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

[Snoopy]

What they are doing is working harder to generate more cash (Eg Census contracts), but less smarter to generate less profit.

It is going to get more difficult to disambiguate what is happening at Madiosn and AbsoluteIT in the future. For financial reporting purposes they have both been combined under the 'Temporary Contract and Permanent Staff to Commerce' reporting segment. Yet from Section G1 in AR2017 we can get a feel for AbsoluteIT's revenue and profit numbers, over FY2017 at least:

	Revenue	Net Profit	Net Profit Margin
If AbsoluteIT had been part of AWF Madison for all of FY2017	$301.600m	$7.500m
less Declared AWF Madison Result for all of FY2017	$256.428m	$5.867m
equals AbsoluteIT Result for Apr to Oct 2014 (7 months)	$45.172m	$1.633m
plus AbsoluteIT Result for Nov 2016 to Mar 2017 (5 months)	$27.600m	$0.809m
equals AbsoluteIT Result for FY2017 (12 months)	$72.7m	$2.44m	3.36%

We can do a similar exercise for when Madison was acquired during FY2014, using Section 18 from AR2014.

	Revenue	Net Profit	Net Profit Margin
If Madison had been part of AWF Madison for all of FY2014	$186.300m	$5.200m
less Declared AWF Madison Result for all of FY2014	$148.691m	$3.952m
equals Madison Result for Apr to Oct 2013 (7 months)	$37.609m	$1.248m
plus Madison Result for Nov 2013 to Mar 2014 (5 months)	$23.156m	$1.265m
equals Madison Result for FY2014 (12 months)	$60.8m	$2.51m	4.14%

SNOOPY

[minimoke]

It is going to get more difficult to disambiguate what is happening at Madiosn and AbsoluteIT in the future. For financial reporting purposes they have both been combined under the 'Temporary Contract and Permanent Staff to Commerce' reporting segment. Yet from Section G1 in AR2017 we can get a feel for AbsoluteIT's revenue and profit numbers:

	Revenue	Net Profit
If AbsoluteIT had been part of AWF Madison for all of FY2017	$301.600m	$7.500m
less Declared AWF Madison Result for all of FY2017	$256.428m	$5.867m

That net profit doesnt look right. 48 staff, say and average of $100k each gets NP down to $5.4m for IT and $5.9 for Maddison

[Baa_Baa]

Anyway you look at it you will find that AbsoluteIT's business of placing higher margin contractors and perms has moved closer to pure recruitment placements like Madison, that's because AbsoluteIT have devolved to the government recruitment market where the volumes are higher but the margins are very slim, which has slashed their overall margin contribution compared to previous years. Either way though, both companies make a decent if not modest margin assuming they can maintain (or grow) volume placements.

Operationally cash flow is obviously important, but whether they can chip away at the massively growing debt burden year on year while sustaining shareholder dividends is another matter entirely. I reckon AWF have over-extended and are winging it. The whole thing could go bang in even a small downturn in placements. Notwithstanding that, the Labour government has always been a lucrative source of contract / consultant revenues as they grow the resource base while obfuscating that against capped FTE permanent employees.

It's been going on for ages, it's just a matter of volumes and market share. Assuming debt doesn't undo them.

[Scrunch]

	Revenue	Net Profit	Net Profit Margin
If AbsoluteIT had been part of AWF Madison for all of FY2017	$301.600m	$7.500m
less Declared AWF Madison Result for all of FY2017	$256.428m	$5.867m
equals AbsoluteIT Result for Apr to Oct 2016 (7 months)	$45.172m	$1.633m
plus AbsoluteIT Result for Nov 2016 to Mar 2017 (5 months)	$27.600m	$0.809m
equals AbsoluteIT Result for FY2017 (12 months)	$72.7m	$2.44m	3.36%

Some thoughts:
Interesting discussion.

So AWF paid $14.7m for an entity delivering a net surplus of circa $2.44m/yr. Either this was a steel or indicates a low sector P/E is appropriate. If the correct PE in this sector should be 6, and AWF delivers $7.5m its market capitalization would be $45m (or $1.38).

There's a group of companies with some earnings doubt, some bank debt and sufficiently large amount of good will that there is a huge gap between Equity/share and NTA/share on the balance sheet. Members of this group include AWF, EVO, GXH, MPG, SKT, TGH. The takeover rescued TGH but the rest are all down heavily this year. Mr Market is nervous around negative NTA companies with borrowing and is continuing to hammer them. AWF may become a buy around the same time some of these other downtrends end.

[Snoopy]

That net profit doesnt look right. 48 staff, say and average of $100k each gets NP down to $5.4m for IT and $5.9 for Maddison

This time I wasn't guessing and all the relevant figures I have referenced in my post 591:

Net profit of $2.44m for AbsoluteIT (FY2017), and $2.51m for Madison (FY2014), are the correct answers, if I got my arithmetic right!

SNOOPY

[winner69]

You are saying that being a much less capital intensive business than Fletcher Building, and generating higher margins than Fletcher building, and not going through the same boom bust cycles as Fletcher Building (actually AWF Madison is more profitable in a business slump), that AWF Madison can afford to be more indebted over the business cycle?

SNOOPY

No I’m not saying that at all

What I’m saying is that AWF is one of the most highly geared company on the NZX. Gearing at 47% is high.

I took FBU (gearing less than 40%) just as an example as punters knew they were relatively highly geared. Another company punters worry about debt with is CAV and their gearing is less than 30%.

Why did AWF raise new capital of $14m in 2015 if debt is a good
thing? Wasn’t to ‘optimise’ their balance sheet was it ..surely not.

Snoops - just as a matter of info except for one division Fletcher’s margins are higher than AWF’s margins

[Snoopy]

No I’m not saying that at all

What I’m saying is that AWF is one of the most highly geared company on the NZX. Gearing at 47% is high.

ASB, the company's new bankers, not only rubber stamped the existing debt levels. They reduced the interest rate payable, which tells you a lot about what they think of the debt risk. As you will recall, ASB and AWF have redefined what leverage means anyway, a good thing to do if you don't like the classical definition. So how does AWF stack up against three blue chip NZX50 companies?

Company & Financial Year	Mercury 2017	Sky City 2017	Spark 2017	AWF 2017 (AbsIT 12mnths)
EBITDA(F) {B}	$523m	$307m	$1,016m	$15.664m
Finance Cost {C}	$95m	$31.1m	$48m	$1.659m
Interest Coverage {B}/{C}	5.5	9.8	21.2	9.4
Net Funding Debt {D}	$1077m	$889m	$935m	$32.383m
Leverage ratio {D}/{B}	2.1	2.9	0.9	2.1

Company & Financial Year	Mercury 2017	Sky City 2017	Spark 2017	AWF 2017 (AbsIT 12mnths)
Debt {B}	$1,107m	$889m	$935m	$33.608m
Equity {C}	$3,308m	$1,071m	$1,651m	$36.935m
Debt Ratio {B}/{B+C}	25.1%	45.4%	36.1%	47.6%

As you can see I have used both the classical definition of leverage (Debt Ratio) as well as the ASB/AWF definition.

Why did I choose Mercury Energy (MCY), Sky City Casino (SKC) and Spark (SP) for comparison? Simply because I hold them all and have considered them as relatively highly leveraged investments. For Sky City I have included the deferred casino licence value as part of the company debt, as the book licence value will be transferred and offset against the PP&E of the completed Auckland and Adelaide complexes when finally built (IOW the licences as they appear on the balance sheet are defacto debts).

Of the three, it is Sky City that stacks up the closest to AWF in debt terms, even if they are very different businesses. Mercury looks respectable in both leverage terms because they have been able to raise capital using the 'thin air' method. The Mercury interest cover is easily the weakest of the four. And without the power station revaluations (thin air capital created) it would present as easily the weakest from a Debt Ratio perspective too. Spark is in the strongest position of the four. But they do have a lot of telecommunications equipment on the books that will require more frequent capital reinvestment to keep current.

Looking at this, I am surprised that ASB consider a leverage ratio of anything below 3 as quite acceptable. Sky City is certainly as highly leveraged a company as I would want to invest in, and their debt is set to go higher as construction continues. You would not want AWF Madison to have two bad years in a row with the debt levels they have now. With the old definition of leverage, AWF Madison and Sky City are nearly line ball. The new definition of leverage makes AWF look much better!

Why did AWF raise new capital of $14m in 2015 if debt is a good thing? Wasn’t to ‘optimise’ their balance sheet was it ..surely not.

That was just before I first appeared on the share register, so I don't have any memory of what spin was used to justify that capital raising at the time. Anyone on here remember?

SNOOPY

[winner69]

ASB, the company's new bankers, not only rubber stamped the existing debt levels. They reduced the interest rate payable, which tells you a lot about what they think of the debt risk. As you will recall, ASB and AWF have redefined what leverage means anyway, a good thing to do if you don't like the classical definition. So how does AWF stack up against a couple of blue chip NZX50 companies?

Financial Year	Mercury 2017	Spark 2017	AWF 2017 (AbsIT 12mnths)
EBITDA(F) {B}	$523m	$1,016m	$15.664m
Finance Cost {C}	$95m	$48m	$1.659m
Interest Coverage {B}/{C}	5.5	21.2	9.4
Net Bank Debt {D}	$1077m	$935m	$32.383m
Leverage ratio {D}/{B}	1.5	0.9	2.1

Gearing is Debt / (Debt + Equity)

Mercury 25% Spark 40% and AWF 47% - AWF is most highly geared of the three

Debt can be good ...and bad .... generally debt is a way for companies to leverage their value to increase profits for shareholders ....in AWF case hmmmm ...the jury is still out on that one

Low levels of debt usually implies greater financial stabilty ....just saying

AWF might have 'optimal' level of debt in their eyes ...but I am always wary of highly geared companies who pay dividends in excess of free cash flow

(Did try to put the detail of the gearing ratios in your table but too hard

[Snoopy]

Interesting discussion.

So AWF paid $14.7m for an entity delivering a net surplus of circa $2.44m/yr. Either this was a steal or indicates a low sector P/E is appropriate. If the correct PE in this sector should be 6, and AWF delivers $7.5m its market capitalization would be $45m (or $1.38).

I think that generally a takeover offer is made on an EBITDA or EBIT multiple. This gives more an impression of the earnings capacity of the business. The gearing of the business after the takeover is of course up to the purchaser. The purchaser must decide how much of the underlying term debt of the company they have just purchased to pay back. In the case of Absolute IT, there doesn't seem to be any term debt to pay off. Furthermore I can't see anything unusual in what AbsoluteIT is paying in tax. So in this particular instance, your suggestion that AbsoluteIT was purchased on a certain PE ratio look valid. However, the purchase was not made on a multiple of FY2017 earnings alone. If you look at the bottom of page 54, the earn out payment is discussed, suggesting that the amount being paid is contingent on this year's results as well, and maybe even the previous year too (FY2016 about which we shareholders know nothing regarding AbsoluteIT). If the representative takeover PE is a lowly 6 that could be right for a much smaller stand alone business, The mere fact that a company is NZX listed does tend to result in higher PEs. That means I don't think you can extrapolate that PE of 6 to a much larger combined listed entity.

Another rationale for these takeovers is savings via synergy gains. But AbsoluteIT seem to be maintaining their existing market branch presence quite separate from Madison. So I am not sure if there are any synergy gains, other than the diversification of being in different markets that are not always in synchronization. Asynchronization implies a 'smoothing of earnings' effect, which is something that shareholders tend to like..

There's a group of companies with some earnings doubt, some bank debt and sufficiently large amount of good will that there is a huge gap between Equity/share and NTA/share on the balance sheet. Members of this group include AWF, EVO, GXH, MPG, SKT, TGH. The takeover rescued TGH but the rest are all down heavily this year. Mr Market is nervous around negative NTA companies with borrowing and is continuing to hammer them. AWF may become a buy around the same time some of these other downtrends end.

It is right to question the goodwill 'on the books', and company auditors do ask that this is done annually. In the case of the AbsoluteIT purchase, this only happened last year. So I am interested in the juxtaposition of you being worried that the AWF goodwill, which includes that from the AbsoluteIT purchase, is 'overvalued', while in the previous paragraph you had described the purchase price of AbsoluteIT as 'a steal'. I think you have to judge the goodwill on the books of any company on a case by case basis.

The thing that does raise my eyebrow though is the $7.465m of permanent 'Madison Brand' goodwill on the AWF Madison books. Compare that to the $1.980m of permanent 'AbsoluteIT' brand goodwill that came on board in FY2017, and compare the profitability of the two operations. Could a write down of some of that Madison brand goodwill be on the cards? Such a write down would put a real dent in the 2HY2018 results, even though it would be a 'non cash adjustment'.

SNOOPY

[Snoopy]

Just an off the cuff observation. Seems Madison has twice the staff and twice the daily deployments but aren't making twice IT's profit. So don't look well equipped to manage a census contract. Whereas AWF have twice their profit with a few extra staff - they seem the ones set up to run 3,000 census workers profitably.

Edit: GP per staff has Madison lowest ranked at $160,000 a staff and AWF the highest at $290,000 a staff member. That Madison acquisition not looking so good.

I actually thought that the AWF unit was the one doing the census job! That was until I read the presentation more carefully. I think that the intersegment work delegation is all part of the perceived blue collar /white collar culture gap. Send in an unmanicured gruff grizzle-head to collect a census form, or a freshly stuffed starched white shirt? Only one fits the image a government department collecting information might want to project, even if the gruff grizzlehead is equally capable. It would be a different story if the government was interested in trimming overgrowth in their citizen's back yards. The AWF gruff grizzlehead would undoubtedly be dispatched with clippers to do the lopping and no-one would bat an eye lid if our gruff friend relieved themselves against a recently hacked tree stump. OTOH our stuffed starched white shirt picking up a census form, and immediately urinating in the garden on the way out, might not match with the officialdom capability image sought?.

I think much of the poor performance for Madison over FY2017 relates to the double desk policy in Auckland where one junior staffer was hired for each existing consultants desk. And the existing more senior colleagues were expected to act as mentors as well as doing their own recruitment work. Simon Bennett indicated in his AGM talk that this policy had been taken too far too quickly, and that Madison had now 'got it right'. But we will see what Madison excuses are made (if any) at the end of the month for FY2018.

SNOOPY