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

[Snoopy]

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?

I took out the healthcare results because there is no indication that 'healthcare' will form part of the business going forwards. 'Healthcare' sounded like a good expansion path at the time, but proved not to be so. We investors today have the benefit of that hindsight, and so should look forwards with that hindsight.

By contrast Madison is at the core of 'AWF Madison' going forwards. To remove it would be tantamount to saying that Madison will not be a significant part of the business going forwards. Management is still backing Madison. So I think that looking forwards, you have to regard Madison and the rest of the legacy business as one investment package.

SNOOPY

[minimoke]

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.

If we are talking about "raising" margins shouldn't the margin actually be raised. So say we have a margin of 10% and inflation is running at 3% shouldn't we be seeing a new margin of 13%. Other wise all we are doing is looking at a margin greater than inflation.

[minimoke]

I took out the healthcare results because there is no indication that 'healthcare' will form part of the business going forwards. 'Healthcare' sounded like a good expansion path at the time, but proved not to be so. We investors today have the benefit of that hindsight, and so should look forwards with that hindsight.

By contrast Madison is at the core of 'AWF Madison' going forwards. To remove it would be tantamount to saying that Madison will not be a significant part of the business going forwards. Management is still backing Madison. So I think that looking forwards, you have to regard Madison and the rest of the legacy business as one investment package.

SNOOPY

That makes sense. Except at the moment Madison is consolidated into the accounts so you have no way of knowing the impact and drain / gain it has on the overall business.

[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.

Minimoke, the ROE test is a strong pass. Even if the FY2015 ROE result had dipped below 15%, the test is a pass.

The FY2015 ROE is significantly lower than last year because I am using the end of year capital to judge the return on capital for the whole year. AWF I am sure would use some weighted average capital measure and produce a higher ROE figure for FY2015. AWF didn't even receive the cash issue capital until just before the end of the year. The fact that they couldn't make a serious return on this capital for the single day they had it (cash issue closed 31st March, the EOFY balance date) comes as no surprise. To see how well AWF can utilise this new capital, shareholders will have to wait until FY2016.

In summary, while the drop in ROE for 2015 looks shocking, it is really a quirk in the calculation method, caused by the timing of the capital raising, that has produced this figure. For that reason I wouldn't read too much into that 15.1% value.

SNOOPY

[Snoopy]

That makes sense. Except at the moment Madison is consolidated into the accounts so you have no way of knowing the impact and drain / gain it has on the overall business.

I might guess that AWF would say that you cannot separate Madison from the legacy business going forwards anyway. Madison was bought so that customers could go to AWF as a one stop employment solution. If you want a combination of white and blue collared shirts to do the job, now AWF can do it. Such a job may have been lost to AWF before. You are assuming that the Madison acquisition would create a series 1+1=2 jobs for AWF. AWF is telling you that acquiring Madison will create profit using the formula 1+1=3. AWF is getting incremental business that neither Madison nor the old AWF would have got if they were still separate stand alone entities.

That's the story. Whether 1+1 really does equal 3, I guess we will find out in due course.

SNOOPY

[Baa_Baa]

I love it when the FA's get the abacus out, us minions can pull up a chart and check out the SP entry/exit capital risks. Thanks Snoopy, you're a Legend.

This is a weekly chart, it looks pretty anaemic for the past couple of years, has no respect for the 200day EMA (39EMA on the weekly chart), but has developed a very symmetrical trading pattern, and is poised to test the 39EMA weekly / 200EMA daily, again, right now. A break out above the 39EMA, then the descending trend line would give confidence, but a rise above $2.54 would suggest a breakout has some legs.
Attachment 7386

Thanks,
BAA

[minimoke]

That's the story. Whether 1+1 really does equal 3, I guess we will find out in due course.

SNOOPY

That is the obvious and logical formula / question. Though another way of looking at is "Oil" + "Water" = ?

[Snoopy]

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

AWF Limited is showing a strong return on equity profile. One way to do this is to borrow heaps. Unfortunately this method of increasing ROE usually comes back to bite shareholders. So has AWF currently leveraged their balance sheet to help make this important statistic look good?

My preferred method of answering this question is to look at what happens if all profits are redirected to repaying debt. In reality this is unlikely to happen. Shareholders like their dividends, and businesses must invest for the future. Also a debt free company may not be 'capital efficient'. Nevertheless 'MDRP' does provide a gauge of just how quickly a company could eliminate their debt should they (or their bankers decree!) that they do so. A figure over 10 years I regard as suspect. A figure under three years I regard as very good. So how does AWF measure up in 2015?

Bank debt in the FY2015 results announcement is as follows:

Cash & Cash Equivalents: {A}	$3.151m
Non Current Borrowings:	$0
Current Borrowings:	$21.759m
Total Borrowings: {B}	$21.759m
Total Net Borrowings: {B}{A}	$18.608m

Net profit after tax: $5.416m

MDRT = $18.608m/ $5.416m = 3.4 years

This I regard as quite acceptable. AWF are not overleveraged, and considering their cash issue had just been banked on this balance date, probably close to their targeted leverage.

SNOOPY

[Snoopy]

You are assuming that the Madison acquisition would create a series 1+1=2 jobs for AWF. AWF is telling you that acquiring Madison will create profit using the formula 1+1=3. AWF is getting incremental business that neither Madison nor the old AWF would have got if they were still separate stand alone entities.

That's the story. Whether 1+1 really does equal 3, I guess we will find out in due course.

They say history is no guarantee of future results. But I have created the following table, charting earnings per share in a calendar year verses dividends per share in a calendar year. This is representative of AWFs cash flow position for the respective years. This differs from the companies declared results because the final dividend is always paid in the subsequent year. I am more comfortable using actual cash flow though, which is why I choose to present the eps/dps results in this way.

I have left out the one off dividend of 3cps paid in FY2014 as a result of the capital gain made on the sale of the healthcare business. One off sales do not represent repeatable sustainable dividends from ongoing operations.

	eps	dps
2007	7.0	8.93
2008	7.2	5.8
2009	8.2	6.5
2010	7.7	4.5
2011	13.5	8.3
2012	14.5	11.4
2013	18.7	14.4
2014	16.4	15.6
2015	16.7	14.8
Total	109.9	90.23

Over the last nine years, AWF have paid out 82% of their ongoing earnings as dividends. The 18% of earnings retained (together with the cash issue earlier in 2015) have been used to grow the business. ROE has been maintained at good levels from FY2011 to FY2014 inclusive. This indicates retained earnings have been used wisely. This bolsters my case for AWF Limited to be regarded as a 'growth company' for financial modelling purposes.

SNOOPY

[Snoopy]

Over the last nine years, AWF have paid out 82% of their ongoing earnings as dividends. The 18% of earnings retained (together with the cash issue earlier in 2015) have been used to grow the business. ROE has been maintained at good levels from FY2011 to FY2014 inclusive. This indicates retained earnings have been used wisely. This bolsters my case for AWF Limited to be regarded as a 'growth company' for financial modelling purposes.

Using

1/the 82% payout ratio and
2/ an historical average PE of 13.0 (as at 31st March, just before results are announced, taken over 9 years) THEN

the Mary Buffett style 'Growth Model' calculation looks like this:

Year	Assets SOFY	eps	dps	Retained Earnings
2016	$1.11	16.7c	14.8c	1.9c
2017	$1.13	20.0c	16.4c	3.6c
2018	$1.16	20.6c	16.9c	3.7c
2019	$1.20	21.3c	17.4c	3.8c
2020	$1.24	22.0c	18.0c	4.0c
2021	$1.28	22.7c	18.6c	4.1c
2022	$1.32	23.4c	19.2c	4.2c
2023	$1.36	24.1c	19.8c	4.3c
2024	$1.41	24.9c	20.4c	4.5c
2025	$1.45	25.7c	21.1c	4.6c
2026	$1.50	26.5c
Sum			$1.83

Using a PE of 13.0 at the start of FY2016 the projected AWF share price is:

P/E x E = 13.0 x $0.265 = $3.44

Based on an acquisition price of $2.30 (where I bought in during the rights issue) the ten year compounding net annual return 'i' is projected as:

$2.30(1+i)^10 = ($3.44+$1.83) => i= 8.6%

That looks decent, if not mortgage your house compelling. But sometimes the numbers do not tell the whole story.

The above projection assumes that the Madison acquisition works. IOW the 1+1=3 formula for generating new business can be cashed up. Yes this is what management plans. But from an investor perspective AWF are sailing into new territory. There is an execution risk here that falls outside what AWF have done before. So I am calling AWF only as 'fair value' based on this calculation. I can see better investment options in other shares in the market right now. I will be following how AWF use the funds from their recent capital raising. But I won't be actively chasing more shares until I can see the forward strategy bedding down. If the share price were to weaken below $2, then I will definitely be looking to buy more.

SNOOPY