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

[Elles]

When is the results announce due? And where do you find this information if not published as an announcement on the NZX? Thanks.

[Joshuatree]

One way if they don't announce that date is to check the previous years date which was 25th may 16 and 28th May for years 2014-15. .

[minimoke]

2 CFO resignations. Coincidence or a reflection of debtor management?

[percy]

2 CFO resignations. Coincidence or a reflection of debtor management?

Not a good sign.
The result was not what I was expecting,therefore I sold 75% of my holding this morning.

[Snoopy]

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!

I wrote the above comments in June 2015. Hindsight has shown that the Madison acquisition may not have delivered the synergy benefits envisaged.

I am always interested when the reporting on a business suddenly changes format with no real explanation.

One point I noted in AR2017 was that all references to 'underlying earnings' have been dropped. Personally I think this is a good call. Adding back intangible write offs because they were not cash expenses does not cut it with me, particularly when those same intangibles were real cash in the not too distant past.

SNOOPY

discl: hold AWF

[minimoke]

I wrote the above comments in June 2015. Hindsight has shown that the Madison acquisition may not have delivered the synergy benefits envisaged.
F

No hind sight required. simon hull is your typical blue collar bloke done good and awf reflected this in their culture.

The two women who owned Madison at other end of scale and so was Madison.

Trying to join the two would be like trying to mate a mongeral with a lap dog.

[Snoopy]

Does this fancy 'underlying earnings' that AWF has created add anything?

<snip>

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.

The above is taken from a July 2016 comment that I made.

This is the comment that AWF management obviously read and decided it made great sense before deciding to ditch their reporting of their in company fabricated 'underlying earnings' for the FY2017 year ;-).

However, on a tangential matter, I may have been a bit harsh with my previous comment on the AWF treatment of amortising intangible assets in my June 2015 comments.

Why does it matter? Because the amortisation of customer relationships over FY2017 was $1.746m. And $1.746m represents 20% of gross profits for FY2017. So this represents a very large opportunity window for the possible manipulation of annual results.

SNOOPY

[Snoopy]

Why does it matter? Because the amortisation of customer relationships over FY2017 was $1.746m. And $1.746m represents 20% of gross profits for FY2017. So this represents a very large opportunity window for the possible manipulation of annual results.

My June 2015 comments are listed below.

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 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.

I notice that when Westpac took over 'St George Bank' and created a lot of new 'intangible assets' (in a way loosely analogous to Allied Work Force taking over Madison). As a result they (Westpac) had the following to say in their Westpac FY2013 annual report (from p94).

------

7. Amortisation of intangible assets comprises:
– the merger with St.George resulted in the recognition of core deposit intangibles and customer relationships intangible assets that are amortised over their useful lives, ranging between five and nine years. The amortisation of intangible assets (excluding capitalised software) is a Cash Earnings adjustment because it is a non-cash flow item and does not affect cash distributions available to shareholders; <snip>

------

If intangible assets do have useful lives, then I can see that writing them off over that useful life makes sense. But my question is this. How do you determine the useful life of a 'customer relationship intangible asset'?

Going back to AWF, I can see that a company who has hired staff via Madison are likely to continue doing so if:

1/ the people they are dealing with are the same AND
2/ the business model remains the same,

despite the ultimate change in Madison company ownership.

If, say, a construction company was building the new Justice and Emergency Precinct in Christchurch (for example), then those white collar engineers hired would lose their positions once this project is complete. The finite time frame of a project therefore means the intangible asset representing workers likely to be hired for that project also has a finite time frame.

Yet once one construction is complete there is always the next construction project. So is it reasonable to say that the Construction company hiring the workers via Madison will not use Madison again? The problem that I have is envisaging the boundary between a 'finite intangible asset' and an 'enduring intangible asset'.

The comment in the FY2017 AWF annual report, p36 on this subject:

"The useful lives of customer relationships used in the calculation of amortization ranges from four to six years based on the directors views of asset life."

does not provide any insight into the decision making process.

If there is no boundary between 'finite' and 'enduring', then I don't think such intangible assets should be written off in a planned way.

SNOOPY

[Snoopy]

Not a good sign.
The result was not what I was expecting,therefore I sold 75% of my holding this morning.

Percy, I have noticed, is quick to head for the exit when a company disappoints, although perhaps not with full conviction here because he has retained 25% of his AWF shares

"For the Board, Chairman Ross Keenan noted that whilst strong performance was delivered in most areas, the significant lift in outstanding debtor balance at Year End put increased pressure on the organisation; and, accordingly, a further lift in bad debt provisions has been deemed appropriate."

The bad debt announcement wasn't good news. But it wasn't 'new news' either.

From AR2016 p39.

"One large overdue debtor owes the group $1.3m due to significant growth in key infrastructure projects. The payment to the group is dependent on variation payments in the debtor being approved and paid by head contractors in the projects. Due to the length of time the debt has been outstanding and the lack of certainty surrounding the variation invoices, the group has taken steps to ensure that it receives the debt it is owed by appointing a liquidator. The group has also provisioned $0.3m against this debt in case the variations are not all approved by the head contractor."

My first reading of that paragraph, suggests that whoever wrote it should be given an 'A' for gobbledegook. But by a process of elimination, AWF has tipped the subcontractor into receivership, because the head contractor won't pay up. But why the sub-contractor should be tipped into receivership when it appears they had too much work and should have hired even more staff (should have been good for AWF) to do the extra work remains a mystery to me.

Roll around to AR2017 p41, and we find the overall debt on this contract has blown out another $100k to $1.4m, but the bad debt provision on that has blown out to $0.8m.

The real question here though is, how bad is all of this when looking at the big picture?

SNOOPY

[Snoopy]

The real question here though is, how bad is all of this when looking at the big picture?

Note figures in italics in table below are estimates

	Doubtful Debt Provisions {A}	Current Trade and Other Receivables (before provisioning)	less Other Receivables (Estimates comes from FY2016)	equals Current Trade Receivables {B}	{A}/{B}
EOFY2014	$0.377m	$24.677m	$3.637m	$21.040m	1.79%
EOFY2015	$0.342m	$27.996m	$3.637m	$24.349m	1.40%
EOFY2016	$0.589m	$33.706m	$3.637m	$30.069m	1.96%
EOFY2017	$0.897m	$46.430m	$5.332m	$41.098m	2.18%

Notwithstanding that an EOFY2017 provision of $0.897m is just over 10% of FY2017 gross profit, in percentage terms I don't believe the 'bad debt provision' to 'total debt' ratio is a matter for concern. Hopefully the bad debt is now dealt with and we shareholders can move forward from here.

To some extent the 'Absolute IT' acquisition has got AWF out of jail. 'Absolute IT' is reflected in the end of year book position. So that means existing problems within AWF are diminished in relative terms by being part of a larger total. I am prepared to take a 'glass half full' approach to the bad debt position at this time. I won't be selling any of my AWF shares because of the bad debt issue.

SNOOPY