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

[Snoopy]

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.

I am in favour of using data that goes back up to ten years, to get a view across the 'business cycle'. In the case of AWF Madison though, I feel that would be misleading today. With the addition of 'Madison Recruitment' and 'Absolute IT' to the fold, I think there is an argument for dropping all indicative data outside of a minimum five year window.

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
2013	19.7	14.4
2014	16.2	15.6
2015	16.8	14.8
2016	16.0	15.2
2017	19.6	16.0
Total	88.3	76.0

This represents an average dividend payout ratio over the last five years of:

76.0 / 88.3 = 86%

SNOOPY

P.S. Just noticed on p15 of AR2017 that AWF have a policy of paying out 65-70% of 'underlying earnings'. 'Underlying earnings' is a unique construction of AWF management which allows for the 'amortization of intangible assets' (a non cash item) to be added back in, less a deferred tax effect based on the 28% tax rate. 'Underlying Earnings' calculated this way is a proxy for cashflow, and cashflow is what dividends are paid from. However, I still contend that 'underlying earnings' is a misleading measure to assess AWF performance. That's because real shareholder cash was used to create the now 'intangible assets' that are being amortised. Just because the cash was paid 'up front', does not mean it should be ignored from an earnings perspective.

The amortization expense was $2.272m for FY2017 (p36, AR2017)

So 'Underlying earnings' for FY2017, based on the declared NPAT of $5.867m would be:

$5.867m + (1-0.28)x $2.272m = $7.503m

65-70% of that figure, the projected dividend payout for FY2017 is:

(0.65 to -0.7) x $7.503m = $4.877m to $5.252m {A}

The actual dividend declared for FY2017 is 8.0c (interim) and 8.2c (final). There are 32.463m AWF shares on issue. So the amount declared as a dividend for FY2017 is:

($0.08+$0.082) x 32.463m = $5.259m {B}

Comparing {A} and {B}, we can see that the declared dividend, which is actually paid over FY2017 (interim bit) and FY2018 (final bit) is right at the top end of policy guidance (70% of underlying earnings).

Yet the actual dividend paid as a percentage of net profit during FY2017 is 16c/19.6c = 82% of NPAT.

Shareholders should be aware that paying out 70% of 'Underlying Earnings' is the same as paying out 82% of 'Net Profit After tax'. But let's not get too picky with management. What difference does 12 percentage of net profit really make between shareholder friends ;-)?

[percy]

I have not checked your figures,but really my investment comes down to eps growth.
Using your figures we see eps went from 18.7cps in 2013,to 19.6 cps in 2017.ie an increase over those years of only 4.8%.or on average just over 1% pa.
This proves AWF is no longer a growth stock,and the PE of 14.69, using your figures ,is not warranted.
The yield ,again using your figures is 5.55% which is healthy,which makes AWF a yield stock..

[Snoopy]

I am in favour of using data that goes back up to ten years, to get a view across the 'business cycle'. In the case of AWF Madison though, I feel that would be misleading today. With the addition of 'Madison Recruitment' and 'Absolute IT' to the fold, I think there is an argument for dropping all indicative data outside of a minimum five year window.

	eps	dps (imputed)
2013	19.7	14.4
2014	16.2	15.6
2015	16.8	14.8
2016	16.0	15.2
2017	19.6	16.0
Total	88.3	76.0
5 year Average		15.2

For a leading market player in a nevertheless fragmented service profession I would accept a 7.5% gross dividend yield.

Implied Acceptable Share Price = (Gross Dividend) / (Acceptable Yield)

= (15.2c / 0.72) / 0.075 = $2.81

With no sales in the market today as I write this, but a bid price of $2.75 and an offer price $2.85, in these days of highly prized dividends I think AWF is trading where it should.

SNOOPY

[BlackPeter]

	eps	dps (imputed)
2013	18.7	14.4
2014	16.4	15.6
2015	16.7	14.8
2016	16.0	15.2
2017	19.6	16.0
Total	87.4	76.0
5 year Average		15.2

Are you sure you are not over-analysing? This looks at the first view like a pretty stagnant (though profitable) company to me.

[Snoopy]

Are you sure you are not over-analysing? This looks at the first view like a pretty stagnant (though profitable) company to me.

The 'Capitalised Dividend Valuation Model' assumes a mature business that will tend to repeat earnings over the business cycle. Management might not like themselves being described as 'stagnant', but I think your comment is 'spot on' BP. If you believe that management can grow the business, then buying at the 'Capitalised Dividend Valuation' means you get any such growth 'for free'. As an investor getting something for nothing has an appeal. But if there is no growth, then you are likely 'stuck' with a business cycle gross dividend yield of 7.5%. Either way I think I can cope!

The moral is, if you are looking for some go go outfit that will lift earnings markedly, then maybe you should look elsewhere. I think this is something that both Percy and I can agree on!

SNOOPY

discl: hold AWF

[percy]

The bonus offcourse being when your yield stock comes up with a big [susstainable] lift in earnings.
This is what I had expected from AWF,but the latest results proved me wrong.

[Snoopy]

The bonus of course being when your yield stock comes up with a big [sustainable] lift in earnings.
This is what I had expected from AWF, but the latest results proved me wrong.

Don't give up on AWF yet Percy. The "Absolute IT" acquisition has only four months of trading in the FY2017 result. The winning of the census contract should benefit 'Madison Recruitment' in FY2018. Meanwhile, the AWF division, where it all started, keeps performing. I think 'step growth' is definitely still possible (I hope for the best). But if growth doesn't happen, then there is that 7.5% , or thereabouts, gross yield to look forward to (I plan for the worst).

SNOOPY

[percy]

Totally agree,and that's why I retained some of my holding.
Maybe,just may be,we are "well positioned," to take advantage of any "surprise" earnings upgrade?

[Snoopy]

The talk is pretty bullish on Madison , supppose they could go gangbusters and the rest of the group could drag them down ....

https://www.nzx.com/files/attachments/185387.pdf

It is interesting to reflect with hindsight on some comments in the: above address by then CEO Mike Huddleston on 18th November 2013

-----

"Let me give you an example: In 2010 we lost the business of a substantial national Government SOE to whom we had been providing blue collar staff across the entire country for many years.
We lost this business not because of our service delivery but because we could not also provide this business with customer service focused staff; with call centre staff and with white collar recruitment services, together with our existing offering."

"This loss reinforced for us the need for this expansion. I can tell you today that since we announced our intention to acquire Madison there has been a significant level of excitement within our clients and prospects about the opportunities the one stop shop will create. We have already been asked to jointly present to one of the country’s major businesses."

<snip>

"The cultures of AWF and Madison are not the same. The difference between delivering blue collar and delivering white collar are quite pronounced. For this reason we have no intention of merging the operations of Madison and AWF. In our evaluation of the business and of the price we should pay we never saw the acquisition as one which would create synergies and generate quick gains. We saw it
instead as a strongly performing business and a leader in its market with substantial opportunity for growth."

-----

So even close to four years ago the game was to catch more business, but there would be no merged company cost savings to create more profit? It looks like Huddleston's prediction came true. More business has been generated but net profit margins have declined.

SNOOPY

[Snoopy]

this looks at the first view like a pretty stagnant (though profitable) company to me.

Divisional Profit	FY2014	FY2015	FY2016	FY2017
AWF Profit after tax {A}	$3.632m	$3.558m	$3.410m	$4.716m
Madison Profit after tax {B}	$0.414m (*1)	$2.564m	$2.091m	$0.649m
Absolute IT Profit after tax {C}				$0.809m (*2)
Total Modelled Profits {A}+{B}+{C}	$4.046m	$5.416m	$5.202m	$6.174m
Total Declared Profits	$3.952m	$6.122m	$5.501m	$5.867m
Profit Error: Modelled vs Declared	+2.38%	-11.5%	-5.44%	+5.23%
Divisional Turnover	FY2014	FY2015	FY2016	FY2017
AWF Turnover {D}	$125.536m	$127.705m	$145.803m	$157.714m
Madison Turnover {E}	$23.155m (*1)	$69.809m	$68.786m	$71.114m
Absolute IT Turnover {F}				$27.6m (*2)
Total Modelled Turnover {D}+{E}+{F}	$186.300m	$197.514m	$214.589m	$256.428m
Total Declared Turnover	$148.691m	$197.514m	$214.589m	$256.428m
Turnover Error: Modelled vs Declared	0%	0%	0%	0%

(*1) Part year from November 2013 only
(*2) Part year from November 2016 only

Divisional Net Profit Margin	FY2014	FY2015	FY2016	FY2017
AWF Net Margin {A}/{D}	2.893%	2.706%	2.339%	2.990%
Madison Net Margin {B}/{E}	1.788%	3.673%	3.040%	0.913%
Absolute IT Net Margin {C}/{F}				2.931%
Net Margin Error: Modelled vs Derived	+2.38%	-11.5%	-5.44%	+5.23%

If shareholders look at what has happened in particular to the profitability of the AWF and Madison sub units over FY2016 and FY2017, a picture different to the 'overall picture' emerges. The AWF division went 'gang busters', while the profitability for Madison fell off the cliff. These two opposite effects nearly cancelled each other out in the overall profit picture. But it does show that if Madison can recover, then the underlying overall picture could be rather brighter than the 'pretty stagnant' 'eps' trend might suggest.

SNOOPY