AGL - Accordant Group. was previously AWF Madison, Allied...

[Snoopy]

I always find it a useful exercise to go over old predictions and see where you went wrong.

	Lower Estimate FY2020	Higher Estimate FY2020	Actual Profit FY2020
EBITDA (AWF Division)	$4.800m	$7.200m	$1.962m
EBITDA (Madison/AbsoluteIT)	$5.597m	$5.597m	$7.156m
less Head Office Admin and Expenses	($2.649m)	($2.649m)	($2.876m)
less Net Interest Expense Paid	($1,232m)	($1.232m)	($2.084m)
less Depreciation and Amortization	($3.445m)	($3.445m)	($6.194m)
equals Net Profit Before Tax	$3.071m	$5.471m	$3.897m
less Income Tax (Scenario Estimates @ 30%)	($0.921m)	($1.641m)	($1.220m)
equals Net Profit After Tax	$2.150m	$3.830m	$2.677m

The actual tax paid over FY2020 was at a rate of:

$1.220m / $3.897m= 31.3%

The actual result was somewhat in the middle of my higher and lower estimate. But digging deeper that AWF division contribution was a clangor. Far far worse than my worst fears. The fix for the 'Auckland Commercial Construction' problems was to avoid the construction industry (AR2020 p12)!

The white collar contribution was up. But that was mainly due to 10 months contribution from the newly acquired 'JacksonStone' 'C' level placement consultancy. Take out that and both Madison and AbsoluteIT were down (revenue down a combined 8%).

Head office expenses were up as "directors and management all took pay reductions" (AR2020 p12)! Wasn't FY2020 also the year that the company gained the full value of putting Madison and Absolute It into the same locations in Auckland and Wellington? It is hard to reconcile administration expenses going up in the circumstances I have outlined.

The interest bill went up because I didn't model the $10.520m purchase of 'JacksonStone'. 'JacksonStone' certainly contributed to increasing White Collar profit But the downside was a much higher interest bill and restraint of trade amortisations that mostly erased the acquired business's positive EBIT contribution. I can't help wondering if in the 'quest for growth' the eye was taken off the existing balls in hand. I am not saying the acquisition of 'JacksonStone' was necessarily wrong long term, albeit the acquisition timing perhaps could have been better. I am saying that increased debt generally doesn't go away. But increased profits can.

If we go back to the interim report p7, 'the Bennster' had high hopes for Net Profit Before tax:

"We expect to achieve NPBT (Net Profit Before Tax) for the full year of above $4.2 million – nearly 50% higher than prior year. An upper range is not provided due to some uncertainty in the level of improvement within AWF and the speed at which we can ramp up temp numbers within Madison."

This was all pre Covid-19 of course. But even so, to fall short of your lowest expectations by: $4.200m - $3.897m = $0.303m, is not a great result.

This is going to be a difficult exercise with 'historical precedent' severely disrupted by Covid-19. But I shall give it a go. I like to start with some figures we know, rather than guessing. So here is the NPAT margin for each white collar business unit when it was absorbed under the Accordant umbrella.

	FY2014	FY2015	FY2016	FY2017	FY2018	FY2019	FY2020	FY2021
Significant Event		First full year owning Madison			First full year owning AbsoluteIT		JacksonStone Acquired	First full year owning JacksonStone
Combined Madison/AbsoluteIT/JacksonStone Turnover		$69.770m	$68.786m	$98.714m	$149.455m	$151.946m	$166.079m	$127.720m
Madison only Turnover (assuming owned whole year)	$61.065m	$69.770m	$68.786m	$71.1m	$76.7m (e1)	n/a	n/a	n/a
AbsoluteIT only Turnover		$0.0m	$0.0m	$27.7m	$72.8m (e1)	n/a	n/a	n/a
AbsoluteIT only Turnover (assuming owned whole year)				$72.772m
JacksonStone only Turnover		n/a	n/a	n/a	n/a	n/a	$27.510m	$33.325m (e2)
Combined Madison/AbsoluteIT Turnover		n/a	n/a	$98.714m	$149.455m	$151.946m	$138.569m	$94.395m
Madison Only Net profit	$2.513m
AbsoluteIT Only Net profit (assuming owned whole year)				$2.442m
JacksonStone Only Net profit (assuming owned whole year)							$2.405m
NPAT Margin (Madison Only)	4.1%
NPAT Margin (AbsoluteIT Only)				3.4%
NPAT Margin (JacksonStone Only)							7.2%

Notes

(e1) or estimate 1 is the full year turnover from (or derived from) the previous year of AbsoluteIT operations, assuming it had been part of the AWF group for the whole year (p55 AR2017).

(e2) Under Section G1, from p49 of AR2020:

I am using the quoted figure of $33.325m for full year FY2020 as an estimate of JacksonStone revenue for FY2021.

"For the period 1 June 2019 to 31 March 2020, included in Group profit after tax is $1.943m and in Group revenue $27.510m attributable to JacksonStone & Partners."

This implies an actual net profit margin for JacksonStone during the part year of initial ownership of:

$1.943m / $27.510m = 7.1%

That is consistent with the surprisingly high full year figure listed in the table.


I am reasonably confident that the Net Profit Margins for Absolute IT (3.4%) and JacksonStone, (7.2%) as calculated in the above table, are still relevant. I expect these businesses have been 'right sized' by reducing the office footprint and reducing staff to match post Covid-19 market conditions. I am less confident that the Net Profit Margin for Madison is still relevant.

SNOOPY

[Snoopy]

I am reasonably confident that the Net Profit Margins for Absolute IT (3.4%) and JacksonStone, (7.2%) as calculated in the above table, are still relevant. I expect these businesses have been 'right sized' by reducing the office footprint and reducing staff to match post Covid-19 market conditions. I am less confident that the Net Profit Margin for Madison is till relevant.

General remarks on 'forecasting the future' are reproduced below:

From AR2020 p3

"In Madison and AbsoluteIT, in addition to the increase in boutique agencies, the growing trend, by clients, to establish in-house recruitment teams contributed substantially to the businesses’ reduced performance."

---------------------

From HYR2021 p5

"The large drop in permanent fee revenue in Madison has reduced the size of the business and we do not expect the business to recover fully this financial year. We predict it may well take a further 18 months. This recovery will likely be through the temp channel, rather than permanent recruitment."

I read the above as saying recovery in revenue will take until FY2023. But even then profits will be lower due to change in mix finding temporary workers and less full time workers.

"AWF too has had a fall in permanent fee revenue and its temporary business suffered considerably during the Level 4 lockdown.
At our current recovery rate, we expect AWF to return to normal trading in its temp business by the end of this financial year."

I read the above as lower profits for FY2022 due to fewer permanent worker placements.

"Absolute IT has also been affected and is approximately 10% down on prior year. However, the tech sector is showing growth and we are confident of our ability to once again grow our business."

I read the above as half way to a 'full recovery' for FY2022

"Likewise, JacksonStone & Partners saw a drop, mainly in May, but is recovering well and we are confident in demand. We expect to pay the vendors of JacksonStone the maximum entitlement for the second tranche of the earnout for the purchase."

A forecast of maximum payment of the earn out fee suggests full recovery.

---------------------

From AR2021 p5

"With the permanent recruitment market most significantly impacted in 2020, the first to see growth was our AWF blue collar labour hire channel. Whilst there is a good recovery from Absolute IT and JacksonStone & Partners, the white collar Madison business has been slower to return to previous revenue across much of its private sector, albeit in the last few weeks the market has gained significant uplift."

The above is consistent with the half year comments.

From AR2021 p10

"The New Zealand labour market currently has significant shortages in ICT, construction and healthcare. We believe that, even with open borders, we cannot expect immigration settings to allow for the same volume of migrants to supplement our workforce, as they have done prior to COVID-19. Maximising workforce participation, and growing the available workforce, is crucial for our country to fill the demand for workers."

Despite healthcare not being a target market for Accordant, the lack of access to overseas workers looks like a hand brake on near term growth.

From AR2021 p11

"At the commencement of the new financial year we were operating on a lower headcount, particularly in Madison where volumes reduced significantly during the year, with a fall-off in clients’ agency spending in the initial weeks post-lockdown."

The above reinforces the bad news for Madison.

From 27th May result release cover letter

"The AWF blue-collar business was impacted by the COVID-19 disruption with revenue down 20.2% on FY2020, however it is recovering faster than anticipated."

That reads as a slight upgrade from the HY2021 position.

All in all a useful series of comments to incorporate into the mix.

SNOOPY

[nztx]

14.5% Gross yield assuming continuing 8.0c & 8.2c Div's onwards (both fully imputed) aint to be sneezed at ..

what could go wrong ? .. maybe only another lengthy Covid lockdown in our local goldfish bowl perhaps ..

[Snoopy]

All in all a useful series of comments to incorporate into the mix.

Further historical context as the business has developed over FY2018 and FY2019.

From AR2018 p3
"The completion of the purchase of Absolute IT during the year certainly validated the decision to acquire this well-led diverse white collar business, and the strong team at Absolute delivered a result that was above our expectations."

From AR2018 p3
"It has been a great pleasure to be able to report the success of Madison in delivering at all levels to the Census project for Statistics New Zealand. By year end, Madison was back up to its own growth targets."

From AR2018 p5
"Creating synergies with our group companies. Madison IT has moved across to the Absolute IT stable and we have co-located our Hamilton and Christchurch white collar teams. We will explore opportunities in Auckland and Wellington to co-locate."

From AR2018 p11
"In the last five years, job hunting and talent acquisition has changed considerably, leading to increased (Madison) delivery costs."

"Targeting growth in retained and project work will achieve a greater balance with contingent work and mitigate the higher cost of delivery."

From AR2018 p12
"Our (Absolute IT) first full year of contribution to the Group has led to the white collar segment revenue growing 51% on the prior year."


"We (AbsoluteIT) have also seen demand for permanent vacancies rise – an indication of positive economic sentiment from our clients."

From AR2018 p13
"Absolute IT has grown market share through regional business strategies delivered by a long-standing service delivery team."

From AR2019 p3
"Absolute IT had a stunning year both in terms of profitability and new clients won. Over the year our senior leaders have continued to grow and develop the business for growth."

From AR2019 p3, p4
"Madison traded well but did not achieve all the growth that we expected. However, the effect of the completion of our large
Managed Service project contract (the census) has to be factored into this comment."

"We grew the core business but did not fully ‘fill the earnings gap’ created following the end of the project."

From AR2019 p4
"Absolute IT’s Auckland branch moved in to 51 Shortland Street, where our head office and Madison are located, in early January. Late last year Madison’s Wellington branch moved in to Cornerstone House in Customhouse Quay, where Absolute IT is located."

From AR2019 p17
"Over the past year we (AbsoluteIT) have realised growth in our number of permanent placements, however contracting placements remain the backbone of our business."

SNOOPY

[nztx]

14.5% Gross yield assuming continuing 8.0c & 8.2c Div's onwards (both fully imputed) aint to be sneezed at ..

what could go wrong ? .. maybe only another lengthy Covid lockdown in our local goldfish bowl perhaps ..

WTF was I thinking when posting references to Covid-19 late last night ? LOL ..

[Snoopy]

My white collar 'Net Profit Margin' post is based on historical information on the date the respective business units were acquired. Once acquired, these businesses are placed in a 'white collar bucket' for reporting purposes. There are commentary hints on how 'Madison', 'AbsoluteIT' and 'JacksonStone' are doing subsequent to acquisition (See my posts 912 & 914). But no actual business unit revenue and profit numbers.

The actual 'AbsoluteIT' gross revenue over FY2017 was $27.6m (AR2017 p55). This implies Madison revenue over FY2017 of:

$71.1m - $27.6m = $43.5m

This is well down on the $61.1m turnover from FY2014, the base acquisition year for Madison (My post 911).

Comments from FY2018 (my post 914) would suggest that turnover was restored to at least that $61.1m 'base level' even if operational costs increased, (meaning reduced profit margins from the FY2014 base year) or -optimistically- turnover as high as $76.7m (my post 911). As a consequence of operational costs increasing, I am reducing the projected Madson net profit margin from 4.1% to 3.4% (the same as AbsoluteIT). However, comments on the contribution of AbsoluteIT to that year's white collar revenue growth would suggest that this business unit contributed at least as much growth as Madison. If the growth in turnover from AbsoluteIT over FY2018 was 12%: $72.8m x 1.12 = $81.5m, that implies Madison turnover of $149.5m - $81.5m = $68.0m. This Madison revenue of $68m is near enough to a 12% gain on that FY2014 base turnover figure of $61m.

From FY2019 comments (my post 914) would suggest that white collar growth once again concentrated on AbsoluteIT. Zero growth at Madison over FY2019 (my post 914) would suggest turnover at AbsoluteIT over FY2019 increased to:

$151.9m - $68.0m = $83.9m

By the end of FY2019 the consolidation of worksites between Madison and Absolute IT was complete. However it is not clear that any rent savings offset the wider increased background work required to evaluate potential job candidates to more thorough investigative standards.

The combined revenue for Madison and AbsoluteIT over FY2020 (Y.E. 31-03-2020) was $138.6m. If both divisions took an equal 'hit' in terms of the percentage drop in business from FY2019 (Madison & Absolute IT revenue of $151.9m (total) , with an estimate of $69.0m (Madison) and $83.9m (AbsoluteIT) ), that would imply Madison turnover of $62.0m and AbsoluteIT turnover of $76.6m over FY2020. On a full year basis, the just acquired JacksonStone turned over $33.3m through the FY2020 period. These three turnover figures I regard as the 'base figures' from which to project earnings for FY2022. I regard FY2021 as a 'Covid affected outlier'.

Looking out to FY2022, JacksonStone is reported to be on target for the sellers of the business to meet their earn out hurdles (my post 912). I am taking that to be a forecast of a full recovery to a $33.3m turnover. Comments on AbsoluteIT being '10% down' over FY2021 ties in with a fall in turnover from $83.9m to $76.6m. I am forecasting a half way return to the baseline for FY2022, which corresponds to a turnover of $80.3m. A less profitable (due to a reduction in the proportion of permanent placements) slower recovering Madison I am modelling by holding turnover firm from FY2021.

My total forecast NPAT for FY2022, attributable to the white collar division only, is therefore:

Forecast Table

Business Unit	Madison	AbsoluteIT	JacksonStone	Total
Forecast FY2022 Turnover	$62.0m	$80.3m	$33.3m	$175.6m
Modelled Net Profit Margin	0.034	0.034	0.072
Business Unit Net Profit	$2.1m	$2.7m	$2.4m	$7.2m

This equates to a total forecast net profit after tax for the Accordant white collar business group collective of $7.2m.

SNOOPY

[Snoopy]

My total forecast NPAT for FY2022, attributable to the white collar division only, is therefore:

Business Unit	Madison	AbsoluteIT	JacksonStone	Total
Forecast FY2022 Turnover	$62.0m	$80.3m	$33.3m	$175.6m
Modelled Net Profit Margin	0.034	0.034	0.072
Business Unit Net Profit	$2.1m	$2.7m	$2.4m	$7.2m

This equates to a total forecast net profit after tax for the Accordant white collar business group collective of $7.2m.

There is a caveat to the above calculations. It all depends on, and I quote from p69 of AR2020:

"In determining the estimated revenue and profit of the Group had (Madison/AbsoluteIT/JacksonStone - take your pick of each one in turn) been acquired at the beginning of the current year, Management have:"

"Calculated borrowing costs on the funding levels, credit ratings and debt/equity position of the Group after the business combination"

The question is, how do interest rates compare in the first full year balance sheet, after the acquisition of Madison, AbsoluteIT and JacksonStone respectively, when lined up against interest rates available today?

Business Unit Acquisition & Acquisition Year	Madison (FY2014)	AbsoluteIT (FY2017)	JacksonStone (FY2020)	FY2021
Debt Ratio	73.0%	65.5%	75.1%	55.4%
Indicative Interest rate	5.4%	4.5%	5.0% (post 817)	3.3% (post 879)

Note

1/ Indicative interest rate calculation over FY2017: $1.193m / 0.5x( $32.275m +$21.000m) = 4.5%
2/ Indicative interest rate calculation over FY2014: $0.714m / 0.5x( -$0.942m +$27.477m) = 5.4%

The lower debt ratio over FY2021 and lower indicative interest rates should mean my estimates for the underlying forecast profits from all three white collar divisions going forwards are understated. However, these calculations have not assumed any change in net profit margin from the ongoing effects of Covid-19. For simplicity I am going to assume the positive effect of lower interest rates and the negative effect of less economical cost structures from Covid-19 cancel each other out. So I will stick to the 'White Collar' NPAT estimates from my post 916.

SNOOPY

[Snoopy]

Following the last AWF crisis relating the the construction sector, the 29th May 2019 wrap up press release said

"Bennett said AWF had reduced its cost base, and was now geared to return 4% to 6% EBITDA on turnover approaching $120 million."

Turnover at AWF over FY2021 was $77.762m, suggesting EBITDA of $3.1m to $4.7m. Take off $1.7m in Depreciation and Amortisation (refer my post 904) off those EBITDA estimates and I get a forecast EBIT of $1.4 to $3.0m.

Granted all of this is before Covid-19 and any longer term restructuring measures taken as a result. But there is still a major disconnect between the forecast restructured AWF EBIT from 2019 of '$1.4m to $3.0m' verses the actual FY2021 EBIT of $10.577m. My conclusion is that EBIT for AWF over FY2021 has been grossly distorted by subsidies and a 'reality check' will loom over the HY2022 results.

When apportioning the annual interest bill between the AWF division and the 'White Collar' division, I like to apportion interest expenses in line with the respective liabilities of each division. This information can be found in AR2021 on p34. The liabilities look to have changed a lot over the year. So I will use average liabilities for my calculation

Division	AWF	Combined White Collar
Average Liabilities	$18.527m	$24.161m
Percentage of Average Liabilities	43.4%	56.6%

Interest bill attributable to AWF I therefore estimate as: $0.707m x 0.434 = $0.307m.

If I go down the middle of my previously estimated EBIT range (post 923), the expected baseline NPAT for the AWF division is:

0.72 x ($2.2m - $0.307m) = $1.4m

If I add this to my estimated profits from the white collar division I get a total indicative NPAT from all divisions of:

$1.4m + $7.2m = $8.6m

However, I still need to take away a tax adjusted Accordant group head office cost from that total. I will use the FY2021 head office costs ( AR2021 p33) as indicative:

$8.6m - 0.72x($2.860) = $6.5m

$6.5m equates to $6.5m / 34.326m shares = an eps figure of 19.0c

That is more than enough to pay the historical dividend rate of 8.0cps + 8.2cps = 16.2cps

But do you 'believe the story'? Have my extrapolations and assumptions gone too far? I guess time will tell.

SNOOPY

[Snoopy]

14.5% Gross yield assuming continuing 8.0c & 8.2c Div's onwards (both fully imputed) aint to be sneezed at ..

what could go wrong ?

In summarizing the results from the Buffett tests (My post 886 to 889 inclusive), it becomes clear that the strongest reason for buying AGL is the prospective dividend yield that NZTX refers to above.

While the Accordant 'position in the market' is good (test 1- check), the earnings per share over FY2019 and FY2020 in no way can cover the quantum of dividend that NZTX is referring to above. The very strong profit booked for FY2021 must be considered in light of the more that $33m in wage subsidies claimed over FY2021. Receiving the wage subsidy is close to the government endorsing your end of year accounts saying FY2021 was 'business as usual' and paying the company money so that it officially looks that way. With Covid-19 severely disrupting the employment of potential overseas candidates to fill skills shortages within New Zealand (particularly IT), this has to affect the recruitment market going forwards for most of the FY2022 year, and possibly longer. My forecast profit for FY2022 is $6.5m (my post 918). But I have to wonder at the FY2022 effect of pulling out a $33m (five times my modelled profit level) security blanket from a company so that it can 'recover' via 'market forces'. Furthermore, if my $6.5m profit for FY2022 is achieved, we have to evaluate that that against the net debt burden of some $13m.

$13m/$6.5m gives an MDRT figure of 2. The looks low enough to allow the company some borrowing headroom ($15m of borrowing headroom available, see note C7 AR2021). Borrowing headroom certainly reduces the short term business execution risk. So I think a second dividend payment of 8cps later in the year is probable. But whether that same outlook will be there for FY2023 onwards, once the intangible 'restraint on trade' and 'customer relationship' assets on the books are fully amortised - with concomitant reduced cashflow in the future-, is another matter.

Over FY2019 the company was beset with a series of client business failures in the formerly core construction sector, and suffered the negative effect of the the Madsion census project rolling off. FY2020 showed how weak a moat a 'specialized employment agency' can have (from p3 AR2020). With reference to Madison and AbsoluteIT there was an:

"increase in (competitor) boutique agencies, (plus) the growing trend for clients to establish in house recruitment teams."

To some extent, my FY2022 forecast is a vote of confidence in Accordant working around these issues. I do feel that a consistent ROE return above 15% is attainable going forwards. A profit margin recovery (Buffett Test 4) I am less sure about. The need for a more thorough vetting of job candidates and increased recruiting costs, both legal and other wise, will have to be paid for, and may not be able to be 'passed on'. Overall I would give Accordant a 'nervous tick of approval' for investment today on the potential of dividend returns.. However, Buffett would require rather more than this. I wouldn't be expecting to find Berkshire Hathaway on the Accordant share register any time soon.

SNOOPY

[nztx]

Going to take a darn long time to trawl up a cool 1 mill shares at the rate they're coming
over the NZX line of late ..

might have to throw some more bucks at the job, if they want to avoid still being sitting trying to achieve it
this time 4 years down the track ..

http://nzx-prod-s7fsd7f98s.s3-websit...215/343655.pdf