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

[winner69]

Sounds reasonable. I don't want to be greedy.



Fibonacci ?

SNOOPY

Spooky eh

As long as AWF profits don’t do a Fibonacci - like spiral downwards - all will be OK

I take it you have heaps of these Snoops

[Snoopy]

I take it you have heaps of these Snoops

Got a few yes, but my average buy price is a lot more than $1.80 unfortunately :-(. It is well less than $3.60 though ;-). I am hedging my bets. Bought a few recently. Will wait until the result comes out before buying the next tranche. If you go by last years profit release I have a month to wait!

SNOOPY

[minimoke]

Got a few yes, but my average buy price is a lot more than $1.80 unfortunately :-(. It is well less than $3.60 though ;-). I am hedging my bets. Bought a few recently. Will wait until the result comes out before buying the next tranche. If you go by last years profit release I have a month to wait!

SNOOPY

I cant figure why people hang onto dividend yield stocks when the SP is in a downtrend like AWF's has been over the past year. Sure 8% is attractive, but if you bought at $3.00 and now sitting on $1.80 you need a lot of dividend to make up that kind of loss. (SKT the same)

[Snoopy]

I cant figure why people hang onto dividend yield stocks when the SP is in a downtrend like AWF's has been over the past year. Sure 8% is attractive, but if you bought at $3.00 and now sitting on $1.80 you need a lot of dividend to make up that kind of loss. (SKT the same)

Some of us, even with what are quite modest sized holdings in gross terms, can't sell out because the total shares on the buy side is less than the number of shares we have. So we can't get even the low market price quoted, because if we sold the share price would go even lower. In my earlier days of sharemarket investing I used to worry about this with my low liquidity investments. But I figured that if I have studied the share well enough and paid a fair price to acquire the shares the chances of me wanting to sell out completely at well below my acquisition price are low. Sometimes I can take the top off my holding, or add a bit to the holding pie by lopping off or buying a small slice.

I don't know when the downtrend will end. But where a share is trading at a good margin of safety to my fair valuation (like AWF), I am pretty comfortable holding, no matter what price Mr Market is offering on the day. You have to remember that the price Mr Market offers is only an offer to buy. No share owner is obliged to accept his offer. Likewise I can't stop other shareholders selling out at what I see as a low ball price. I don't mind suddenly entering the market to buy those same shares low ball though!

SNOOPY

P.S. BTW AWF is currently trading on a much higher modelled gross yield than 8%.

Snoopy Modelled business cycle yield: (15.6c/0.72) / 175c = 12.4%

Historical yield FY2018 perspective: (16.2c/0.72) / 175c = 12.9%

Is there any other share trading on the NZX with a higher gross dividend yield than that?

[Baa_Baa]

I cant figure why people hang onto dividend yield stocks when the SP is in a downtrend like AWF's has been over the past year. Sure 8% is attractive, but if you bought at $3.00 and now sitting on $1.80 you need a lot of dividend to make up that kind of loss. (SKT the same)

The best analogy I can come up with to understand this logic is to s-l-o-w it down, a lot, by looking at an alternate long term investment and seeing whether there are comparators.

Say someone buys a commercial building, lets say they do it because the yield is good by their calculations (why else would they). So they've sunk a dollop of capital into this building (probably but not certainly, they have a debt overhang) but as long at it remains occupied and the leased space income comes in and exceeds expenses so their yield remains attractive, then it's really irrelevant to them or their calculations whether the market 'at this or any moment in time' would buy their building for more or less than their purchase price.

So they don't worry much about what the market thinks the capital value is, while they enjoy the ongoing income yields (analogous to dividends). This could go on ad infinitum until one day they have to sell for some reason and are exposed to the market's capital valuation whatever it may be at the time, or they see that the market valuation is way above their calcs and they are better off flicking the building for capital gains than holding for X years yield, or the market valuation is well below (hence yields are attractive) and they leverage their building to buy another building, all the while enjoying a nice yield.

Something like that.

[Snoopy]

As long as AWF profits don’t do a Fibonacci - like spiral downwards - all will be OK

I always buy with optimism, but with any transaction there is always a downside risk. There is nothing I could find on banking covenants in the Annual Report. But I remember Simon Bennett putting up a slide at the AGM video presentation where he mentioned banking covenants. It is slide 8 in the presentation for those who want to look it up.

The two targets mentioned were:

1/ 'Interest Coverage' ratio to be greater than 3
2/ 'Leverage Ratio' to be less than 3.

I looked up the 'investorwords' (www.investorwords.com) definition of these two terms.

'Interest Coverage' ratio is equal to Earnings Before Interest and Tax (EBIT) for a time period, often one year, divided by interest expenses (I) for the same time period.
'Leverage Ratio' What the debt/equity ratio measures.

Rather disconcertingly, AWF does not use these definitions. AWF define these same terms as follows:

'Interest Coverage' ratio is equal to " EBITDA / I "
'Leverage ratio' is " 'Net bank Debt' / EBITDA "

I find it very disconcerting when companies play fast and loose with such definitions. But for the purpose of this exercise, I will go with the AWF definition view. I was able to derive all the numbers in the year by year table in slide 8 from the respective annual reports, except for the EBITDA figures.

I calculated EBITDA from the income statement using the formula: EBITDA = NPBT + I + DA

The discrepency is not huge, as you can see below. But I will go with my figures for EBITDA, not AWFs, as I can't figure out how they calculated them, and I need figures that are consistent with my own future EBITDA estimates.

Financial Year	2015	2016	2017
EBITDA (AWF produced)	$12.617m	$11.710m	$13.454m
EBITDA (Snoopy produced)	$12.729m	$11.945m	$12.751m

Now, let's see how close AWF is going to get to those covenants!

SNOOPY

[Snoopy]

Financial Year	2015	2016	2017
EBITDA (AWF produced)	$12.617m	$11.710m	$13.454m
EBITDA (Snoopy produced)	$12.729m	$11.945m	$12.751m

Now, let's see how close AWF is going to get to those covenants!

What follows is my recreation of the table presented in slide 8

Financial Year	2015	2016	2017	2018 (HY Annualised Estimate Scenario)	2018 (Horror Scenario)
EBITDA (Snoopy produced *) {B}	$12.729m	$11.945m	$12.751m	$12.046m	$7.728m
Finance Cost {C}	$2.109m	$1.333m	$1.193m	$1.659m	$1.659m
Interest Coverage {B}/{C} (target >3)	6.0	9.0	10.7	7.3	4.7
Net Bank Debt {D}	$18.608m	$21.870m	$32.383m	$23.183	$23.183m
Leverage ratio {D}/{B} (target <3)	1.5	1.8	2.5	1.9	3.0

(* I calculated EBITDA from the income statement using the formula: EBITDA = NPBT + I + DA)


So what does all this mean?

The situation we don't want is the 'horror scenario' which sees the 'leverage ratio' banking covenant broken (bottom RH corner in bold). Note that even in this 'horror scenario', the interest coverage ratio remains OK. I have made the following assumptions in my FY2018 estimates:

1/ The net bank debt is unchanged from HY2018 (the latest balance sheet information published).
2/ My first estimate simply doubles the earnings from an already depressed half year result.
3/ For my second estimate (the horror scenario), I have reduced EBITDA down to a level so that the banking covenants are broken, without changing my net debt assumption.

However, AWF does not tend to emphasize the EBITDA figures when announcing their results. They speak in terms of NPAT. So what does an EBITDA of $7.728m imply in terms of NPAT?
Assuming the interest costs and Depreciation and Amortisation costs carry over from the half year to the full year:

NPAT = 0.72 x [ EBITDA - I -DA ]
= 0.72 x [ $7.728m - 2($0.741m) - 2($1.864m)] = $1.813m

However, a $3.418m profit has already been declared for the half year. So to produce an annual result like that, would require a second half loss of :

$1.813m - $3.418m = -$1.605m

We have been told that AbsoluteIT are tracking to budget and Madison will have the benefit of the Census contract to boost their second half result. To produce this 'horror result' will require a massive second half loss to be posted by the AWF division, to drag down the other two (which should be nicely profitable) via the group result into the red. Even writing off the remaining $0.6m outstanding from the much talked about 'bad debtor' won't do it. While such a loss is possible, it just doesn't seem likely. The AWF banking covenants look pretty safe to me.

SNOOPY

P.S. Ross and the rest of the board wants the leverage ratio below 2

[winner69]

Phew .... that’s a relief Snoops

[Snoopy]

Phew .... that’s a relief Snoops

Market agrees? Up 3c to $1.78 today.

SNOOPY

[winner69]

I don’t think AWF are playing fast and loose in respect of their convenant definitions

They probably are what their bank uses in these matters.

Wouldn’t want them to borrow to keep paying that high divie would we ....that would upset some ratios