Will AWF break their banking covenants in FY2018: Part 1?
Quote:
Originally Posted by
winner69
As long as AWF profits don’t do a Fibonacci - like spiral downwards - all will be OK
I always buy with optimism, but with any transaction there is always a downside risk. There is nothing I could find on banking covenants in the Annual Report. But I remember Simon Bennett putting up a slide at the AGM video presentation where he mentioned banking covenants. It is slide 8 in the presentation for those who want to look it up.
The two targets mentioned were:
1/ 'Interest Coverage' ratio to be greater than 3
2/ 'Leverage Ratio' to be less than 3.
I looked up the 'investorwords' (www.investorwords.com) definition of these two terms.
'Interest Coverage' ratio is equal to Earnings Before Interest and Tax (EBIT) for a time period, often one year, divided by interest expenses (I) for the same time period.
'Leverage Ratio' What the debt/equity ratio measures.
Rather disconcertingly, AWF does not use these definitions. AWF define these same terms as follows:
'Interest Coverage' ratio is equal to " EBITDA / I "
'Leverage ratio' is " 'Net bank Debt' / EBITDA "
I find it very disconcerting when companies play fast and loose with such definitions. But for the purpose of this exercise, I will go with the AWF definition view. I was able to derive all the numbers in the year by year table in slide 8 from the respective annual reports, except for the EBITDA figures.
I calculated EBITDA from the income statement using the formula: EBITDA = NPBT + I + DA
The discrepency is not huge, as you can see below. But I will go with my figures for EBITDA, not AWFs, as I can't figure out how they calculated them, and I need figures that are consistent with my own future EBITDA estimates.
Financial Year |
2015 |
2016 |
2017 |
EBITDA (AWF produced) |
$12.617m |
$11.710m |
$13.454m |
EBITDA (Snoopy produced) |
$12.729m |
$11.945m |
$12.751m |
Now, let's see how close AWF is going to get to those covenants!
SNOOPY
Will AWF break their banking covenants in FY2018: Part 2?
Quote:
Originally Posted by
Snoopy
Financial Year |
2015 |
2016 |
2017 |
EBITDA (AWF produced) |
$12.617m |
$11.710m |
$13.454m |
EBITDA (Snoopy produced) |
$12.729m |
$11.945m |
$12.751m |
Now, let's see how close AWF is going to get to those covenants!
What follows is my recreation of the table presented in slide 8
Financial Year |
2015 |
2016 |
2017 |
2018 (HY Annualised Estimate Scenario) |
2018 (Horror Scenario) |
EBITDA (Snoopy produced *) {B} |
$12.729m |
$11.945m |
$12.751m |
$12.046m |
$7.728m |
Finance Cost {C} |
$2.109m |
$1.333m |
$1.193m |
$1.659m |
$1.659m |
Interest Coverage {B}/{C} (target >3) |
6.0 |
9.0 |
10.7 |
7.3 |
4.7 |
Net Bank Debt {D} |
$18.608m |
$21.870m |
$32.383m |
$23.183 |
$23.183m |
Leverage ratio {D}/{B} (target <3) |
1.5 |
1.8 |
2.5 |
1.9 |
3.0 |
(* I calculated EBITDA from the income statement using the formula: EBITDA = NPBT + I + DA)
So what does all this mean?
The situation we don't want is the 'horror scenario' which sees the 'leverage ratio' banking covenant broken (bottom RH corner in bold). Note that even in this 'horror scenario', the interest coverage ratio remains OK. I have made the following assumptions in my FY2018 estimates:
1/ The net bank debt is unchanged from HY2018 (the latest balance sheet information published).
2/ My first estimate simply doubles the earnings from an already depressed half year result.
3/ For my second estimate (the horror scenario), I have reduced EBITDA down to a level so that the banking covenants are broken, without changing my net debt assumption.
However, AWF does not tend to emphasize the EBITDA figures when announcing their results. They speak in terms of NPAT. So what does an EBITDA of $7.728m imply in terms of NPAT?
Assuming the interest costs and Depreciation and Amortisation costs carry over from the half year to the full year:
NPAT = 0.72 x [ EBITDA - I -DA ]
= 0.72 x [ $7.728m - 2($0.741m) - 2($1.864m)] = $1.813m
However, a $3.418m profit has already been declared for the half year. So to produce an annual result like that, would require a second half loss of :
$1.813m - $3.418m = -$1.605m
We have been told that AbsoluteIT are tracking to budget and Madison will have the benefit of the Census contract to boost their second half result. To produce this 'horror result' will require a massive second half loss to be posted by the AWF division, to drag down the other two (which should be nicely profitable) via the group result into the red. Even writing off the remaining $0.6m outstanding from the much talked about 'bad debtor' won't do it. While such a loss is possible, it just doesn't seem likely. The AWF banking covenants look pretty safe to me.
SNOOPY
P.S. Ross and the rest of the board wants the leverage ratio below 2