BT1/ ENABLE Group Market Position (FY2020 perspective)
I hold a very minor 'position of interest;' in 'Enable Networks' courtesy of being a Christchurch ratepayer. 'Enable Networks' was created to be the builder of the fibre broadband network in Christchurch. Lyttelton, Lincoln, Prebbleton, Rolleston, Tai Tapu, Kaiapoi, Mandeville, Tuahiwi, and Woodend. 'Enable Networks' (ENL) is a wholly owned subsidiary of 'Enable Services Limited' (ESL) which is in turn a wholly owned subsidiary of 'Christchurch City Holdings Limited' (CCHL). CCHL is the commercial arm of the Christchurch City Council. ESL and ENL make up the 'Enable Group'.
The founding shareholders of ENL were ESL and CIP (Crown Infrastructure Partners, was Crown Fibre Holdings). CIP were bought out on 29th June 2016.
Does Enable hold a top three position in its chosen market space. As the monopoly wholesale provider in the greater Christchurch region, the answer has to be 'yes'.
Conclusion: Pass Test
SNOOPY
BT2/: ENABLE Increasing EARNINGS PER SHARE (One setback allowed) FY2020 Perspective
The 'Enable Annual Reports' may be found here:
https://www.enable.net.nz/about-enab...-publications/
Profits for the last five years have been normalised as described in the notes below:
'Earnings Per Share' = 'Adjusted Net Profit' / 'No. Shares on Issue'
FY2016: [$3.311m - $11.838m + 0.72( $0.377m + 0.005m)] / 34m = -24.3cps
FY2017: [-$8.518m - 0.72( $0.023m)] / 44m = -19.4cps
FY2018: [-$3.783m + 0.72($0.021m)] / 67.5m = -5.6cps
FY2019: [+$10.830m + 0.72($0.015m)] / 67.5m = 16.1cps
FY2020: [+$11.320m + 0.72($0.010m) - $0.006m] / 67.5m = 16.8cps
Notes
1/ For FY2016, I have removed $11.838m of asset revaluations that came about from a business recombination, added back $377k of business acquisition costs and $5k of Forex losses.
2/ For FY2017, I have removed $23k of Forex gains.
3/ For FY2018, I have added back $21k of Forex losses.
4/ For FY2019, I have added back $15k of Forex losses.
5/ For FY2020, I have added back $10k of Forex losses and subtracted $6k from asset sales
The eps trend is all one way, and that is up!
Conclusion: Pass Test
SNOOPY
BT3/: ENABLE ROE (>15% for five years, one setback allowed) [perspective 2020]
ROE or 'Return on Equity' is calculated as follows:
ROE = Adjusted Net Profit / (Shareholder Equity - Equity Adjusted Asset Revaluations)
FY2016: -$8.252m / [$100.799m - (0.2944x $11.838m)] = -8.48%
FY2017: -$8,535m / [$138.888m - (0.3270x $11.838m)]= -6.32%
FY2018: -$3.768m / [$212.952m - 0.4068 x ($11.838m + $24.854m)] = -1.90%
FY2019: +$10.841m / [$227.988m - 0.4157x ($11.838m + $24.854m)] = +5.10%
FY2020: +$11.321m / [$311.323m - 0.4690x ($11.838m + $24.854m +$66.424m)] = +4.31%
Notes
1/ I have decided to adjust shareholder equity by removing the equity funded component of all historic asset revaluations. Asset revaluations are beneficial for shareholders. But since no shareholder funds were outlaid to obtain these revaluations (a good thing), it will artificially reduce the return on 'paid for' company equity - if I include the revaluations in my ROE calculations. To calculate the adjustment to make to:
1/ the shareholder equity for all historically revalued assets,
2/ for each year
I have taken the cumulative historically revalued totals and multiplied each total by the equity ratio of that year.
Although we are going in the right direction, at no time in the last five years has Enable got even close to our return on equity target.
Conclusion: Fail Test
SNOOPY
BT4/ ENABLE Ability to raise margins above the rate of inflation [perspective 2020]
Net Profit Margin = Adjusted Net Profit After Tax / Working Revenues
FY2016: -$8.252m / [$63.370m - $43,144m -$8.538m] = -70.6%
FY2017: -$8,535m / [$36.272m - $8.781m]= -31.0%
FY2018: -$3.768m / [$48.473m - $6.628m]= -2.14%
FY2019: +$10.841m / [$58.678m - $2.486m] = +19.3%
FY2020: +$11.321m / [$76.985m - $2.000m] = +15.4%
Notes
1/ I have removed 'Contract Construction Revenue' of $43.144m when ENL was regarded as an associate to ESL, before ESL gained full control of it . From FY2017 onwards ESL took full control of ENL. This transaction occurred on 29th June 2016. Balance date for ESL/ENL is 30th June of each year.
2/ I have removed 'inventory' revenue from each year. 'Inventory' represents goods bought to be on sold to contractors for the building of the network.
The above trend is showing that as the fibre network finishes being built, and the take up improves, then profit margins for the business improves. That should not come as a surprise to anyone reading this. What might come as a surprise is to see the net profit margin dip in the last reported financial year. However, I see this as a 'rogue result' that does not devalue the underlying uptrend (yet).
Conclusion: Pass Test
SNOOPY
Buffett Test: ENABLE Overall Evaluation Conclusion [perspective 2020]
All of the Buffett tests are there for a reason. So a 100% pass rate (all four tests being passed) is needed to go on to the next level of analysis. The 'Return on Equity' calculation for 'Enable' is a big fail (a best of circa 5% is well short of the 15% target). This is not a real surprise, as Buffett does tend to prefer companies with a lower level of capital assets. The 'Enable' assets are relatively new, certainly so compared to the copper wires, probably most of which have a history dating back over 50 years. New assets imply a high asset valuation.
The 'Return on Equity' for 'Enable' will certainly improve going forwards, as more connections are made to the existing fibre network. It will also improve as the overall value of the network depreciates and the accompanying ongoing capital expenditure reduces. At EOFY2020 (30th June 2020), the customer connection rate at 'Enable' had risen to 63%. That compares favourably to 'Chorus' which, at the same date, had a fibre network connection rate of 60%. ROE at 'Chorus' was greater at an albeit still not Buffett inspiring 7.2%. 'Chorus' carry their networks at historic cost. So in this sense, my historic revaluation adjustments that increase ROE for 'Enable' -that I have measured at EOFY2020 to be 4.31%- makes the two ROE figures comparable. Where the companies do differ is where 'Chorus' can rely on the profits of the long established 'legacy copper wire network' as well. Given the depreciated book value of the copper network, and roughly comparable 'customer service charges' for the older and newer technologies, it is no surprise that the ROE on the legacy copper network is greater than the ROE on much newer fibre assets.
This is a long winded way of saying that I expect the ROE of 'Enable' to improve going forwards. But having failed the Buffett test, I feel it is more appropriate to consider both Chorus and 'Enable' as 'dividend shares', with any growth that might arise in the future as a bonus.
SNOOPY