is a capitally un-intensive (efficient) company with a good track record of generating cash, and how they are not going to be knocked off their perch as 'king of the job placements in NZ' any time soon, there is one factor that I have not allowed for in my valuation - incompetence. Competence is a relative measure. My new theory is that all of the business units within Accordant were founded by people with incredible self belief and drive: Simon Hull, Wynnis Armour etc.etc. Failure was a word not in the vocabulary of these people. Take the founder out of the driving seat, and replace them with a corporate manager who is merely 'excellent' at their job, and the down sliding of results becomes inevitable. Don't get me wrong, I am not saying the people at the top of Madison and AbsoluteIT today are twats. On the contrary I suspect they are excellent at what they do, but lack that entrepreneurial vision to oversee the change in direction a dynamic job marketplace requires at times.

When reviewing Accordant's earnings and dividends over the years, I noted that dividends were cut reluctantly. My interpretation of that board behavior being that any earnings decline was seen as temporary and that earnings would bounce back. It was only when earnings did not bounce back that 'reality hit' and the dividend was chopped back. Yet I am not suggesting that dividends should always follow earnings down. Management are certainly in a better position than shareholders to know what is a temporary hurdle to peak performance. But it appears that in the board's quest to be a 'one stop agency for all levels of jobs' that they have taken their eye off the operational detail. Going from a business that was 'brilliantly run' to one with 'merely excellent managers' is a downgrade, which seems inherent in Accordant's business model. I am now bumping up my required return rate to 8.5% gross, with that extra 0.5% 'incompetence adjustment' to be permanently baked into my investment expectations

Implied Acceptable Share Price = (Gross Dividend) / (Acceptable Yield)

=> (9.8c / 0.72) / 0.085 = $1.60

So 10c lopped off my previous valuation to allow for 'perpetual built in incompetence'. I think that is fair. A 12% expected return, as Winner suggested, is IMO way too high for a market leading company like this. And as for taking an extra 20% off such a valuation you get, I think that is 'double counting' or in this case 'double discounting'. The discount in the valuation of this company is reflected in the high return interest rate I select. It is too harsh, I think, to impose a further discount factor requirement on top of that.

SNOOPY

P.S. I don't like to speculate using this technique. But if the banks (actually ASB bank) were to decree 'no dividend payments over FY2025') to shore up that balance sheet, then the five year dividend sum would drop to 32.8cps, or an annual average of 6.56cps. Curiously this is not too far removed from the actual FY2024 dividend payment rate of 6.0cps.

=> (6.56c / 0.72) / 0.085 = $1.07

[Snoopy]

Of more interest than the absolute value of derived cashflow profits is the forecast change from FY2023 to FY2024: ($9.692m) - ($0.595m) = ($9.907m). Transfer that across to the declared profits and you are looking at a NPAT loss of:

FY2023 Normalised net profit = $1.977m + 0.72($1.406m+$0.379m+$0.109m) - $0.044m = $3,297m
Where$1.406m represents a one off ACC scheme adjustment, $0.379m represents an earn out payment for the Hobson Leavy Acquisition, $0.109m a one off impairment, and $0.044m money from a Property Plant and Equipment sale.

$3.297m + ($9.907m) = ($6.610m). Ouch!

And on top of this we have the $13.223m of Madison goodwill and $7.836m in AbsoluteIT goodwill that will/may need trimming. Double ouch! No wonder the Accordant share price has taken a hammering in recent times. But the bankers are still happy - apparently.

OK the FY2024 results are not out yet. But there are a few clues we can put together to assess what the FY2024 balance sheet might look like. Madison and AbsoluteIT are two divisions roughly equivalent in size and profitability. We know that Madison goodwill is going to be trimmed. Given that AbsooluteIT has also been restructured, I think goodwill there will need a trim too. I think goodwill for each will be reduced to $6.000m. That makes for a total goodwiil 'haircut' of:

($13.223m-$6.000m) + ($7.836m-$6.000m) m= $9.059m

We need to remember that his is not cash. But it was cash - once. There is no way to sugar coat this: Accordant has overpaid and overpaid significantly for both Madison and AbsoluteIT.

Unfortunately the $6.610m loss for the year I am projecting is cash, and that comes on top of the 2x $1.987m = $3.974m of dividends paid out this financial year: a total of: $10.584m So what does this do to the balance sheet at EOFY2024?

	FY2024 forecast	FY2023
Assets
Cash and cash equivalents	$1.954m	$1.954m
Other current assets	$23.994m	$23.994m
Intangible assets - goodwill	$33.494m	$42.553m
Intangible assets - other	$16.612m	$16.612m
Other non-current assets	$9.768m	$9.768m
Total assets (A)	$85.822m	$94.879m
Liabilities
Current Liabilities	$25.842m	$25.842m
Borrowings	$34.084m	$23.500m
Other non-current liabilities	$10.981m	$10.981m
Total liabilities (B)	$70.907m	$60.293m
Shareholder Equity (A)-(B)	$14.915m	$34.586m
Debt Ratio (B)/(A)	83%	64%
Shares on issue	34.326m	34.326m
Net asset backing	43.5cps	100.8cps
Net tangible asset backing	-102.5cps	-71.6cps

Now banks consider leverage as a cashflow issue, rather than a balance sheet issue. But my projected blow out in the debt ratio must raise eyebrows nevertheless. This is not a new problem I am highlighting. It is merely the result of the blowout in the leverage ratio that I have already highlighted in post 1065. But if you are struggling with profitability on top of high debt, this is not a good look.

If it was not obvious before, this is why I am not mopping up AGL shares at the 'apparent bargain price' in the 60c range in the market today. A discounted cash issue could fix this. 1:1 at 50c would raise just over $17m. But could majority 53.01% shareholder Simon Hull afford this? I am guessing no. So the company is really dependent on the business turning around to climb out of their debt hole. Accordant have been fairly agile in the past, and know how to 'make the right market noises', but.......

SNOOPY

discl: Shareholder who has too big a position to sell out. So I am buckled up for the ride. Roll on the end of May

[winner69]

Snoops …your incompetence theory interesting viewpoint and aligns with my thinking why I’d want a 12% expected v your 8.5%

I say 12% because of the recent declining cash lows and dividends which along with the current issues impacting the business I’d want a decent risk margin and 8.5% doesn’t reflect that.

I see execution risk as key here …..especially if you say the current team is not as competent as in the past lol

Interesting times eh …might look back in a years times with a $1.75 share price and say well that was a lost opportunity

[Perky]

Ok…time to fess up…I own some of this dog of a share. I’ve wanted out for a while but got greedy…should of sold when it sat around $1.50 -$1.70 for a while and taken a very small loss…now I’m sitting on a moderate loss.

This share reminds me of FBU…they can’t seem to make it work when it’s full employment, mid employment or low employment…lol

I consider my financial loss as an investment in my share investing education..lesson learnt.


It’s a dog. Admit it ,own it and move on

[Perky]

Edit: someone just kicked the dog….up 12% today.

Dont worry it’s still a dog…you will wake up tmrw and their will be a **** in the hallway

[nztx]

Edit: someone just kicked the dog….up 12% today.

Dont worry it’s still a dog…you will wake up tmrw and their will be a **** in the hallway

Hey - it's a got a curious habit of spitting out unexpected chips when most think the chips are down

[Perky]

The days of good divies are long gone now for a while in my opinion

In last few years…
We had a construction boom
We had a labour govt employing any consultant they could find…boom boom
We had a technology boom

Just like FBU…they can’t make consistent repeatable earnings.

Its a dog

A few years ago they talked about getting into healthcare sector..ie nursing and care
That would be a good growth sector for an ageing population like nz…better to stick with its blue collar heritage and not the consultants and it sector…the robots and AI will replace them