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

[minimoke]

Is this because Madison is inherently 'lower margin'?
Conclusion: Pass Test

SNOOPY

I can answer that for you. Awf is a very simple business. There are only two ways to make money. High volume and Low margin or low volume high margin. Madison ought to be the later. If it isn't then the business is in trouble. Awf labour hire will be lower margin. If Madison is propping up awf labour hire them that's a problem

[Penfold]

I sold a small parcel on Friday... somehow got 2.45 a share. Held for just over a year and walk away with a small gain.

Reason I sold was the stock is just not liquid enough. Founder holds over half the company. Never seems to realise its full value. In saying that seems pretty fully priced at the moment based on its result. When Chch winds down things could get a lot worse...

[stoploss]

Hi All,

I have looked at AWF Limited before. But it always looked a bit expensive to my superficial analysis. I was also concerned about liquidity and how I might have to bid up the share price just to get a modest stake.

However, during the rights issue period I got a call from my broker. A shareholder with a decent stake wanted to sell up and move to Australia. Was I interested in picking up a decent sized parcel of shares? A back of the envelope calculation and I was in. I have been a bit distracted with other life matters since. So I haven't had a chance to have a closer look at AWF until now. I hope you fellow (and potential shareholders) will find my AWF 'snoopshot' treatment interesting!

SNOOPY

Welcome aboard Snoopy . Surely with all your analysis on this you would have read the major shareholder ( S Hull 66 % ) was going down to around 50 % from memory . So maybe he has gone to Australia ? There were some big parcels of rights crossed through the market which I presumed was him selling. Been a bit frustrating this , a lot of promise ( CHCH rebuild ) no delivery . I am still a long term believer . I have been trading SKE.ax , not for the feint hearted , my reasoning was more people go to part time work hire in a downturn such as the Aussie mining sector . Been a bumpy ride, on the positive side for now

[Snoopy]

I can answer that for you. Awf is a very simple business. There are only two ways to make money. High volume and Low margin or low volume high margin. Madison ought to be the later. If it isn't then the business is in trouble. Awf labour hire will be lower margin. If Madison is propping up awf labour hire them that's a problem.

Minimoke, I think you sum up the two driving forces for the future direction of AWF very well. It isn't clear to me that AWF will choose to 'segment out' Madison from the legacy business so that shareholders can get a feel for the margin of 'Madison' and 'Everything Else'.

Prior to the Madison acquisition, the following rather strange statement appeared in the FY2012 annual report

"Shareholders may have noted the Groups reference to the additional reporting of ‘UNDERLYING EARNINGS’. This is because now that some borrowings are being committed as part of the growth programme, given the nature of the acquisition targets (in accounting terms), containing high levels of identifiable intangible asset components (and requiring amortisation according to NZ IFRS requirements), the AWF Board considers that the resulting non cash adjustments distort true performance. Underlying earnings adjust for non cash items and in the opinion of the Board more correctly reflects the operating performance of the Group."

I am unclear if that was written with Madison (acquired November 2013) on the investment horizon. But I have never heard of any NZ IFRS requirement that means that intangible assets must be written off upon acquisition. Indeed I thought the law had been changed so that exactly the opposite happened. I.E. intangible assets were only to be written off if they were impaired. If intangible assets are forced to be written off on acquisition, doesn't that mean the acquirer paid too much for those assets? I certainly hope that all the cash spent on Madison so recently is not being written off already!

SNOOPY

[minimoke]

Firstly Snoopy, thnask for sharing yoru tests. I think it always great as to see how others arrive at theri decisosns and is useful for learign.

And in hte intersts of healthy debate I hope you dont mind if I add a few observations

Test 4: Ability to raise margins (above inflation).

Margin = Net Profit/Sales

2010: $2.002m /$70.329m = 2.85%
2011: $3.535m /($95.800m - $7.000m) = 3.98%
2012: $3.789m /($119.264m-$14.349m)= 3.61%
2013: $4.952m /($138.852m - $8.375m)= 3.79%
2014: $4.205m /$148.691m = 2.83%
2015(*): $5.416m/$197.5m = 2.74%

Note: For FY2011, FY2012 and FY2013 I have removed the healthcare unit profit and the associated turnover.

Margins were certainly raised above inflation between the base year FY2010 in comparison with the next subsequent three years. The last two years have seen a decline back to FY2010 margin levels. Is this because Madison is inherently 'lower margin'? AWF have already shown they are prepared to deal with below par margin businesses. That is why they sold their healthcare assets. So I am prepared to back AWF management and let them work some margin magic going forwards, as they have done before.

Conclusion: Pass Test

SNOOPY

I think this test raises a huge red flag (ie a SELL, not BUY) for three reasons.

Firstly I'm wondering if you are setting your sights too low. Inflation is just above zero and we are facing the prospect of deflation. To pass this test a company only has to make the teeniest of profits to pass. Perhaps the threshold should be a bit higher. Maybe the OCR rate, or 1 year Fixed term interest rate. Obviously its your test but I'd be looking for something a bit more aspirational.

Secondly, the trend is our friend. Margin shrinkage consistently over the past four years - despite an environment where there should have been opportunity.

Thirdly 2.74%!!!. So a company has all its capital tied up with a large branch network, loads of staff, product / service diversity, IP in a market where business confidence is high (meaning companies will spend on temp workers) and the best it can do after all that effort and angst is generate 2.74% margin.. That is seriously low and the best thing that can be said, is at least it is profitable. This leaves them very vunerable to a new player with resources to come in and undercut their market, or for the market to shift very slightly and all of a sudden you are facing a loss.

So its a Fail. Yet you are stil prepared to back a management that has overseen disastrous acquisition in healthcare (and lets not go to their previous disasters) and falling margins. I'd have a vote of no confidence in management.

So its stil a fail for me on this test.

[winner69]

Minimoke, raising margins above the rate of inflation means consistently improving margins (above rate of inflation), not a margin higher than the rate of inflation as you outlined.

My understanding of Buffett's view on margins is a company's profitability depends not only on having a good profit margin (generally above industry averages) but also on consistently increasing it and make that assessment after looking at 5 years plus numbers. A high profit margin indicates a company is executing its business well .....but increasing margins means management has been extremely efficient and successful at controlling price and more importantly expenses.

I would think Buffett wouldn't be too impressed with Allied's margin of 2.7% and Snoopy's numbers don't really show they are improving it. Like you minimoke a fail on this test (Allied does have returns on capital though even though margins are razor thin)

Note: the 'snoopshot' is based on Buffett methodology, at least it was years ago. Probably served Snoopy well over the years

[Snoopy]

Firstly Snoopy, thnask for sharing your tests. I think it always great as to see how others arrive at their decisions and is useful for learning.

I should add that these four tests are 'indicators'. Passing these four tests means that I can apply my 'growth model' to check the fair value of this share. You will note that none of these tests say anything about fair market value. It is fair market value that determines if AWF is a buy, not passing these four tests!

And in the intersts of healthy debate I hope you dont mind if I add a few observations
I think this test raises a huge red flag (ie a SELL, not BUY) for three reasons.

Firstly I'm wondering if you are setting your sights too low. Inflation is just above zero and we are facing the prospect of deflation. To pass this test a company only has to make the teeniest of profits to pass. Perhaps the threshold should be a bit higher. Maybe the OCR rate, or 1 year Fixed term interest rate. Obviously its your test but I'd be looking for something a bit more aspirational.

A fair criticism.

What I am looking for in test 4 is some indication that in a company's relatively recent history they have been able to increase margins. Going from 2.85% (FY2010) to 3.98% (FY2011) is a ratio of:

3.98/2.85 = 1.40

That represents a 40% increase in margin, way, way in excess of inflation. Granted all that margin expansion has been undone in subsequent years. But the point of the test is can management increase their margins? Is there any evidence at all that they can? If they can do it once, then maybe they can do it again? In a competitive market, I think it is too much for any company to expect an increase in margin year on year.

I do take your point though that 'Test 4' may be the weakest of the four indicator tests.

Secondly, the trend is our friend. Margin shrinkage consistently over the past four years - despite an environment where there should have been opportunity.

I would say that should margin shrink again in FY2016, then the argument that management is still capable of increasing margins going forwards would be looking shakey.

Thirdly 2.74%!!!. So a company has all its capital tied up with a large branch network, loads of staff, product / service diversity, IP in a market where business confidence is high (meaning companies will spend on temp workers) and the best it can do after all that effort and angst is generate 2.74% margin.. That is seriously low and the best thing that can be said, is at least it is profitable. This leaves them very vulnerable to a new player with resources to come in and undercut their market, or for the market to shift very slightly and all of a sudden you are facing a loss.

2.74% as a margin? Yes I would like to see it higher. But this is, IMO, likely an industry margin parameter, rather than something specific to AWF.

All businesses in a competitive market are vulnerable to competition. But I don't think the largest player in the market will be dangerously damaged within a ten year timeframe (addressing this issue is the reason for Test 1).

So its a Fail. Yet you are stil prepared to back a management that has overseen disastrous acquisition in healthcare (and lets not go to their previous disasters) and falling margins. I'd have a vote of no confidence in management.

To give management their due, they got out of healthcare quickly and made a nice (one off) profit on the way through.

So its stil a fail for me on this test.

Events are open to different interpretations. I respect that your interpretation of events has lead to a somewhat different conclusion to mine. I am prepared to say that you may end up being right and I may end up being wrong. I haven't said the investment case for AWF is clear cut. For the moment though there are enough positives, to my way of viewing things, to keep me invested in the AWF game.

SNOOPY

[minimoke]

For this exercise I have removed the group's foray into the healthcare sector. I am referring here to the groups purchase of Panacea Healthcare on 04-10-2010, the additional purchase of Nursing NZ on 19th March 2012 and the subsequent sale of the lot on 31-08-2012.

Earnings figures calculated are adjusted net profit after tax.

2010: $2.002m/26.125m= 7.7cps
2011: ($3.212m - $0.003m +0.7x($0.465m) )/26.125m = 13.5cps
2012: ($2.877m +0.72x($0.167m+$1.100m) )/26.125m = 14.5cps
2013: $4.952m/25.805m = 19.2cps
2014: ($3.952m+0.72x(0.095m+0.257m) )/25.804m = 16.3cps
2015(*): $5.416m/ 32.463m =16.7cps

Notes:

1/ Panacea Healthcare NPAT (an non continuing business stream) removed from results for FY2011, not included in FY2012 and FY2013.
2/ Business acquisition costs removed from FY2011, FY2012 and FY2014.
3/ Goodwill impairment removed from FY2012.
4/ Due diligence cost removed from FY2014
(*) FY2015 results based on abbreviated results released. When full result becomes available it may require adjustment.

There was one dip in the underlying earnings trend following FY2013, but apart from that the eps path is steadily upwards.

Conclusion: Pass test

OK, I kinda get this test. But if we have faith in management (which we must surely do) shouldn't we be looking at numbers warts and all. If you are cherry picking bits to take out shouldn't you also therfore remove the Madison acquisition from latest years results?

[Snoopy]

Welcome aboard Snoopy . Surely with all your analysis on this you would have read the major shareholder ( S Hull 66 % ) was going down to around 50 % from memory . So maybe he has gone to Australia ?

From the number of shares quoted to me, I don't think the shareholder selling down was Hull. From memory the number of shares being quit in total was some 200,000. A lot of shares for most people, but only a drop in the bucket of Simon Hull's shareholding.

SNOOPY

[minimoke]

ROE= (Net Profit)/(EOFY Shareholders Funds)


2010: $2.002m /$18.588m= 10.8%
2011: $3.535m /$19.913m = 17.7%
2012: $3.789m /$19.201m = 19.7%
2013: $4.952m /$21.607m = 22.3%
2014: $4.205m /$20.763m = 20.3%
2015(*): $5.416m/$35.931m =15.1%

The big improvement from FY2010 has been sustained. A significant drop in the FY2015 is because of the newly enlarged equity base. But even with this, AWF is earning well above its cost of capital.

Conclusion: Pass test

SNOOPY

I quite like this test. But again look at the trend. Currently heading down and lowest in 5 years and just on the cusp of your threshold. A pass is a pass but by the slimest of margins.