Thanks Snoopy, most enlightening.
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Thanks Snoopy, most enlightening.
Snoopy.
One analytic missing: impact of new CEO. Culture change from Awf flavour to madison flavour so far unquantified.
= risk
I agree Minimoke. New strategy, new culture, new head: how to measure that? I would like to say there is a fudge factor to cover that contingency, but of course there isn't. For those who want to watch from the sidelines for a bit to see what happens, well, I wouldn't call them foolish. Myself, I am comfortable watching from the inside. But each to their own....
SNOOPY
You are 100% technically correct Noodles.
However, taking one step backwards, if AWF had first raised the new capital (the same amount) then bought Madison would your answer not be that they raised the new capital to buy Madison? I don't think it is any secret that if AWF had not bought Madison they would not have needed their recent capital raising. IOW the new capital structure, after debt is paid down, has been 'right sized' for the Madison acquisition to be bedded in.
Perhaps I should have worded my previous post more carefully. What I meant to say was it will be interesting to see how the acquisition of Madison and the accompanying new debt structure compares in ROE terms with the sort of ROE figures that AWF were generating in the five years prior to the acquisition of Madison.
SNOOPY
Thats OK Baa. I should add that it would have been nicer for existing shareholders if their capital invested in AWF had been revalued upwards by the market rather than crabbing sideways. But then again, the sideways crabbing 'value' while the underlying business performance improved opened up the opportunity for new shareholders to join the AWF share register at a reasonable price.
SNOOPY
As you well know Winner the market can become wildly exhuberant or drown in the troughs of despair. In between are bouts of rationality.
I am not saying that AWF deserves a PE of 13. I am saying that over the last five years that is somewhere near the average where Mr Market has priced it. On average I am not going to say that Mr Market is wrong, even if at odd times he may be.
Come 2026, there is a very good chance the PE won't be 13. And yes just because my modelling shows a big leap in profitability for FY2017 and more modest gains in the years after, that doesn't mean this is the way the improved profitability that I am forecasting will actually pan out. How it gets there is less important than getting there!
If I needed the money in 'about' ten years, then I would start looking at the market again in say eight years. Mr Market might have got ahead of himself? So it could be a good time to exit? OTOH maybe Madison had just lost an important client and the AWF share price has plunged? In that case perhaps I might need to hold for twelve years to get my 'ten' year return. In markets nothing is that tightly pinned down. You have to be a bit flexible in your exit strategy.
Best guess is still a share price of $3.44 in 2026 though, even though that precise figure forecast will almost certainly be wrong at the 'cash in' date. I am not really sure why the share price spiked to near $3.44 two years ago. Perhaps an even larger dividend was expected from the sale of the healthcare operations than the 3c bonus dividend that shareholders ended up with?
SNOOPY
I sold our holdings in AWF a few days ago.
Felt the labour hire business was at maturity, and was doubtful of the growth prospects for Madison.
Had held for a number of years.
Yes I am sorry to leave.AWF has been very kind to me.I think I brought in around $1.03/$1.05.Then added more.Then sold some just over $3,and recently took up the cash issue.
From what I can understand, there is little to stop new entrants to the labour hire sector,and I think in fact, AWF cut back on their low margin business,so to really to stay in business ,or expand they needed Madison.The projections made on the Madison acquisition have not been achieved.
So where to with Madison?.Well I am not sure.From what I am told "social media" is altering the whole sector.Employers are going, via social media, direct to the people they wish to recruit,by passing agencies,such as Madison.
Everybody happy after the ASM by the looks of it, especially the directors eh. Chairman gets a decent pay rise.
At least profits look like ahead of last year
They came out with a strong first quarter. EBITDA up 250%. If they continue at this rate, we could see eps=30c.
I have taken the last year EBITDA, multiplied by 1.20. Reduced interest cost (because they have paid down debt), and removed amortization of the Maddison acquisition
.
Ebitda 15120 Depn 1000 ebit 14120 Interest 1110 NPBTA 13010 tax 3642.8 NPATA (underlying) 9367.2 underlying earnings 0.289 pe 8.0
EDIT: Changed profit uplift from 25 to 20%
I've been interesting to see Percy's comments (being a fan of your wisdom) and now Noodles'. I don't think they've ever had protection from new entrants or high margins. The other side of the coin is low PS (one man's meat...). They certainly do look cheap even with no or low growth. Would be interested to hear any thoughts on how cyclical their revenues are in present form, and where margins are likely to go.
I wish I had gone to the meeting,then I would have been confident to have made informed comments.
Did anyone go?
If so what was the body language, and mood of the meeting.?
Here are the presentations from the meeting if you haven't seen them .
http://news.media.mdgms.com.s3.amazo...2bb1608ed9d350
There is no doubt that they are cyclical. During the GFC, revenues dropped by 20%
Their labor hire business has performed very poorly in the last couple of years. This is mainly due to competition. Overall profitability has been masked to an extent by the Maddison acquisition. Share price performance has been bogged down by poor communications over the capital raise and then the actual capital raise.
All these headwinds may now be behind the company. The 20% increase in EBITDA may be a catalyst for a rerate back to an average pe=13. That would be a 60% gain.
DISC: HOLDING
Noodles, you say first quarter ebitda up 25% - report says up 20%
Percy, have a listen to this!
http://podcast.radionz.co.nz/busines...spects-048.mp3
I have just reread the agm presentation.Reading it yesterday I thought it was a bit glib.
So although my reasons for selling remain, there were a lot more positives in the agm presentation for shareholders,that I missed yesterday;
1] Growth has been a lot higher than I thought.If this continues I was wrong to sell.
2]The business is now fully focussed.Focus was lost with the on/off again capital raise.
3]The balance sheet is again very strong with the debt reduction,and will be even stronger with further debt reduction from earnings,The ratios are now very modest and the divie is excellent.
4]The new CEO,Simon Benntt coming from such a successful career at Maddison,will see where the opportunities are,and the company is in the position to take up those opportunities.
5]Left a little uncertain about the need to "strengthen the board".
So for shareholders,your company is sound,well run and looks "well positioned", and you should only sell if you see something a lot better [difficult!] or growth does not eventuate.
Be interested in Roger's view of his practice of eliminating amortisation to come to a normalised earnings number
Why not eliminate depreciation as well?
Answer would probably say using multiples like PE ratios is cheating - do the hard yakka and generate proper cash flows
Board quite diverse eh Percy
Really pleased to see they have taken on somebody from the Future Director program. Good stuff
(She only gets 50% of fees, but plenty of experience)
Maybe I am a little negative as I sold my AWF shares,but I do note the extra shares issued in the capital raise,means the eps are lower than previously,although the business is in better shape with the lower debt.However there was nothing in the presentation to cause me regret for selling my shares. I will keep any eye on AWF as I did do very well with them.
Quite right percy. If the net profit lifts 20% but the numbere of shares has gone up by 20% that means shareholders are going nowhere. It is the gain in earnings per share, not the gain in earnings, that is the statistic to look for (half year eps were 10.5cps, down from 11.1cps). This is why the dividend per share has only held steady, despite the increase in profit
Unlike you, I am a recent addition to the share register. I may have even bought your shares when you sold out! Acqusitions , like Madison, always take some time to bed down and integrate before all those synergy benefits start coming through. So while I am always disappointed to see 'eps' dip, I am not entirely surprised. All the signs ('Decline in Margin halted') are that the Madison acquisition is bedding in well. But time as always will be the ultimate judge.
SNOOPY
Snoopy I do wish you every success with AWF.
I was just thinking that you are following in the footsteps of a great investor, Ian Urquhart,whose two largest investments were AWF and SCT.
He would be proud of you.!
Most probably would have enjoyed the tucka at RBD's agm too.!!
Thanks Percy. Being a latecomer I didn't realise Ian Urquhart was an investor in AWF. I fear however, despite his death, Ian is very much an active investor again right now. He must be spinning in his grave, given what the trustees of his estate are now doing to his holding there!
SNOOPY
He did make things rather difficult for them by having overweight positions in illiquid stocks.
Yet that is how he made his fortune.Was a large investor in EBO in the early 1990s.He worked at the National Bank for a number of years,rode a bike to work,made his own lunch and was an early investor in BIL.[and was a hard case.]
I think this illustrates the difficulties of being a lawyer and managing an estate prudently. The lawyers I am sure are working within accepted practice guidelines for managing such an estate. But the problem is such an approach will never make you rich, but neither will it make you go broke. It's what you call a clash of investment culture.
SNOOPY
Ha! Certainly a character Percy.
I remember him coming into the courthouse after having just walked through the Avon River. Poor bugger he was on bail at the time. Sitting down he rolled up his trouser legs and removed his shoes and socks. The stench!,, He proceeded to wring out his socks on the courthouse floor and then put his shoes and socks back on.
Is it just me whose head is muddled by flag debate. It seems to me AWF's logo is remarkedly similar to the new Department of Labour logo.
How well would a company such as AWF do in a downturn?
I would imagine the labour, manufacturing and supply chain roles they focus on would dry up? Also the competition in the recruitment space from my own personal job search recently shows there is so many to choose from.
Traditionally in a downturn employers will not take on new ( or as many) full-time employees as they are just not too sure how they will get on . However on the flip side they are happy to take on a heap of temps , contractors, etc
So this is positive for AWF imo, in a downturn . The Madison side may not do as well on the Full time placements, but probably go gangbusters on temps .
DISC: Holding
I would look at it the other way. The HR department of a company under pressure is likley to be downsized. Hence more work will be outsourced to 3rd party contractors like AWF.
Also I think the view that AWF Madison focus on "labour, manufacturing and supply chain roles" is outdated. The Madison acquisition means there is just as much focus on white collar jobs these days.
There is always competition out there. But there are economies of scale in being one of the very largest players in teh industry.Quote:
Also the competition in the recruitment space from my own personal job search recently shows there is so many to choose from.
SNOOPY
discl: AWF Shareholder
So in summary, AWF you both feel would not just survive a recession but potentially thrive in one?
In a downturn what will typically happen is the number of paying employers reduces and the supply of job candidates increases. This inevitably leads to margin pressure between agencies.
Hiring companies also look at reducing hiring costs so the HR department goes but operational managers do the hiring from an increasing pool of easily available people.
Downturns dont last forever so it becomes a battle of attrition : who can best control costs relative to margin and who has the cash/ banking facilities to keep the payroll ticking over without dipping into IRD reserves.
Results out and management claim they are disappointed but really things are better than they appear. Dividend maintained.
There is a $1.3m 'one off' adjustment mentioned in the Chairman's address. Later is mentioned a $0.3m provision due to a 'Christchurch problem'. This came about because of 'significant growth in key infrastructure projects' (!??!*!). The head contractor is not approving payment to a subcontractor and AWF is owed by the sub-contractor or something like that. Actual amount in dispute is $1.3m, but AWF says only $0.3m of that is the provision at risk. I am not clear if the $0.3m 'Christchurch Provision' is included in the $1.3m 'one off' provision or not.
Some other odd things going on in the books too. There is an intangible asset, not related to goodwill, described as 'Customer Relationships'. Well, I thought that was the kind of thing that goodwill covered. So I am surprised to see 'Customer Relationships' listed as a separate intangible asset. Apparently this asset is typically amortised over 4-6 years. I would be very interested to find out from those who have a longer history with the company than I do, just how 'Customer Relationships' got onto the balance sheet in the first place. AWF thinks the after tax effect of amortising 'Customer Relationships' should be added back to get 'underlying earnings'.
It does appear that 'underlying earnings' are indeed better than the GAAP mandated numbers indicate. But how much of this hidden earnings pie should really be counted? This is a question I am struggling with.
SNOOPY
The following extract is from note 16.5 in AR2012. This may go some way to answering my own question.
-----
Goodwill arose in the acquisition of Tradeforce Recruitment as the consideration paid included amounts in relation to the benefit of future market development and the assembled client base and workforce of Skilled NZ Limited. The portion of these benefits that relates to contracts with major clients has been valued separately as an intangible asset. The remaining benefits are not recognised separately from goodwill as the future economic benefits arising from them cannot be reliably measured and they do not meet the definition of intangible assets.
------
What AWF seem to be saying here is that if they have a 'large customer', and the benefit of future work 'down the pipeline' is forseeable and measurable, then whatever they pay for that future pipline of work is not goodwill. Yet the same kind of contract made with a smaller customer over the same future period is goodwill, because the future work is less certain because the customer is small (?).
This strikes me as odd to have different treatment of a customer base, made only becasue of the size of the customer. The former seems subject to an annual write off policy, yet the latter does not?
SNOOPY
Take care.
Today AWF's sp was $2.30 which is below the 50 day EMA $2.35,the 100 day EMA $2.34,and the 200 day EMA $2.32.
Not looking very healthy.
We shed a decent dividend not too long ago Percy.
Today's trading totalled just $14k. AWF is a small relatively illiquid share. One small shareholder can push this share price around by getting a 25th anniversary gift for their spouse. Doesn't really say much about the underlying company if you did that.
There has been no compelling reason to buy or sell over the last year IMO. Madison is still 'bedding in' (apparently). Dividend looks sustainable.
SNOOPY
Agree with you the dividend is sustainable and the stock is very illiquid.
With the ex ceo of Madison running AWF the "bedding in" should be well done and dusted.
The sp in July 2014 was $2.34,and in July 2015 $2.30,the same as today.
Some more thoughts on AWF's 'underlying earnings' calculation. Transforming a 'Customer Relations' intangible asset into hard cash is good news for shareholders. From a cashflow perspective it makes quite a difference to the 'overall' underlying result, in the most general sense. Nevertheless IMO, 'cashflow' and 'underlying profit' are different things. If a shareholder wants to know about cashflow, what is wrong with looking at the cashflow statement? Does this fancy 'underlying earnings' that AWF has created add anything?
When managing the business, yes. Having an intangible asset on the book that you expect to change into cash, is great. But this transformation will only happen if trained staff do a good job. And this is the kind of thing that should be of great interest to the middle management of AWF. From a shareholders perspective though, I find 'underlying earnings', calculated by adding back amortised 'customer relations', is less useful.
The problem is, the 'Customer Relations' intangible asset was originally created by shareholder cash, when that shareholder cash was used to buy an acquisition. So turning 'Customer Relations' back into cash is really just giving shareholders back the cash they had to start with. From a shareholder perspective, I think the particular brand of 'underlying earnings' that AWF is quoting is 'double counting' an 'already on the books' benefit.
IFRS accounting rules can be pigs when trying to understand the underlying business. In this case though, I am siding with the IFRS guys. AWF's 'underlying earnings' are useful to shareholders in the sense that it provides more cash to secure payment of dividends when cashflow drops from other sources. But IMO shareholders need to foucus on the old fashioned NPAT figure. That's the one that IFRS says gives the true picture, and I agree.
SNOOPY
I have searched through the Annual Report for FY2016. There is no further mention of the $1.3m adjustment referred to in the Chairman's address. I hope he is right and the benefits of this adjustment flow thorough to future years. But in the absence of further information, as an investor, I believe I should treat this as a 'normal business expense' that does not distort the result for this year.
The most disappointing sentence in AR2016, I think is in the strategy section (p11).
"While most staff, client and candidate experiences remain distinct between AWF and Madison...."
I'm sorry, what was the purpose of this merger again? Was 'zero synergies' one of those bullet points?
Also disappointing was the hint dropped on raising the final dividend at half year result time which didn't happen becasuse of the disappointing second half.
Nevertheless eps was 16cps (let's forget about this 'underlying profit' that management like to speak about). dps was 15.2cps.
At $2.30 I get a net yield of 6.6%, and a gross yield of 9.2%. You would have to be in some sort of financial trouble to want to sell out at those levels I would have thought. This still looks like a good 'bottom drawer keeper' for the income investor. I could make an argument for adding a few at $2.30, even if I hadn't bought most of my comfortable little holding at that price already!
SNOOPY
The announced AWF Madison acquisition of Absolute IT appears to be a step in the right direction.
$15.3 mil for a business with revenue of nearly $65mil ,without knowing its profitablity, seems to be OK to me.
Well Snoopy I hope the AWF shares you brought from me start performing.!!..lol.
Good news...
Madison has been awarded a contract commencing on 20 October 2016 and running through to 30 June 2018. This major project will involve the recruitment of between 3,500 and 4,000 staff throughout New Zealand who will be responsible for all Census activities...
Pretty well at a 2 year high on very good (for AWF) vol.
I note AWF's CEO,Simon Bennett will be presenting at NZ Shareholders' Auckland meeting on Wednesday 26th April.
Details here:
http://www.sharetrader.co.nz/showthr...l=1#post663250
Hi Percy, Simon did turn up. He started his presentation explaining that being so close to the result announcement he was unable to talk about resent trading/profits. He then went on to say that the aim for the foreseeable future is double digit growth. He said all this with a big smile on his face. The rest of the presentation was an overview of the 3 business units AWF operates.
So here you have it, he was unlikely smiling and thinking about a bad result at the same time. :)
Thanks Forest, percy and noodles. AWF performing like this keeps me out of a job:t_up:
When is the results announce due? And where do you find this information if not published as an announcement on the NZX? Thanks.
One way if they don't announce that date is to check the previous years date which was 25th may 16 and 28th May for years 2014-15. .
2 CFO resignations. Coincidence or a reflection of debtor management?
I wrote the above comments in June 2015. Hindsight has shown that the Madison acquisition may not have delivered the synergy benefits envisaged.
I am always interested when the reporting on a business suddenly changes format with no real explanation.
One point I noted in AR2017 was that all references to 'underlying earnings' have been dropped. Personally I think this is a good call. Adding back intangible write offs because they were not cash expenses does not cut it with me, particularly when those same intangibles were real cash in the not too distant past.
SNOOPY
discl: hold AWF
No hind sight required. simon hull is your typical blue collar bloke done good and awf reflected this in their culture.
The two women who owned Madison at other end of scale and so was Madison.
Trying to join the two would be like trying to mate a mongeral with a lap dog.
The above is taken from a July 2016 comment that I made.
This is the comment that AWF management obviously read and decided it made great sense before deciding to ditch their reporting of their in company fabricated 'underlying earnings' for the FY2017 year ;-).
However, on a tangential matter, I may have been a bit harsh with my previous comment on the AWF treatment of amortising intangible assets in my June 2015 comments.
Why does it matter? Because the amortisation of customer relationships over FY2017 was $1.746m. And $1.746m represents 20% of gross profits for FY2017. So this represents a very large opportunity window for the possible manipulation of annual results.
SNOOPY
My June 2015 comments are listed below.
I notice that when Westpac took over 'St George Bank' and created a lot of new 'intangible assets' (in a way loosely analogous to Allied Work Force taking over Madison). As a result they (Westpac) had the following to say in their Westpac FY2013 annual report (from p94).
------
7. Amortisation of intangible assets comprises:
– the merger with St.George resulted in the recognition of core deposit intangibles and customer relationships intangible assets that are amortised over their useful lives, ranging between five and nine years. The amortisation of intangible assets (excluding capitalised software) is a Cash Earnings adjustment because it is a non-cash flow item and does not affect cash distributions available to shareholders; <snip>
------
If intangible assets do have useful lives, then I can see that writing them off over that useful life makes sense. But my question is this. How do you determine the useful life of a 'customer relationship intangible asset'?
Going back to AWF, I can see that a company who has hired staff via Madison are likely to continue doing so if:
1/ the people they are dealing with are the same AND
2/ the business model remains the same,
despite the ultimate change in Madison company ownership.
If, say, a construction company was building the new Justice and Emergency Precinct in Christchurch (for example), then those white collar engineers hired would lose their positions once this project is complete. The finite time frame of a project therefore means the intangible asset representing workers likely to be hired for that project also has a finite time frame.
Yet once one construction is complete there is always the next construction project. So is it reasonable to say that the Construction company hiring the workers via Madison will not use Madison again? The problem that I have is envisaging the boundary between a 'finite intangible asset' and an 'enduring intangible asset'.
The comment in the FY2017 AWF annual report, p36 on this subject:
"The useful lives of customer relationships used in the calculation of amortization ranges from four to six years based on the directors views of asset life."
does not provide any insight into the decision making process.
If there is no boundary between 'finite' and 'enduring', then I don't think such intangible assets should be written off in a planned way.
SNOOPY
Percy, I have noticed, is quick to head for the exit when a company disappoints, although perhaps not with full conviction here because he has retained 25% of his AWF shares
The bad debt announcement wasn't good news. But it wasn't 'new news' either.Quote:
"For the Board, Chairman Ross Keenan noted that whilst strong performance was delivered in most areas, the significant lift in outstanding debtor balance at Year End put increased pressure on the organisation; and, accordingly, a further lift in bad debt provisions has been deemed appropriate."
From AR2016 p39.
"One large overdue debtor owes the group $1.3m due to significant growth in key infrastructure projects. The payment to the group is dependent on variation payments in the debtor being approved and paid by head contractors in the projects. Due to the length of time the debt has been outstanding and the lack of certainty surrounding the variation invoices, the group has taken steps to ensure that it receives the debt it is owed by appointing a liquidator. The group has also provisioned $0.3m against this debt in case the variations are not all approved by the head contractor."
My first reading of that paragraph, suggests that whoever wrote it should be given an 'A' for gobbledegook. But by a process of elimination, AWF has tipped the subcontractor into receivership, because the head contractor won't pay up. But why the sub-contractor should be tipped into receivership when it appears they had too much work and should have hired even more staff (should have been good for AWF) to do the extra work remains a mystery to me.
Roll around to AR2017 p41, and we find the overall debt on this contract has blown out another $100k to $1.4m, but the bad debt provision on that has blown out to $0.8m.
The real question here though is, how bad is all of this when looking at the big picture?
SNOOPY
Note figures in italics in table below are estimates
Doubtful Debt Provisions {A} Current Trade and Other Receivables (before provisioning) less Other Receivables (Estimates comes from FY2016) equals Current Trade Receivables {B} {A}/{B} EOFY2014 $0.377m $24.677m $3.637m $21.040m 1.79% EOFY2015 $0.342m $27.996m $3.637m $24.349m 1.40% EOFY2016 $0.589m $33.706m $3.637m $30.069m 1.96% EOFY2017 $0.897m $46.430m $5.332m $41.098m 2.18%
Notwithstanding that an EOFY2017 provision of $0.897m is just over 10% of FY2017 gross profit, in percentage terms I don't believe the 'bad debt provision' to 'total debt' ratio is a matter for concern. Hopefully the bad debt is now dealt with and we shareholders can move forward from here.
To some extent the 'Absolute IT' acquisition has got AWF out of jail. 'Absolute IT' is reflected in the end of year book position. So that means existing problems within AWF are diminished in relative terms by being part of a larger total. I am prepared to take a 'glass half full' approach to the bad debt position at this time. I won't be selling any of my AWF shares because of the bad debt issue.
SNOOPY
That wasn't very diligent of me.
Further detail of this $1.3m debt does appear on p39 of AR2016, with a note that $0.3m of provisioning has been taken on the books against it. Fast forward one year to AR2017 p41 and the debt has grown to $1.4m (not sure how as the company owing the debt was put into receivership by AWF: Could the difference be receivership fees?). Total provisioning against this debt has jumped to $0.8m, and that means an extra $0.5m in provisioning provided over FY2017.
Now I have this extra information I will have to decide if the debt incurred was part of normal operations or a significant 'one off'. Hmmmm?
SNOOPY
Hopefully a significant "one off".
Does seem to be a lot higher debt than I would expect from normal operations.
Maybe lessons learnt.
Selling off 75% of my holding in both AWF and EVO was because both results were well under what I expected.Had I had a high conviction stock I wanted to buy, I would have sold out completely.The result is I have lowered my average price.I was also sitting on more cash than I wanted.Both stocks now have PE ratios higher than their growth rate,however their yields are satisfactory.
A lot has happened over the last couple of years. So time for an update.
AWF Madison is in the business of recruitment and provision of people. The company operates in both the white collar and blue collar market place. AWF are the largest recruiter and labour provider in New Zealand providing the full spectrum of temporary and permanent recruitment services to industry and commerce.
The prime mission of the AWF (formerly Allied Work Force) sub-brand, founded in 1988, is "the provision of blue collar temporary labour", both semi-skilled and skilled. Industry sectors covered include construction, infrastructure, manufacturing, food processing, timber processing and waste management. AWF have 30 branches nationwide with 124 staff who supply up to 3,500 people per day on deployment.
The Madison sub brand, founded in 1998, acquired by AWF in 2nd December 2013, both recruits outright (5,615 placements last year) and deploys on their own behalf (up to 1,100 people per day) white collar staff through 5 offices and 98 support staff.
Absolute IT, founded in 2000, acquired by AWF on 1st November 2016, is also a 'white collar' recruitment business, but is an Information and Communication Technology (ICT) recruitment specialist (complimentary to Madison). Absolute IT has 4 offices with a total of 48 support staff deploying around 450 people daily.
"Madison" and "Absolute IT" report as one operating segment.
The combined group is New Zealand's largest recruitment company in terms of placements and the only NZX listed company in this market sector.
Conclusion: Pass Test
SNOOPY
Divie in my bank.
Just to show there is more than one way of doing things, I have slightly changed the way I am calculating underlying profit. I am now removing property plant and equipment sales profits/losses from all of my calculated profit figures.
2013: ($4.952m+$0.124m)/ 25.805m = 19.7cps
2014: ($3.952m-$0.025m+0.72x($0.095m+$0.257m) )/ 25.805m = 16.2cps
2015: ($5.416m+$0.031m)/ 32.463m = 16.8cps
2016: ($5.202m+$0.008m)/ 32.463m = 16.0cps
2017: ($5.867m-$0.050m+0.72x($0.262m+$0.442m) )/ 32.463m = 19.5cps
Notes:
1/ Due diligence cost for "Madison" removed from FY2014. "Madison Business" acquisition costs removed from FY2014.
2/ "Absolute IT" acquisition costs removed from FY2017. Legacy software write down removed from FY2017
Conclusion: Fail Test
Net Profit Margin = Net Profit/Sales
2013: $5.076m /($138.852m - $8.375m)= 3.89%
2014: $4.180m /$148.691m = 2.81%
2015: $5.447m/$197.514m = 2.76%
2016: $5.210m/ $214.589m = 2.43%
2017: $6.324m/ $256.428m = 2.47%
Note: For FY2013 I have removed the since sold healthcare unit profit and the associated turnover.
One uptick in the data in FY2017 is so far a welcome blip rather than a trend.
Conclusion: Fail Test
SNOOPY
The exercise of trying to normalise results is not always easy, as there are always 'judgement issues' to consider. And whatever numerical tools you think you have to assist with your investment decisions, you must still use judgement to assess the validity of those tools.
Management in AR2016 and AR2017 have gone on about this 'one off' bad debt, but haven't adjusted for it in AR2016 (when they still produced their own 'underlying earnings' figure). While a big account going wrong like this is unusual, is it unusual enough to distort the normal earnings of the business? I am forced to conclude that while management have put in extra checks and will no doubt learn from the experience, there is still a good chance it will all happen again. In this instance I have taken my queue from management, and not made any 'underlying adjustments' for this account gone bad. Doing nothing in this instance is also the more conservative thing to do. Conservatism, when valuing an investment, gives you an extra safety factor.
By contrast I have now decided to adjust my 'normalised results' for property, plant and equipment sales under the broader concept of adjusting for asset sales. Once an asset it sold, it cannot be sold again. So it seems right to remove property plant and equipment sales to give a better picture of operating results. However the actual adjustments in relation to profit are quite small (for example in FY2017, $50,000 on a $6.324m normalised profit is less than 1%). So doing this breaks my other rule of 'keeping things as simple as possible' and not being distracted by minutiae. However I decided to do it anyway, because not all asset sales are trivial. And if I am going to include the non-trivial asset sales when they occur, I need to include the trivial ones of today to be consistent.
SNOOPY
Bank debt in the FY2017 results announcement is as follows:
Cash & Cash Equivalents: {A} $1.225m Non Current Borrowings: $33.500m Current Borrowings: $0.0m Overdraft: $0.108m Total Borrowings: {B} $33.608m Total Net Borrowings: {B}{A} $32.383m
Net profit after tax: $6.324m
MDRT = $32.383m/ $6.324m = 5.1 years
Quite a large increase in leverage at AWF in the last couple of years. The acquisition of "Absolute IT" last November funded by bank debt would have something to do with that. However going from and MDRT of 3.4 at EOFY2015 to 5.1 today I would see as a move up, but still within, the medium debt spectrum. Not too much to worry about here, but the debt situation deserves monitoring.
SNOOPY
Fast forward a couple of years and much has changed. What was a clean pass on all tests at EOFY2015, has now morphed into a couple of failed tests. The net profit margin in FY2016 did shrink again and the recovery in FY2017 is still below FY2015 levels.
Next we have the somewhat sorry 'earnings per share story'. Five years on from the first corporate move and two acquisitions ('Madison Recruitment' and 'Absolute IT') have joined the AWF family. So we now have a much bigger company in revenue terms. But what has happened to 'eps' over that time period?
2013: ($4.952m+$0.124m)/ 25.805m = 19.7cps
<snip>
2017: ($5.867m-$0.050m+0.72x($0.262m+$0.442m) )/ 32.463m = 19.5cps
That's right. 'Eps' has gone down! OK the latest acquisition of Absolute IT is still bedding in, and I do expect 'eps' will rise in FY2018. But right at this point, shareholders who have held for five years (I haven't) must be disappointed. Sadly this means the 'Buffett Growth ' model is currently not suitable for checking out the value of this share :-(. Time to bring out the alternative 'Capitalised Dividend Valuation Model', and see what sort of valuation figures I get!
SNOOPY
I am in favour of using data that goes back up to ten years, to get a view across the 'business cycle'. In the case of AWF Madison though, I feel that would be misleading today. With the addition of 'Madison Recruitment' and 'Absolute IT' to the fold, I think there is an argument for dropping all indicative data outside of a minimum five year window.
I have left out the one off dividend of 3cps paid in FY2014 as a result of the capital gain made on the sale of the healthcare business. One off sales do not represent repeatable sustainable dividends from ongoing operations.
eps dps 2013 19.7 14.4 2014 16.2 15.6 2015 16.8 14.8 2016 16.0 15.2 2017 19.6 16.0 Total 88.3 76.0
This represents an average dividend payout ratio over the last five years of:
76.0 / 88.3 = 86%
SNOOPY
P.S. Just noticed on p15 of AR2017 that AWF have a policy of paying out 65-70% of 'underlying earnings'. 'Underlying earnings' is a unique construction of AWF management which allows for the 'amortization of intangible assets' (a non cash item) to be added back in, less a deferred tax effect based on the 28% tax rate. 'Underlying Earnings' calculated this way is a proxy for cashflow, and cashflow is what dividends are paid from. However, I still contend that 'underlying earnings' is a misleading measure to assess AWF performance. That's because real shareholder cash was used to create the now 'intangible assets' that are being amortised. Just because the cash was paid 'up front', does not mean it should be ignored from an earnings perspective.
The amortization expense was $2.272m for FY2017 (p36, AR2017)
So 'Underlying earnings' for FY2017, based on the declared NPAT of $5.867m would be:
$5.867m + (1-0.28)x $2.272m = $7.503m
65-70% of that figure, the projected dividend payout for FY2017 is:
(0.65 to -0.7) x $7.503m = $4.877m to $5.252m {A}
The actual dividend declared for FY2017 is 8.0c (interim) and 8.2c (final). There are 32.463m AWF shares on issue. So the amount declared as a dividend for FY2017 is:
($0.08+$0.082) x 32.463m = $5.259m {B}
Comparing {A} and {B}, we can see that the declared dividend, which is actually paid over FY2017 (interim bit) and FY2018 (final bit) is right at the top end of policy guidance (70% of underlying earnings).
Yet the actual dividend paid as a percentage of net profit during FY2017 is 16c/19.6c = 82% of NPAT.
Shareholders should be aware that paying out 70% of 'Underlying Earnings' is the same as paying out 82% of 'Net Profit After tax'. But let's not get too picky with management. What difference does 12 percentage of net profit really make between shareholder friends ;-)?
I have not checked your figures,but really my investment comes down to eps growth.
Using your figures we see eps went from 18.7cps in 2013,to 19.6 cps in 2017.ie an increase over those years of only 4.8%.or on average just over 1% pa.
This proves AWF is no longer a growth stock,and the PE of 14.69, using your figures ,is not warranted.
The yield ,again using your figures is 5.55% which is healthy,which makes AWF a yield stock..
eps dps (imputed) 2013 19.7 14.4 2014 16.2 15.6 2015 16.8 14.8 2016 16.0 15.2 2017 19.6 16.0 Total 88.3 76.0 5 year Average 15.2
For a leading market player in a nevertheless fragmented service profession I would accept a 7.5% gross dividend yield.
Implied Acceptable Share Price = (Gross Dividend) / (Acceptable Yield)
= (15.2c / 0.72) / 0.075 = $2.81
With no sales in the market today as I write this, but a bid price of $2.75 and an offer price $2.85, in these days of highly prized dividends I think AWF is trading where it should.
SNOOPY
The 'Capitalised Dividend Valuation Model' assumes a mature business that will tend to repeat earnings over the business cycle. Management might not like themselves being described as 'stagnant', but I think your comment is 'spot on' BP. If you believe that management can grow the business, then buying at the 'Capitalised Dividend Valuation' means you get any such growth 'for free'. As an investor getting something for nothing has an appeal. But if there is no growth, then you are likely 'stuck' with a business cycle gross dividend yield of 7.5%. Either way I think I can cope!
The moral is, if you are looking for some go go outfit that will lift earnings markedly, then maybe you should look elsewhere. I think this is something that both Percy and I can agree on!
SNOOPY
discl: hold AWF
The bonus offcourse being when your yield stock comes up with a big [susstainable] lift in earnings.
This is what I had expected from AWF,but the latest results proved me wrong.
Don't give up on AWF yet Percy. The "Absolute IT" acquisition has only four months of trading in the FY2017 result. The winning of the census contract should benefit 'Madison Recruitment' in FY2018. Meanwhile, the AWF division, where it all started, keeps performing. I think 'step growth' is definitely still possible (I hope for the best). But if growth doesn't happen, then there is that 7.5% , or thereabouts, gross yield to look forward to (I plan for the worst).
SNOOPY
Totally agree,and that's why I retained some of my holding.
Maybe,just may be,we are "well positioned," to take advantage of any "surprise" earnings upgrade?
It is interesting to reflect with hindsight on some comments in the: above address by then CEO Mike Huddleston on 18th November 2013
-----
"Let me give you an example: In 2010 we lost the business of a substantial national Government SOE to whom we had been providing blue collar staff across the entire country for many years.
We lost this business not because of our service delivery but because we could not also provide this business with customer service focused staff; with call centre staff and with white collar recruitment services, together with our existing offering."
"This loss reinforced for us the need for this expansion. I can tell you today that since we announced our intention to acquire Madison there has been a significant level of excitement within our clients and prospects about the opportunities the one stop shop will create. We have already been asked to jointly present to one of the country’s major businesses."
<snip>
"The cultures of AWF and Madison are not the same. The difference between delivering blue collar and delivering white collar are quite pronounced. For this reason we have no intention of merging the operations of Madison and AWF. In our evaluation of the business and of the price we should pay we never saw the acquisition as one which would create synergies and generate quick gains. We saw it
instead as a strongly performing business and a leader in its market with substantial opportunity for growth."
-----
So even close to four years ago the game was to catch more business, but there would be no merged company cost savings to create more profit? It looks like Huddleston's prediction came true. More business has been generated but net profit margins have declined.
SNOOPY
Divisional Profit FY2014 FY2015 FY2016 FY2017 AWF Profit after tax {A} $3.632m $3.558m $3.410m $4.716m Madison Profit after tax {B} $0.414m (*1) $2.564m $2.091m $0.649m Absolute IT Profit after tax {C} $0.809m (*2) Total Modelled Profits {A}+{B}+{C} $4.046m $5.416m $5.202m $6.174m Total Declared Profits $3.952m $6.122m $5.501m $5.867m Profit Error: Modelled vs Declared +2.38% -11.5% -5.44% +5.23% Divisional Turnover FY2014 FY2015 FY2016 FY2017 AWF Turnover {D} $125.536m $127.705m $145.803m $157.714m Madison Turnover {E} $23.155m (*1) $69.809m $68.786m $71.114m Absolute IT Turnover {F} $27.6m (*2) Total Modelled Turnover {D}+{E}+{F} $186.300m $197.514m $214.589m $256.428m Total Declared Turnover $148.691m $197.514m $214.589m $256.428m Turnover Error: Modelled vs Declared 0% 0% 0% 0%
(*1) Part year from November 2013 only
(*2) Part year from November 2016 only
Divisional Net Profit Margin FY2014 FY2015 FY2016 FY2017 AWF Net Margin {A}/{D} 2.893% 2.706% 2.339% 2.990% Madison Net Margin {B}/{E} 1.788% 3.673% 3.040% 0.913% Absolute IT Net Margin {C}/{F} 2.931% Net Margin Error: Modelled vs Derived +2.38% -11.5% -5.44% +5.23%
If shareholders look at what has happened in particular to the profitability of the AWF and Madison sub units over FY2016 and FY2017, a picture different to the 'overall picture' emerges. The AWF division went 'gang busters', while the profitability for Madison fell off the cliff. These two opposite effects nearly cancelled each other out in the overall profit picture. But it does show that if Madison can recover, then the underlying overall picture could be rather brighter than the 'pretty stagnant' 'eps' trend might suggest.
SNOOPY
I need to answer the obvious question. If I know what the 'net margin error' is, why don't I just fix it? Two reasons:
1/ AWF does not provide 'net profit' figures for divisions. I have derived divisional net profit figures by assigning unallocated costs in proportion to divisional revenues. If this assumption is not entirely accurate (and it probably isn't) then the divisional 'revenues minus expenses' sums will also be inaccurate.
2/ I have assumed that all business units pay tax at 28 cents in the dollar. But this assumes that all expenses are tax deductible, and that might not be true. If I calculate that less tax is paid that is really due, then my calculated after tax profit will be higher than reality.
There is insufficient disclosure in the annual results to quantify the error effects of 1/ and 2/. Except to say that if I:
a/ add up my divisional NPAT for each division AND
b/ if that sum does not equal the NPAT company declared total
THEN there is definitely an error in the assumptions I have made. But exactly where that error is can't be pinpointed. So IMO it is best to accept the divisional results 'as calculated', while bearing in mind that the significance of the figures calculated are suspect by the percentage of the error quoted that was introduced when I did my own calculations.
SNOOPY
The problem worth this "major business" is that it is a sale generator but loss creator.
Its vrry simple. Customer, with their large business ecpects servusr at very low margin. So instantly you can expect margin loss. Next, customer expects rolls royce service - so service costs go up. All the while focus is on this big customer and you loose sight of all the other existing customers (so loose them) and you fail to secure new high margin business.
I take it this is not good news
https://www.nzx.com/files/attachments/265947.pdf
What margin are they achieving in the core business?
Suppose this is not the best of news .....seems to be an never ending story of things that aren't working in their favour
Extract:
As a consequence of the above, profit, as at 31 March 2018, is expected to be behind that of the prior year. However, Cash Flow remains strong, and the operational plans to improve financial performance, implemented during the year, are having the desired effect, albeit at a rate slower than anticipated.
http://nzx-prod-s7fsd7f98s.s3-websit...921/275470.pdf
And there was me thinking construction and civil were booming industries. I'm not sure what legislative compliance costs they are referring to - cant think of too many recent changes. Followers of this stock need to follow the Triangular Employment relations bill going through parliament, as well as minimum wage
eps dps (imputed) 2014 16.2 15.6 2015 16.8 14.8 2016 16.0 15.2 2017 19.6 16.0 2018 21.6 (*) 16.2 Total 90.2 77.8 5 year Average 15.6
(*) Based on projected FY2018 NPAT earnings for the year of $7m.
For a leading market player in a nevertheless fragmented service profession I would accept a 7.5% gross dividend yield. However, with the vulnerability to weather permissible building projects as evidenced in the first half, I am pushing out my acceptable gross dividend yield to 8%
Implied Acceptable Share Price = (Gross Dividend) / (Acceptable Yield)
= (15.6c / 0.72) / 0.08 = $2.70
Last sale on the market was $1.80. Using this valuation model, I think AWF Madison is now trading at a 33% discount to fair value.
SNOOPY
discl: holder