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

[Snoopy]

Tempering the outlook is the ghostly figure of former CEO Simon Bennett looking for complimentary business acquisitions. And that means 'cash out' from the balance sheet is an imminent threat. That could be why the market received what I thought was quite a positive result in a muted way. From HYR2023

"We have an appetite for acquisition as previously indicated. Whilst it has been complex identifying and progressing with suitable targets in the past couple of years, we have been assessing some interesting and attractive prospects. The opportunity for sustainable growth via acquisition therefore continues to appeal."

I take it the fact that no purchase has been announced is that Bennett is being very careful with his due diligence. Let's hope so!

I noticed the AGL share price trending down over the last few days, but was too busy to understand why. I got a shock when I saw the aforementioned 'Bennster Bomb' had struck!

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News Release 24 January 2023

Accordant Group to acquire prominent executive search firm Hobson Leavy

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About Hobson Leavy:
"Hobson Leavy is a retained executive search firm that was founded in 2006 by Carrie Hobson and Stephen Leavy. Hobson Leavy has enjoyed strong and consistent growth and today the business has 14 staff across offices in Auckland and Wellington. Hobson Leavy operates exclusively in the “C” suite: Board Directors, CEOs and Executive team members such as COO, CFO, CIO, CTO positions. With an extensive track record in both the public and private sectors, over the last 17 years Hobson Leavy has built a substantial network of clients and contacts at the most senior levels of New Zealand business and the public sector, successfully leading hundreds of executive searches and appointing some of the country’s most senior leaders at Board, CEO and Executive level."

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"The acquisition was funded from existing debt facilities and is expected to grow annual EBITDA in excess of $2m."

Over FY2020 (the last year mostly unaffected by Covid-19) EBITDA was $5.891m. So a forecast $2m EBITDA boost to that underlying figure is quite significant. Nevertheless we aren't told the purchase price, and so can't work out the ongoing interest burden that this acquisition incurs.

"Hobson Leavy’s strong identity and operational leadership will remain which is consistent with Accordant’s previous acquisition strategies. Founders Carrie Hobson and Stephen Leavy will continue to lead the business and are excited to continue delivering the same quality of service they are renowned for with the opportunity to utilise new access to the Group’s infrastructure, broader network, and additional offerings."

I am glad that Carrie and Stephen have agreed to stay with the business, and that they remain 'excited' at work. I guess this acquisition paves a way for the Hobson Leavy founders to eventually retire. But in the meantime their excitement is bound to go sky high on 31st January with that Accordant money for purchasing their business hitting their bank accounts!

SNOOPY

[Snoopy]

News Release 24 January 2023

Accordant Group to acquire prominent executive search firm Hobson Leavy


"The acquisition was funded from existing debt facilities and is expected to grow annual EBITDA in excess of $2m."

Over FY2020 (the last year mostly unaffected by Covid-19) EBITDA was $5.891m. So a forecast $2m EBITDA boost to that underlying figure is quite significant. Nevertheless we aren't told the purchase price, and so can't work out the ongoing interest burden that this acquisition incurs.

Thinking about this acquisition a bit more, I have decided I can make a good educated guess at the acquisition price, and the downstream consequences of that. All will be revealed in AR2023, but that is still a few months away, and I want answers now.

If we roll back to FY2019, here is what Accordant said about acquiring their other senior executive recruitment business 'Jackson Stone' in their May 19 2019 update. Jackson Stone serves a very similar market to Hobson Leavy, - albeit skewed towards more governmental and non-profit clients:

"JacksonStone has successfully recruited CEO and C-suite roles for large numbers of central and local government organizations along with high profile corporate and not-for-profit clients. The breadth of service includes executive search, recruitment and top-level contracting assignments."

"Normalised EBITDA for the year ending 31 March 19 in excess of $3.0 million."

The total purchase price for Jackson Stone, less any cash and cash equivalents acquired was (AR2020 p68):

$10.520m - $1.547m = $8.973m

If we guess that Hobson Leavy purchase was made on the same EBITDA multiple, this suggests a purchase price for Hobson Leavy of:

$8.973m x ($2m/$3m) = $5.982m

Let's call that $6m (round figures). On the last full year reporting date, the average floating annual interest rate charged by the bank was 3.17% (AR2022 p56). I reckon going forwards Accordant is likely to be paying nearer 8%. So the annual interest charge on this purchase (all borrowed money remember) will be: $6m x 0.08 = $0.480m

Acquisitions such as this, where the purchase price exceeds the NTA are generally balanced in accounting terms by introducing 'customer relationship' or 'restraint of trade' assets that are subsequently depreciated or amortised. This affects the profit of the Accordant business going forwards, but not the cashflow. Customer relationships and restraint of trade assets on the acquisition of JacksonStone totalled $2.185m + $1.406m = $3.591m (AR2020 p47). If we apportion that to EBITDA profitability, the equivalent figure for Hobson Leavy would be: 2/3 x $3.591m = $2.4m. Apportioned over 5 years, that works out to $0.48m per year.

Lease Liabilities (eventually an interest cost under IFRS16) totalled $0.905m on the acquisition of Jackson Stone. So using my 2/3 scaling factor, I am guessing these were around $0.600m at Hobson Leavy. Assuming a 2 year lease contract (weighted average), this amounts to $0.3m per year to be written off as interest.

Finally we now have an estimate of the annual incremental NPAT from the Hobson Leavy acquisition:

NPAT = (1-T) x (EBITDA - I -DA)
=(1-0.28) x ($2m - $0.48m -$0.48m -$0.3m) = $0.523m

I was a bit worried when Accordant did not announce their new acquisition was 'eps' accretive. But my back of the envelope calculation shows that it probably is.

SNOOPY

[Snoopy]

Thanks to the opening up of more opportunities to recruit overseas job seekers. the potential for a reset rebound in AWF and hence the entire Accordant business is now apparent. If Accordant have managed to hang on this well -while the supply of job seekers has been so constrained-, just think what they will do as the job market opens up.

As CEO Jason Cherrington so neatly puts it:
"Demand for our services and expertise remains at an all time high."

This then is the case for investment going forward, and why I have been topping up as the share price slipped back below $1.70 recently. I look for an 8% gross yield for my income investments. And at $1.70 the gross yield is closer to 10% on this one.

We have had a hiccup in terms of a business acquisition, But for those who have not 'seen through' my posts 1011 and 1012, I have been topping up my Accordant shareholding at $1.65 over the last few days. The story remains the same as last time I topped up. But the uncertainty of what was to be acquired has gone.

The loan facility negotiated with the ASB Bank was $30m at last balance date of which $18m had been drawn (AR2022 p56) That means a $6m acquisition of Hobson Leavy was well within present banking arrangement ceilings. As a result I am not expecting a cash issue soon to pay down debt, particularly as the earnings capability of AWF business unit in particular looks set to rebound.

This is one of the few investments that I hold that is 'underwater' (actually the only one on the NZX). At least my average holding price is now under that magic $2 price, now sitting at $1.97 - Yay! But the lack of liquidity has certainly made accumulation at the right price an exercise in patience. That same lack of liquidity also means I can't sell out if my mood changes. But then again with a gross yield of over 8%, why would I want to?

SNOOPY

[nztx]

We have had a hiccup in terms of a business acquisition, But for those who have not 'seen through' my posts 1011 and 1012, I have been topping up my Accordant shareholding at $1.65 over the last few days. The story remains the same as last time I topped up. But the uncertainty of what was to be acquired has gone.

The loan facility negotiated with the ASB Bank was $30m at last balance date of which $18m had been drawn (AR2022 p56) That means a $6m acquisition of Hobson Leavy is well within present banking arrangement ceilings. As a result I am not expecting a cash issue soon to pay down debt, particularly as the earnings capability of AWF business unit in particular looks set to rebound.

This is one of the few investments that I hold that is 'underwater' (actually the only one on the NZX). At least my average holding price is now under that magic $2 price, now sitting at $1.97 - Yay! But the lack of liquidity has certainly made accumulation at the right price an exercise in patience. That same lack of liquidity also means I can't sell out if my mood changes. But then again with a gross yield of over 8%, why would I want to?

SNOOPY

Still a bit expensive for my liking Snoopy .. think I will let you fill your boots at these levels

Your words of a further acquisition, and usual pattern of debt and invisible intangibles that usually flow on
with that sort of conduct all make me nervous on this one

[Snoopy]

Still a bit expensive for my liking Snoopy .. think I will let you fill your boots at these levels

I am working on normalised historical NPAT earnings for FY2022 of: $2.999m + 0.72($0.845m) - $0.024m = $3.583m

That takes out the effect of the final earn out payment for acquisition JacksonStone and some PPE sales.

$3.583m / 34.325m = 10.4cps

At a share price of $1.65 that means AGL is trading on an historical PER of 165/10.4 = 15.9

However the first half result for FY2023 is already in at $2.094m, up 37% on FY2022.. Last year the underlying second half profit was greater than the first (just over $2m). So I think a full year profit of at least $4.1m is already baked in, and in 2024 we add to that the acquisition benefits of Hobson Leavy. of $0.5m. So if FY2024 profit is $4.6m, or $4.6m/34.325m = 13.4cps, that means we are looking at a forward PER of 165/13.4= 12.3. That doesn't look so demanding and is assuming no synergies between Hobson Leavy and the other Accordant divisions. Throw in a bit of that amortising cashflow and the historical average dividend rate of 11.8cps (post 1008) looks not only sustainable but beatable. Actual dividends last year were 5.6cps + 6.5cps = 12.1cps. I think the apparent high PER that Accordant trades at today is because it is coming out of the bottom of the earnings cycle.

Your words of a further acquisition, and usual pattern of debt and invisible intangibles that usually flow on
with that sort of conduct all make me nervous on this one

Just to be clear the 'further acquisition' was Hobson Leavy. I would not be expecting another acquisition on top of that soon. Debt looks under control and those 'invisible intangibles' is what gives this company cashflow ahead of profit. Nothing to be worried about in my view but YMMV and obviously does.

I am sticking to my 'no growth' business cycle valuation of $2.05,(post 1008), with an expected business cycle share price fluctuation of 20% around that figure ($1.64 to $2.46). That means at a market price of $1.65 today we are currently 19.5% below 'fair value' and I am being paid 8% gross while I wait for the share price to recover to $2.05. That means $1.65 was at an attractive share price for me to do some portfolio re-balancing.

SNOOPY

[Snoopy]

I am working on normalised historical NPAT earnings for FY2022 of: $2.999m + 0.72($0.845m) - $0.024m = $3.583m

That takes out the effect of the final earn out payment for acquisition JacksonStone and some PPE sales.

$3.583m / 34.325m = 10.4cps

At a share price of $1.65 that means AGL is trading on an historical PER of 165/10.4 = 15.9

However the first half result for FY2023 is already in at $2.094m, up 37% on FY2022.. Last year the underlying second half profit was greater than the first (just over $2m). So I think a full year profit of at least $4.1m is already baked in.

I got this wrong - ouch! Annual profit for the year was $1.977m, which means a loss over the second half. Yet they are still paying a final dividend, albeit reduced. So what were their excuses?
"This year’s result includes the cost of the additional statutory holiday (Monday 26 September 2022) to commemorate the life and passing of Queen Elizabeth II,"

Blaming the dear departed queen seems a bit of a low blow.

"in addition to high claim costs incurred by AWF associated with work related injuries incurred in prior years. AWF participates in the ACC Partnership Discount Plan. Under this plan AWF Limited, as the employer, undertakes injury management and accepts financial responsibility for employees who incur work-related injuries. The high claim costs incurred in FY23 are associated with the ACC Full Self Cover plan, which AWF exited as at 31 March 2021. Under the ACC Full Self Cover plan AWF undertakes injury management for claims registered to 31 March 2021 for a 48-month term through until 31 March 2025, with financial liability for the life of the claim. In order to de-risk the business, AWF changed to the Partnership Discount Plan with 12 months’ claims management post-year end, with financial liability terminating at the conclusion of the claims management period."

Section F2 in the financial report contains the quantification of this. The way the figures are presented makes it a little difficult to see what the effect on profit was. Rehabilitation costs are set out as a provision. The provision at the end of FY2022 was $0.400m and the provision at the end of FY2023 was $582m. But that was after $0.653m in costs were paid out during the year. So to balance the provision pot, the amount of money put into it during the year must have been: ($0.582m-$0.400m+$0.653m)= $0.835m.

Nevertheless, it would not be expected that annual medical costs in a normal year would be zero. If I look at the previous five years the actual medical payments out were $0.223m (FY2022), $0.344m (FY2021), $0.152m (FY2020), $0.272m (FY2019) and $0.152m (FY2018). I make that a five year average of $0.229m. So maybe the 'abnormal' adjustment for the year should be more realistically thought of as: $0.835m-$0.229m=$0.606m.

There were also business acquisition expenses relating to Hobson Leavy incurred during the year of $0.379m, and a $0.109m impairment of 'right of use' AWF assets (a lease ended early?). Finally there was $44k of gain booked from property plant and equipment sales.

Adjust for those unusual transactions back onto the declared profit. For the normalised profit I get:
= $1.977m + 0.72($0.606m+$0.379m+$0.109m)-$0.044m = $2.721m

That makes the profit is closer to the adjusted profit of $3.583m from the previous year. Blame the queen for dying like that for the difference. What was she thinking? If we had been a republic and it was President John Key that had died, this 'royal loss' would never have happened.

SNOOPY

[Snoopy]

	eps	dps (imputed)
FY2018	? + -0.001	Not Applicable
FY2019	6.2	8.2 + 8.0
FY2020	9.4	8.2 + 8.0
FY2021	18.1	0.0 + 0.0
FY2022	10.4	8.2 + 6.5
FY2023	6.1 + ?	5.6 + 6.5
Total	50.2	59.2
5 year Average		11.8

Note

1/ Implied Acceptable Share Price = (Gross Dividend) / (Acceptable Yield)

=> (11.8c / 0.72) / 0.08 = $2.05

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Higher historical dividends roll off the historical calculation feed, to be replaced by today's lower dividends. This is why the capitalised dividend valuation of the company has reduced by 5c, despite the more positive outlook. Nevertheless at the closing price of $1.64, the share price is well within the band of keeping Accordant in the 8% yield club.

It has been a turbulent six months for the share price. The support line of $1.60ish was tested a couple of times, and may yet be again. The share price has bounced as high as the mid $1.80s even if most traders were either SHAZ members or bots.
IOW to trade a meaningful sized parcel of shares to take advantage of this share price volatility would be impossible.

Once again cashflow exceeded profit. That was fortunate because the announced half year dividend exceeded profit as well, albeit not by a huge amount (6.5c vs 6.2c). The rest of the excess cashflow went towards reducing debt. Long term debt fell by $3m to $15m. This little game of cashflows exceeding profits is coming to an end though, as the amortisation of various 'restraints on trade' and 'historical customer relationships' created as a result of paying more than net asset value for past business acquisitions fades with time.

Dividends declared I see as a vote of management confidence. So it is historically interesting that the 6.5c interim dividend declared exactly matched the interim dividend declared last year, despite a more positive outlook. The segment analysis showed that revenue is down for the blue collar temp workers (yet again, probably as a result of overseas labour supply constraints) while revenue for white collar temporary workers surged by 20%. Our CEO Jase is telling us "the labour market continues to see unprecedented client demand." I wonder if this is an indication that Accordant is 'near the top' of the earnings curve? So much going forwards rests on how the Blue Collar division recovers from 'the blues'.

AGL has in the past payed out 100% of their underlying earnings as dividends over time. So if dividends are to be restored or even increase above historical high levels, then so must earnings.

Tempering the outlook is the ghostly figure of former CEO Simon Bennett looking for complimentary business acquisitions. And that means 'cash out' from the balance sheet is an imminent threat. That could be why the market received what I thought was quite a positive result in a muted way. From HYR2023

"We have an appetite for acquisition as previously indicated. Whilst it has been complex identifying and progressing with suitable targets in the past couple of years, we have been assessing some interesting and attractive prospects. The opportunity for sustainable growth via acquisition therefore continues to appeal."

I take it the fact that no purchase has been announced is that Bennet is being very careful with his due diligence. Let's hope so!

	eps	dps (imputed)
FY2019	6.2	8.2 + 8.0
FY2020	9.4	8.2 + 8.0
FY2021	18.1	0.0 + 0.0
FY2022	10.4	8.2 + 6.5
FY2023	9.6	5.6 + 6.5
FY2024	?	3.0 + ?
Total	53.7	54.0
5 year Average		10.8

Note

1/ Implied Acceptable Share Price = (Gross Dividend) / (Acceptable Yield)

=> (10.8c / 0.72) / 0.08 = $1.875

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Higher historical dividends roll off the historical calculation feed, to be replaced by today's lower dividends. This is why the capitalised dividend valuation of the company has reduced by 17.5c from six months ago. The closing price of $1.70 today is a chart resistance point. With a shortage of job applicants in AbsoluteIT and AWF, I don't see the shares going much higher until members of that 'Double A' team shows signs of life.

The shares closed today at $1.70 and even with the slashed final dividend, the share price is still flirting in that band of keeping Accordant in the 8% yield club (actual historical gross yield 7.8%).

The share price was largely sinking for six months to date, but recovered sharply just before results day . The support line kissed $1.50 a couple of times. But that looked like Shaz trading on near zero volume, so not really real.

Cashflow from operating activities ($4.715m, 13.7cps) exceeded adjusted profit ($3.297m, 9.6cps), even if it was only the cashflow that exceeded the dividend paid during the financial year twelve months totalling 12.1cps.

Long term debt has blown out from $15m at the half year to $23.5m today But $5.87m of that is the cash paid out for acquisition Hobson Leavy. Add in the $0.835m to sort out the ACC medical account balance and you have most of the explanation.

The little game of cashflows exceeding profits has been extended with the purchase of Hobson Leavy. This purchase has fed the 'historical customer relationships' intangible asset pot to the tune of $1.072m. Amortisation of this balance will produce future cashflow ahead of earnings to the tune of a few hundred thousand dollars a year at least.

AGL has in the past paid out 100% of their underlying earnings as dividends over time. So if dividends are to be restored or even increase above historical high levels, then so must earnings.

SNOOPY

discl: holding

[Snoopy]

CEO Jason Cherrington is taking advantage of that buying window insiders have following a results announcement.

https://stocknessmonster.com/announc...gl.nzx-413208/

For that relevant interest-
Number held in class before acquisition or disposal: 16,214
Number held in class after acquisition or disposal: 71,345
Current registered holder(s):
Registered holder(s) once transfers are registered: J Cherrington

$79,839.06 paid 55,131 shares acquired. Price paid per share, $1.45!

SNOOPY

[winner69]

Jeez, just noticed AGL share price down to $1.33

If you block out covid times about the same price as 2011

What’s up Snoopy ….they going broke or something

That Jason probably wishing he didn’t buy more a few weeks ago

[Snoopy]

Jeez, just noticed AGL share price down to $1.33

If you block out covid times about the same price as 2011

What’s up Snoopy ….they going broke or something

That Jason probably wishing he didn’t buy more a few weeks ago

No, not going broke Winner. There are a couple of short term headwinds I can see though. We have the 'software drain' caused by Australian government subsidies making software development more lucrative in Australia , and cutting the candidates able to be placed in NZ by subsidiary AbsoluteIT.

Accordant have also been gearing up for the maoriisation placement side of co-governance. That might take a hit with a National/ACT government. On top of that there are slowing job adverts generally, no doubt being affected by the Reserve bank interest rate policy.

The main recent historical drag on profits has been the shutting off of the overseas worker supply at blue collar recruiter 'Allied Workforce'. That restriction is now gone, but maybe there will not be a resilience of demand bounce back for fruit pickers in some areas like Hawkes Bay?

This has been by far the worst performer in my portfolio of late , wiping out all my SCT gains during the year. . Swings and roundabouts I guess. Accordant was my last NZX share parcel purchase (SCT was just before that , and I intend to buy more Accordant. However I have a new self imposed investment rule where I am not allowed to purchase two parcels of shares in the same company twice in a row. So I am looking for something else to buy first. And all the rest of my portfolio is looking fully (although not over) priced

SNOOPY