The Buyout Years: Madison in FY2014, AbsoluteIT in FY2017
Quote:
Originally Posted by
minimoke
What they are doing is working harder to generate more cash (Eg Census contracts), but less smarter to generate less profit.
It is going to get more difficult to disambiguate what is happening at Madiosn and AbsoluteIT in the future. For financial reporting purposes they have both been combined under the 'Temporary Contract and Permanent Staff to Commerce' reporting segment. Yet from Section G1 in AR2017 we can get a feel for AbsoluteIT's revenue and profit numbers, over FY2017 at least:
|
Revenue |
Net Profit |
Net Profit Margin |
If AbsoluteIT had been part of AWF Madison for all of FY2017 |
$301.600m |
$7.500m |
less Declared AWF Madison Result for all of FY2017 |
$256.428m |
$5.867m |
equals AbsoluteIT Result for Apr to Oct 2014 (7 months) |
$45.172m |
$1.633m |
plus AbsoluteIT Result for Nov 2016 to Mar 2017 (5 months) |
$27.600m |
$0.809m |
equals AbsoluteIT Result for FY2017 (12 months) |
$72.7m |
$2.44m |
3.36% |
We can do a similar exercise for when Madison was acquired during FY2014, using Section 18 from AR2014.
|
Revenue |
Net Profit |
Net Profit Margin |
If Madison had been part of AWF Madison for all of FY2014 |
$186.300m |
$5.200m |
less Declared AWF Madison Result for all of FY2014 |
$148.691m |
$3.952m |
equals Madison Result for Apr to Oct 2013 (7 months) |
$37.609m |
$1.248m |
plus Madison Result for Nov 2013 to Mar 2014 (5 months) |
$23.156m |
$1.265m |
equals Madison Result for FY2014 (12 months) |
$60.8m |
$2.51m |
4.14% |
SNOOPY
Heavily Indebted AWF - or is it? part 1
Quote:
Originally Posted by
winner69
No I’m not saying that at all
What I’m saying is that AWF is one of the most highly geared company on the NZX. Gearing at 47% is high.
ASB, the company's new bankers, not only rubber stamped the existing debt levels. They reduced the interest rate payable, which tells you a lot about what they think of the debt risk. As you will recall, ASB and AWF have redefined what leverage means anyway, a good thing to do if you don't like the classical definition. So how does AWF stack up against three blue chip NZX50 companies?
Company & Financial Year |
Mercury 2017 |
Sky City 2017 |
Spark 2017 |
AWF 2017 (AbsIT 12mnths) |
EBITDA(F) {B} |
$523m |
$307m |
$1,016m |
$15.664m |
Finance Cost {C} |
$95m |
$31.1m |
$48m |
$1.659m |
Interest Coverage {B}/{C} |
5.5 |
9.8 |
21.2 |
9.4 |
Net Funding Debt {D} |
$1077m |
$889m |
$935m |
$32.383m |
Leverage ratio {D}/{B} |
2.1 |
2.9 |
0.9 |
2.1 |
Company & Financial Year |
Mercury 2017 |
Sky City 2017 |
Spark 2017 |
AWF 2017 (AbsIT 12mnths) |
Debt {B} |
$1,107m |
$889m |
$935m |
$33.608m |
Equity {C} |
$3,308m |
$1,071m |
$1,651m |
$36.935m |
Debt Ratio {B}/{B+C} |
25.1% |
45.4% |
36.1% |
47.6% |
As you can see I have used both the classical definition of leverage (Debt Ratio) as well as the ASB/AWF definition.
Why did I choose Mercury Energy (MCY), Sky City Casino (SKC) and Spark (SP) for comparison? Simply because I hold them all and have considered them as relatively highly leveraged investments. For Sky City I have included the deferred casino licence value as part of the company debt, as the book licence value will be transferred and offset against the PP&E of the completed Auckland and Adelaide complexes when finally built (IOW the licences as they appear on the balance sheet are defacto debts).
Of the three, it is Sky City that stacks up the closest to AWF in debt terms, even if they are very different businesses. Mercury looks respectable in both leverage terms because they have been able to raise capital using the 'thin air' method. The Mercury interest cover is easily the weakest of the four. And without the power station revaluations (thin air capital created) it would present as easily the weakest from a Debt Ratio perspective too. Spark is in the strongest position of the four. But they do have a lot of telecommunications equipment on the books that will require more frequent capital reinvestment to keep current.
Looking at this, I am surprised that ASB consider a leverage ratio of anything below 3 as quite acceptable. Sky City is certainly as highly leveraged a company as I would want to invest in, and their debt is set to go higher as construction continues. You would not want AWF Madison to have two bad years in a row with the debt levels they have now. With the old definition of leverage, AWF Madison and Sky City are nearly line ball. The new definition of leverage makes AWF look much better!
Quote:
Why did AWF raise new capital of $14m in 2015 if debt is a good thing? Wasn’t to ‘optimise’ their balance sheet was it ..surely not.
That was just before I first appeared on the share register, so I don't have any memory of what spin was used to justify that capital raising at the time. Anyone on here remember?
SNOOPY
The Madison Curse: Part 2
Quote:
Originally Posted by
Scrunch
Interesting discussion.
So AWF paid $14.7m for an entity delivering a net surplus of circa $2.44m/yr. Either this was a steal or indicates a low sector P/E is appropriate. If the correct PE in this sector should be 6, and AWF delivers $7.5m its market capitalization would be $45m (or $1.38).
I think that generally a takeover offer is made on an EBITDA or EBIT multiple. This gives more an impression of the earnings capacity of the business. The gearing of the business after the takeover is of course up to the purchaser. The purchaser must decide how much of the underlying term debt of the company they have just purchased to pay back. In the case of Absolute IT, there doesn't seem to be any term debt to pay off. Furthermore I can't see anything unusual in what AbsoluteIT is paying in tax. So in this particular instance, your suggestion that AbsoluteIT was purchased on a certain PE ratio look valid. However, the purchase was not made on a multiple of FY2017 earnings alone. If you look at the bottom of page 54, the earn out payment is discussed, suggesting that the amount being paid is contingent on this year's results as well, and maybe even the previous year too (FY2016 about which we shareholders know nothing regarding AbsoluteIT). If the representative takeover PE is a lowly 6 that could be right for a much smaller stand alone business, The mere fact that a company is NZX listed does tend to result in higher PEs. That means I don't think you can extrapolate that PE of 6 to a much larger combined listed entity.
Another rationale for these takeovers is savings via synergy gains. But AbsoluteIT seem to be maintaining their existing market branch presence quite separate from Madison. So I am not sure if there are any synergy gains, other than the diversification of being in different markets that are not always in synchronization. Asynchronization implies a 'smoothing of earnings' effect, which is something that shareholders tend to like..
Quote:
There's a group of companies with some earnings doubt, some bank debt and sufficiently large amount of good will that there is a huge gap between Equity/share and NTA/share on the balance sheet. Members of this group include AWF, EVO, GXH, MPG, SKT, TGH. The takeover rescued TGH but the rest are all down heavily this year. Mr Market is nervous around negative NTA companies with borrowing and is continuing to hammer them. AWF may become a buy around the same time some of these other downtrends end.
It is right to question the goodwill 'on the books', and company auditors do ask that this is done annually. In the case of the AbsoluteIT purchase, this only happened last year. So I am interested in the juxtaposition of you being worried that the AWF goodwill, which includes that from the AbsoluteIT purchase, is 'overvalued', while in the previous paragraph you had described the purchase price of AbsoluteIT as 'a steal'. I think you have to judge the goodwill on the books of any company on a case by case basis.
The thing that does raise my eyebrow though is the $7.465m of permanent 'Madison Brand' goodwill on the AWF Madison books. Compare that to the $1.980m of permanent 'AbsoluteIT' brand goodwill that came on board in FY2017, and compare the profitability of the two operations. Could a write down of some of that Madison brand goodwill be on the cards? Such a write down would put a real dent in the 2HY2018 results, even though it would be a 'non cash adjustment'.
SNOOPY