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

[Snoopy]

And on top of this we have the $13.223m of Madison goodwill and $7.836m in AbsoluteIT goodwill that will need trimming. Double ouch!

Jason Cherrington CEO speaking at the AGM on 21st August 2023:
"Following on from a solid reporting of the first six months of FY2023, we experienced a much faster than anticipated softening and market environment, most prominently felt in the final quarter of the year (January-March 2023). And in some parts of the business, that challenge eventuated by year end on a less than optimal return on the cost deployed."

On Madison:
"As a general recruiter specialising in more entry level roles, and support service areas of the market, Madison felt the biggest impact in the second half of the year - and is somewhat of a good barometer for what is happening generally, within the marketplace. Whilst Madison's project delivery exceeded expectations in the first half of FY2023, it was the core business that felt the level of confidence drop during the pre-Christmas GDP contraction that we saw across the market. With an increased lens on costs for many, administrative and support roles were affected the most, with businesses 'making do' rather than back filling roles. Development in technology will to some degree have lead to a noticeable drop in hiring intentions amongst administrative and support staff, but, as such, Madison have continued to shift their focus to more roles that are future proofed. Despite the borders opening fully, NZ's white collar temp market has not picked up to pre-Covid levels, especially in the private sector. And while immigration and statistics point to an increase in working holiday applications, we still haven't seen the impacts with the temporary labour market pool that is usually visible by now. The thesis for all this is that people coming to this country probably delayed two or three years, probably came with more money, probably weren't eager to get straight back into the labour market and enjoy what New Zealand can offer first. So we do expect to see some of those numbers come back through, potentially post election, but for now we stay close to that. Broadening our client activity remains a key focus, with key activity around the specialist channels of accounting, business transformation based on where the market currently is, and marketing communication supported by new hires that we have brought into the business to lead these areas, with effective experience and proven historic delivery results."

On the first four months of FY2024:
"Within our Madison and AbsoluteIT business, we continue to see the challenges around skill shortage and business confidence."

Barely a month later in the FY2024 Interim Report dated 30th September 2023:

On Madison:
"Many private sector businesses either pared back growth strategies or froze hiring altogether. Support and administration roles saw the biggest impact with many businesses cutting back costs in this space and choosing to recruit internally at least initially, rather than via an agency. The government sector also slowed for Madison with reduced spend on contractors and an increased lens on cost in the lead up to the general election."

Announcement to the market on 4th March 2024:

On Madison:
"Madison have experienced the same decline in government contracting (permanent placements down 15% against prior year to date), the more widespread slowdown in temporary and permanent entry level and support roles has driven a 20% drop in revenues and we therefore expect to review the carrying goodwill value for the business unit as of 31st March 2024."

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

If you have a revenue decline of 20%, and the difference between 'cost to do business' and revenue of less than 5% under more normal operating conditions (see post 1059), this is getting serious. I love Jason's euphemism of 'a less than optimal return on the cost deployed." Outside of 'corporate speak' we call that 'a loss'.
If overall placements are 'only' down 15% on a revenue decline of 20%, that means the underlying core temping positions must be down nearer 25%. AR2023 p56 shows the Madison goodwill was predicated on 2.5% of sales growth. An actual sales 'growth' of -20% is not tenable with that modelled figure. No wonder Madison goodwill is due for a severe haircut. Of the $13.223m of Madison goodwill on the books at EOFY2023, I wonder how much will be left at EOFY2024?

Could it could be that automation has permanently reduced what was the core market for Madison?
What are these alternate roles that are 'future proofed' that Madison talks about?
Could it be that Madison's 'temp' pool will be permanently down, due to tourism not returning to its pre-Covid highs?
We have been told before that when times are good, businesses gravitate to having their own in house recruitment teams. But now we are told that when times are bad, businesses are doing the same thing? Perhaps as Accordant shareholders, we should be hoping for more business customers in that 'squeezed middle' space?

SNOOPY

[Snoopy]

Jason Cherrington CEO speaking at the AGM on 21st August 2023:
"Following on from a solid reporting of the first six months of FY2023, we experienced a much faster than anticipated softening and market environment, most prominently felt in the final quarter of the year (January-March 2023). And in some parts of the business, that challenge eventuated by year end on a less than optimal return on the cost deployed."

On AbsoluteIT:
"In our annual report, I refer to enhancing our offering within the IT channels, coming alongside our clients early on in their digital transformation plans, and looking at ways in which we can better deliver holistic solutions in this space. AbsoluteIT is already well known for additional IT staffing, and so to be able to leverage their strengths to offer solutions to some of the headaches that our clients feel, experienced across the whole of the tech sector, is for us a no-brainer. AbsoluteIT's traditional channel continues to face the ongoing skills shortage and New Zealand remains in fierce competition with the likes of Australia for the same. Whilst easing immigration has created some opportunities, as a country the retention of talent is going to have to be even greater, as we are simply not developing enough organic talent fast enough within the New Zealand market. The nervousness about job retention has seen candidate movement slow down. The great resignation is probably over -I would say- in this area specifically of the market. But neither address the significant growth we see in the tech sector, and we must remain capable of delivery as the industry, the government and ourselves, look for a more permanent solutions to tech shortages at all levels."

On the first four months of FY2024:
"Within our Madison and AbsoluteIT business, we continue to see the challenges around skill shortage and business confidence."

On tax relief for gaming software development in Australia:
"Australia got a steal on the march and did confirm that nationally across Australia, 30% is the tax benefit they (gaming developers) would get as a reduction, and some states 40%. What does that mean for talent? It does mean that a lot of those big organizations are now looking to Australia and that will take senior talent away. I don't necessarily agree that it will take any of the developers away that we would see within AbsoluteIT as an example. A lot of this stuff is done offshore as well (by NZ companies), in the lower level of development areas (already). I don't see a significant impact for AbsoluteIT specifically, but it is an issue for New Zealand and the gaming industry that is growing and is growing quite quietly and quite phenomenally over a relatively short period of time."

Barely a month later in the FY2024 Interim Report dated 30th September 2023:

On AbsoluteIT:
"AbsoluteIT has underperformed against expectation and investment made in some areas has not been realised to date. Whilst this traditional IT recruitment channel continues to face ongoing digital skill shortages, it has had the opportunity to perform much better than the current delivery suggests."

Announcement to the market on 4th March 2024:

On AbsoluteIT:
"Following senior leadership changes and a national restructure, Absolute IT is operating more leanly in a subdued environment for technology recruitment, as job ads fell by 58.3% in 2023 according to RCSA’s “The Jobs Report” and 38.0% as measured by Jobs Online. In line with market, revenues remain at -15% against the prior year."

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


I am a little concerned when an umbrella recruitment group (Accordant) takes over a niche recruitment specialist (AbsoluteIT) and then proceeds to tell them that they are not doing their job properly (reflected in the recent change of AbsoluteIT leadership). IIRC there was a small section of Madison recruitment specialising in IT, that got folded into AbsoluteIT, when the latter business joined the Accordant family. At that time there was no doubt that Accordant management thought AbsoluteIT 'knew what they were doing'.

If you were a third party 'Company IT developer', and a lead member of your team wanted to hive off to another company, might you not be tempted to give your team member a significant salary boost to ensure their retention? AbsoluteIT would only get paid for people who actually switch jobs. And in a time where 'in demand' people with the right skills are short, might you not expect less 'job hopping'?

Jason speaks as though there is some kind of gulf between gamer programmers, and the perhaps more prosaic database managers and software troubleshooters and package software experts who are on the books at AbsoluteIT. I wonder if this is really true? What iif AbsoluteIT was suffering more under 'unfavourable market dynamics' rather than 'management incompetence'? In this instance time will tell. It does sound like AbsoluteIT is being refocussed on offering turnkey solutions to business problems, rather than just having computer savvy temps ready to help out. I hope it works for them (and being a shareholder - me!). But if job ads fell by between 38-58%, maybe a revenue fall of 'only' 15% at AbsoluteIT is actually a good result in this market?

SNOOPY

[Snoopy]

One way to assess how vulnerable a company is, is to look at the interest bill that the bank charges them.

The net interest rate paid on last years (FY2022) average net loan balance can be estimated as follows:

Interest Rate = $0.671m / 0.5x($13.028m +$13.205m) = 5.1%

From AR2022 Note C8 pg56

"The Group has complied with all covenant requirements during the year. Interest is calculated on a floating rate and the annual weighted average rate is 3.17% (2021: 2.21%). The rate is reset every three months. The loan is an interest only loan, and is repayable on 1 October 2023 (2021: 1 October 2022)"

This means that over the last year, the loan facility was renewed early. As part of this renewal, the maximum amount that can be borrowed from the ASB remains steady at $30m. Actual term borrowings have gone up from $15m to $18m over the year.

Accordant haven't been on any new capital growth initiatives during the year, although $5.171m was paid out in dividends. It looks like borrowings were used to top up the dividends (profits totalled $2.999m over the same period). I guess management are thinking very carefully about satisfying shareholder dividend demands given the dividend freeze over the Covid-19 period. I guess that is good?

"The banking facilities require the Group to operate within defined financial undertakings."

My post 985 confirms all banking covenants are being complied with.

I was a little lazy in my interest rate paid assessment for FY2022. I merely took the net bank balance (bank loans-cash) at the start and end of the financial year and averaged those two figures. Since we are told the net loan balance at mid year as well (from HYR2022), I might as well use that extra data point which will give me a three point average of the loan balance. Let's see if that makes a significant difference to the calculation.

One way to assess how vulnerable a company is, is to look at the interest bill that the bank charges them.

The net interest rate paid on last years (FY2022) average net loan balance can be estimated as follows:

Interest Rate = $0.671m / 0.3333x($13.028m+$13.011m+$13.205m) = 5.1%

That means the extra datapoint has made no difference. This is not too much of a surprise as overall, the Accordant business is not seasonal.

From AR2022 Note C8 pg56

"The Group has complied with all covenant requirements during the year. Interest is calculated on a floating rate and the annual weighted average rate is 3.17% (2021: 2.21%). The rate is reset every three months. The loan is an interest only loan, and is repayable on 1 October 2023 (2021: 1 October 2022)"

This means that over the last year, the loan facility was renewed early. As part of this renewal, the maximum amount that can be borrowed from the ASB remains steady at $30m. Actual term borrowings have gone up from $15m to $18m over the year.

Accordant haven't been on any new capital growth initiatives during the year, although $5.171m was paid out in dividends. It looks like borrowings were used to top up the dividends (profits totalled $2.999m over the same period). I guess management are thinking very carefully about satisfying shareholder dividend demands given the dividend freeze over the Covid-19 period. I guess that is good?

"The banking facilities require the Group to operate within defined financial undertakings."

My post 985 confirms all banking covenants are being complied with.

SNOOPY

[Snoopy]

I was a little lazy in my interest rate paid assessment for FY2022. I merely took the net bank balance (bank loans-cash) at the start and end of the financial year and averaged those two figures. Since we are told the net loan balance at mid year as well (from HYR2022), I might as well use that extra data point which will give me a three point average of the loan balance. Let's see if that makes a significant difference to the calculation.

One way to assess how vulnerable a company is, is to look at the interest bill that the bank charges them.

The net interest rate paid on last years (FY2022) average net loan balance can be estimated as follows:

Interest Rate = $0.671m / 0.3333x($13.028m+$13.011m+$13.205m) = 5.1%

That means the extra datapoint has made no difference. This is not too much of a surprise as overall, the Accordant business is not seasonal.

From AR2022 Note C8 pg56

"The Group has complied with all covenant requirements during the year. Interest is calculated on a floating rate and the annual weighted average rate is 3.17% (2021: 2.21%). The rate is reset every three months. The loan is an interest only loan, and is repayable on 1 October 2023 (2021: 1 October 2022)"

This means that over the last year, the loan facility was renewed early. As part of this renewal, the maximum amount that can be borrowed from the ASB remains steady at $30m. Actual term borrowings have gone up from $15m to $18m over the year.

Accordant haven't been on any new capital growth initiatives during the year, although $5.171m was paid out in dividends. It looks like borrowings were used to top up the dividends (profits totalled $2.999m over the same period). I guess management are thinking very carefully about satisfying shareholder dividend demands given the dividend freeze over the Covid-19 period. I guess that is good?

"The banking facilities require the Group to operate within defined financial undertakings."

My post 985 confirms all banking covenants are being complied with.

One way to assess how vulnerable a company is, is to look at the interest bill that the bank charges them. I will use the loan balance on the three snapshots in time we know (FY2022, HY2023 and FY2023) to assess the average loan balance over the year.

The net interest rate paid on last years (FY2023) average net loan balance can be estimated as follows:
Interest Rate = $1.343m / 0.3333x($13.028m+$12.483m+$21.546m) = 8.6%

The big jump in debt can mostly be explained by cash outlaid to purchase Hobson Leavy during the year. The large interest rate rise over the year can be put down to the greed of bankers.

From AR2023 Note C8 pg62

During the year the interest only revolving credit facility was reduced from $30m to $23m. But a trade finance facility of $15m, ostensibly replacing what was an overdraft facility of $8m was added. Thus the overall package of loan facilities available remains at the same level, and the arrangements have been fixed until 1st October 2024, and this loan facility was renewed early.

The revolving credit loan is drawn in tranches which are financed for 90 days. The trade finance loan is drawn in tranches which are financed for 30 days, repayable during the interest term without penalty at the company's discretion. The weighted average cost of interest including bank margin and line fee (excluding the bank facility fee) was 5.18% (comparable figure for FY2022 was 2.57%).

The loan facilities require the group to operate within 'defined financial undertakings' (read 'covenants') and all have been complied with throughout the year.

Apart from the Hobson Leavy purchase, a $1.669m reduction in government grants received over the year has affected the company's net debt position. $4.309m was paid out in dividends, which was in excess of declared profits of $1.977m and normalised profits of $3.297m.
So for another year it looks like borrowings were used to top up those dividends.

My post 1065 leaves a question mark as to whether all banking covenants are being complied with. I am not saying AGL do not comply. It is just that with the figures as presented in the annual report, I haven't been able to figure out 'how'.

SNOOPY

[Snoopy]

Financial Year	2017	2018	2019	2020	2021	2022
EBITDA (Snoopy produced) {B}	$12.751m	$11.751m	$7.679m	$8.795m	$14.230m	$7.901m
Finance Cost {C}	$1.193m	$1.297m	$1.380m	$1.502m	$0.723m	$0.684m	$7.901m
Interest Coverage {B}/{C} (target >3)	10.7	9.0	5.6	5.9	19.7	11.6
Net Bank Debt {D}	$32.383m	$29.731m	$26.643m	$29.822m	$13.205m	$13.028m
Leverage ratio {D}/{B} (target <3)	2.5	2.5	3.5	3.4	0.93	1.65

Notes

1/ Historically (up to and including FY2019), I have calculated EBITDA from the income statement using the formula: EBITDA = NPBT + I + DA.

2/ Following the introduction of IFRS16, which had the effect of turning what were 'rent expenses' into a 'right of use asset depreciation' with an associated 'interest on lease liabilities', I have had to adjust the 'annual interest change' and 'annual depreciation charge' to remove this effect.

FY2020: EBITDA = NPBT + I + DA = $3.897m+($2.084m-$0.582m)+($6.194m-$2.798m) = $8.795m (with I=$1.502m)

FY2021: EBITDA = NPBT + I + DA = $10.929m+($1.228m-$0.505m)+($5.286m-$2.702m) = $14.230m (with I=$0.723m)

FY2022: EBITDA = NPBT + I + DA = $4.705m+($1.095m-$0.411m)+($4.941m-$2.429m) = $7.901m (with I=$0.684m)

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

It is no surprise that with interest rates so low, that the 'interest rate cover' covenant is so easily met. It is pleasing that the 'debt ratio coverage' is back to manageable levels too, even if this is a slight uptick in the half year position (see quoted text). And all this is after $5.171m in dividend payments were made over FY2022. Good stuff.

I have no real concerns with the financial position of the company as it stands. Going forwards, I am hopeful that the 'opening of the borders' will allow more candidates to fill the AbsoluteIT potential job placements and allow a big recovery of profits there. On the negative side, I have fears of a 'cash issue' to make an acquisition. No doubt Simon Bennett will figure out a way that any such acquisition is 'eps accretive' (that's good). Let's just hope that it isn't neglect of the existing business units that make it so.

Financial Year	2017	2018	2019	2020	2021	2022	2023
EBITDA (Snoopy produced) {B}	$12.751m	$11.751m	$7.679m	$8.795m	$14.230m	$7.901m	$6.627m
Finance Cost {C}	$1.193m	$1.297m	$1.380m	$1.502m	$0.723m	$0.684m	$1.343m
Interest Coverage {B}/{C} (target >3)	10.7	9.0	5.6	5.9	19.7	11.6	4.9
Net Bank Debt {D}	$32.383m	$29.731m	$26.643m	$29.822m	$13.205m	$13.028m	$21.546m
Leverage ratio {D}/{B} (target <3)	2.5	2.5	3.5	3.4	0.93	1.65	3.25

Notes

1/ Historically (up to and including FY2019), I have calculated EBITDA from the income statement using the formula: EBITDA = NPBT + I + DA.

2/ Following the introduction of IFRS16, which had the effect of turning what were 'rent expenses' into a 'right of use asset depreciation' with an associated 'interest on lease liabilities', I have had to adjust the 'annual interest change' and 'annual depreciation charge' to remove this effect.

FY2020: EBITDA = NPBT + I + DA = $3.897m+($2.084m-$0.582m)+($6.194m-$2.798m) = $8.795m (with I=$1.502m)

FY2021: EBITDA = NPBT + I + DA = $10.929m+($1.228m-$0.505m)+($5.286m-$2.702m) = $14.230m (with I=$0.723m)

FY2022: EBITDA = NPBT + I + DA = $4.705m+($1.095m-$0.411m)+($4.941m-$2.429m) = $7.901m (with I=$0.684m)

FY2023: EBITDA = NPBT + I + DA = $3.077m+($1.683m-$0.318m)+($4.628m-$2.443m) = $6.627m (with I=$1.343m)

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

The 'interest rate cover' covenant is now feeling the pressure of higher interest rates and higher debt, but is still easily met. The 'leverage ratio' has returned to Covid problem levels by my calculations. This is in contrast to the company's own statements that it is in compliance with all of its covenants. Perhaps the company has removed from its costs, the $5.750m cash payment used as part of the Hobson Leavy purchase? I am not sure. But for consistency of presentation I am sticking with my figures.

Either way, if the auditors have not pulled them up, I have no real concerns with the financial position of the company as it stands. Going forwards into FY2024 is another matter.

SNOOPY

[Snoopy]

Without full disclosure being available (because disclosure of certain details of the half year financial position do not match that of the full year), I have managed to cobble together the half year position of Accordant, so that I can keep an eye on those banking covenants. Specifically there is no break down of the depreciation and amortisation charges in the half year results. So I am using the depreciation and amortisation charges for FY2023 as a proxy for the combination of 2HY2023 and HY2024. I have called this 'cobbled together year of halves', year 2023.5.

Financial Year	2023.5
EBITDA (Snoopy produced) {B} (2)	$6.038m
Finance Cost {C}	$2.124m
Interest Coverage {B}/{C} (target >3)	2.84
Net Bank Debt {D}	$21.140m
Leverage ratio {D}/{B} (target <3)	3.50

Notes

1/ Following the introduction of IFRS16, which had the effect of turning what were 'rent expenses' into a 'right of use asset depreciation' with an associated 'interest on lease liabilities', I have had to adjust the 'annual interest change' and 'annual depreciation charge' to remove this effect.

2/ EDITDA for FY2023.5:

EBITDA = NPBT + I + DA
= [$1.629m + ($3.077m - $2.977m) + ([$1.370m-$0.130m]+[($1.683m-$0.318m)-($0.651m-$0.170m)]) + $2.185m] = $6.038m (with I=$2.124m)

Bank Interest charge, I = ([$1.370m-$0.130m]+[($1.683m-$0.318m)-($0.651m-$0.170m)]) = $1.240m+$0.884m = $2.124m

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

By my calculations this is a 'double fail' on the banking covenants at the HY2024 balance date - albeit not by much. I don't know exactly how the banks adjust these numbers around the edges. So it could be that with one or two small tweaks the covenants sneak through. But, looking out to the FY2024 results, we have to remember that net profit for FY2024 will be materially lower than last years full year result of $2m. To further exasperate things the interest bill will not be dropping as another $1.086m of dividend payments (likely borrowed money) has gone out of the accounts since this half year balance date.

What will Accordant's bankers, ASB Bank, do about this? Demand a cash issue to fix things? Or will they give AGL some extra time to sort things out? I think the next dividend is a goner on these numbers. We might have to wait for the full year results announcement date in mid-April to see what tweaks the financial engineering spanners need to make?

SNOOPY

[Nor]

So.......
Is it a buy at these levels?

[Snoopy]

looks doomed with massive govt cuts coming soon

So.......Is it a buy at these levels?

Good question Nor. I have a general investment philosophy. That is to look for companies with a proven track record that hit a 'rough patch' which causes the market to mark down their shares. At that point I 'buy in' and wait for the recovery.

Accordant may be a minnow on the NZX. But it is the largest job agency in New Zealand. They are recognised as one of a few 'preferred suppliers' to the government in that space for the medium term. So IMO bull's assessment is exactly that (bull), as jobs continue to roll over whatever the environment (those out of work government employees will be looking for work somewhere else and Accordant can help). While the country is now under the stewardship of 'Chris Lux-in', Accordant may have to wait for the return of the other guy, 'Chris Lux-out', to be seen at its best. Yet Accordant does not necessarily have to be operating at its best to make a good investment return from here.

As the country sputters towards an economic recovery, this is potentially a good earning time for Accordant (if you believe what management say). AWF, the blue collar labour arm is already showing 'green shoots' after the tough labour lockout years. Jackson Stone and Hobson Leavy seem to be 'holding position' as the senior executive market shrinks (temporarily) around them. But Madison and AbsoluteIT seem to be on a steady decline. And current CEO Jason Cherrington, has rolled out the excuses and now taken action by revamping the structure of AbsoluteIT. My problem is, if I invest for the recovery, I have to believe the recovery is possible. Over recent years Management have been quick to point out the merits of their senior executive chasing 'Jackson Stone' and 'Hobson Leavy', while Madison and AbsoluteIT are left on a ski slope trajectory that sees the overall white collar business arm of Accordant going nowhere.

The 'spanner in the works', as I see it, are those banking covenants. While I may be prepared to 'ride out the downtimes', bankers are not so forgiving. Accordant does have an advantage of being very agile. Most of their assets are their people. And if the market contracts, then they can let a few people go. But then you have a smaller 'matched to market' earnings base, while the debt remains the same. I remain unclear exactly what the banks are going to suggest, and just how agile Accordant can be. Until I can get some more insight into this, I am not investing any more into AGL. But the good news is, insight is on the horizon. Accordant should be reporting their annual result in May. I expect some more forward looking commentary then.

SNOOPY

[Nor]

Guess I'll wait too. I have difficultly understanding why some white collar employment agencies should be doing ok and others not. Seems to me that desks and computers and office space should be easy to reconfigure. Not as if they have special purpose machinery with only certain uses.

[nztx]

Someone thinks it's a buy - up 2c today

If they crack out another Div then she could be away off the blocks

seem to recollect that happened a few moons ago