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