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

[Buffett Jr]

So in summary, AWF you both feel would not just survive a recession but potentially thrive in one?

[stoploss]

So in summary, AWF you both feel would not just survive a recession but potentially thrive in one?

If not thrive maybe outperform most of the market ......

[Snoopy]

So in summary, AWF you both feel would not just survive a recession but potentially thrive in one?

Not saying a recession is good for AWF. Even if business goes up, margins could be squeezed. Just saying the picture may noy be quite as cut and dry bad as you suggest Buffett Jr!

SNOOPY

[minimoke]

In a downturn what will typically happen is the number of paying employers reduces and the supply of job candidates increases. This inevitably leads to margin pressure between agencies.

Hiring companies also look at reducing hiring costs so the HR department goes but operational managers do the hiring from an increasing pool of easily available people.

Downturns dont last forever so it becomes a battle of attrition : who can best control costs relative to margin and who has the cash/ banking facilities to keep the payroll ticking over without dipping into IRD reserves.

[Snoopy]

Not saying a recession is good for AWF. Even if business goes up, margins could be squeezed. Just saying the picture may noy be quite as cut and dry bad as you suggest Buffett Jr!

Results out and management claim they are disappointed but really things are better than they appear. Dividend maintained.

There is a $1.3m 'one off' adjustment mentioned in the Chairman's address. Later is mentioned a $0.3m provision due to a 'Christchurch problem'. This came about because of 'significant growth in key infrastructure projects' (!??!*!). The head contractor is not approving payment to a subcontractor and AWF is owed by the sub-contractor or something like that. Actual amount in dispute is $1.3m, but AWF says only $0.3m of that is the provision at risk. I am not clear if the $0.3m 'Christchurch Provision' is included in the $1.3m 'one off' provision or not.

Some other odd things going on in the books too. There is an intangible asset, not related to goodwill, described as 'Customer Relationships'. Well, I thought that was the kind of thing that goodwill covered. So I am surprised to see 'Customer Relationships' listed as a separate intangible asset. Apparently this asset is typically amortised over 4-6 years. I would be very interested to find out from those who have a longer history with the company than I do, just how 'Customer Relationships' got onto the balance sheet in the first place. AWF thinks the after tax effect of amortising 'Customer Relationships' should be added back to get 'underlying earnings'.

It does appear that 'underlying earnings' are indeed better than the GAAP mandated numbers indicate. But how much of this hidden earnings pie should really be counted? This is a question I am struggling with.

SNOOPY

[Snoopy]

Some other odd things going on in the books too. There is an intangible asset, not related to goodwill, described as 'Customer Relationships'. Well, I thought that was the kind of thing that goodwill covered. So I am surprised to see 'Customer Relationships' listed as a separate intangible asset. Apparently this asset is typically amortised over 4-6 years. I would be very interested to find out from those who have a longer history with the company than I do, just how 'Customer Relationships' got onto the balance sheet in the first place. AWF thinks the after tax effect of amortising 'Customer Relationships' should be added back to get 'underlying earnings'.

The following extract is from note 16.5 in AR2012. This may go some way to answering my own question.

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Goodwill arose in the acquisition of Tradeforce Recruitment as the consideration paid included amounts in relation to the benefit of future market development and the assembled client base and workforce of Skilled NZ Limited. The portion of these benefits that relates to contracts with major clients has been valued separately as an intangible asset. The remaining benefits are not recognised separately from goodwill as the future economic benefits arising from them cannot be reliably measured and they do not meet the definition of intangible assets.

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What AWF seem to be saying here is that if they have a 'large customer', and the benefit of future work 'down the pipeline' is forseeable and measurable, then whatever they pay for that future pipline of work is not goodwill. Yet the same kind of contract made with a smaller customer over the same future period is goodwill, because the future work is less certain because the customer is small (?).

This strikes me as odd to have different treatment of a customer base, made only becasue of the size of the customer. The former seems subject to an annual write off policy, yet the latter does not?

SNOOPY

[percy]

Take care.
Today AWF's sp was $2.30 which is below the 50 day EMA $2.35,the 100 day EMA $2.34,and the 200 day EMA $2.32.
Not looking very healthy.

[Snoopy]

Take care.
Today AWF's sp was $2.30 which is below the 50 day EMA $2.35,the 100 day EMA $2.34,and the 200 day EMA $2.32.
Not looking very healthy.

We shed a decent dividend not too long ago Percy.

Today's trading totalled just $14k. AWF is a small relatively illiquid share. One small shareholder can push this share price around by getting a 25th anniversary gift for their spouse. Doesn't really say much about the underlying company if you did that.

There has been no compelling reason to buy or sell over the last year IMO. Madison is still 'bedding in' (apparently). Dividend looks sustainable.

SNOOPY

[percy]

Agree with you the dividend is sustainable and the stock is very illiquid.
With the ex ceo of Madison running AWF the "bedding in" should be well done and dusted.
The sp in July 2014 was $2.34,and in July 2015 $2.30,the same as today.

[Snoopy]

Some other odd things going on in the books too. There is an intangible asset, not related to goodwill, described as 'Customer Relationships'. Well, I thought that was the kind of thing that goodwill covered. So I am surprised to see 'Customer Relationships' listed as a separate intangible asset. Apparently this asset is typically amortised over 4-6 years.

AWF thinks the after tax effect of amortising 'Customer Relationships' should be added back to get 'underlying earnings'.

Some more thoughts on AWF's 'underlying earnings' calculation. Transforming a 'Customer Relations' intangible asset into hard cash is good news for shareholders. From a cashflow perspective it makes quite a difference to the 'overall' underlying result, in the most general sense. Nevertheless IMO, 'cashflow' and 'underlying profit' are different things. If a shareholder wants to know about cashflow, what is wrong with looking at the cashflow statement? Does this fancy 'underlying earnings' that AWF has created add anything?

When managing the business, yes. Having an intangible asset on the book that you expect to change into cash, is great. But this transformation will only happen if trained staff do a good job. And this is the kind of thing that should be of great interest to the middle management of AWF. From a shareholders perspective though, I find 'underlying earnings', calculated by adding back amortised 'customer relations', is less useful.

The problem is, the 'Customer Relations' intangible asset was originally created by shareholder cash, when that shareholder cash was used to buy an acquisition. So turning 'Customer Relations' back into cash is really just giving shareholders back the cash they had to start with. From a shareholder perspective, I think the particular brand of 'underlying earnings' that AWF is quoting is 'double counting' an 'already on the books' benefit.

IFRS accounting rules can be pigs when trying to understand the underlying business. In this case though, I am siding with the IFRS guys. AWF's 'underlying earnings' are useful to shareholders in the sense that it provides more cash to secure payment of dividends when cashflow drops from other sources. But IMO shareholders need to foucus on the old fashioned NPAT figure. That's the one that IFRS says gives the true picture, and I agree.

SNOOPY