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

[Snoopy]

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'.

It is interesting is to compare the 'on the books' goodwill with the revenue each division is estimated to generate

	Madison	AbsoluteIT	AWF	JacksonStone	Total
Brand value	$7.465m	$1.980m	$0m	$1.029m	$10.474m
Goodwill	$20.223m	$7.836m	$11.212m	$5.797m	$45.068m
Grand Total					$55.452m
Revenue	$71.1m (1)	$67.5m (2)	$97.448m	$33.025m

Calculation Notes

(1) Estimated Apportioned revenue for Madison $138.569m x 51.3% = $71.1m.
(2) Estimated Apportioned revenue for AbsoluteIT $138.569m x 48.7% = $67.5m

What becomes obvious now is that the 'Goodwill' and 'Brand Value' attributed to Madison looks way out of proportion to the revenue generated (In comparison with 'AbsoluteIT' and 'JacksonStone') . And all of these goodwill and brand value figures are pre-Covid!

Now let me lay my cards on the table. I have been an investor in AWF Madison for five years. I like the capital light business model. I think the business model will have future in the post Covid-19 world. With so many job applicants to sort through I think more and more companies will use the services of the likes of AWF Madison. But any business is a bad investment if you pay too much for it, no matter how good the business model. I fear that in another era, without the benefit of hindsight, AWF might have done just that when they acquired Madison in FY2014. And I fear that shareholders may soon have to face up to that fact. It won't stop AWF Madison being a good investment longer term if the book value of that base investment is reduced. But in the short term at least that could mean pain for shareholders.

The half year result has proved me right: The 'Madison pain' has arrived.

From p5 HYR2021

"The large drop in permanent fee revenue in Madison has reduced the size of the business and we do not expect the business to recover fully this financial year. We predict it may well take a further 18 months. This recovery will likely be through the temp channel, rather than permanent recruitment. As a generalist and low to mid-level recruiter, there is a tendency for clients to attempt this recruitment themselves in the early stages of a recession. This has reduced the carrying value of Madison with a resulting goodwill impairment."

So management has 'bitten the bullet' on Madison goodwill, albeit not to the extent I thought they might. So how does the $7m hit on Madison goodwill reflect in the overall goodwill picture at Accordant?

	Madison	AbsoluteIT	AWF	JacksonStone	Total
Brand value	$7.465m	$1.980m	$0m	$1.029m	$10.474m
Goodwill	$13.223m	$7.836m	$11.212m	$5.797m	$45.068m
Grand Total					$55.452m
Net Profit Margin (on acquisition)	4.1%	3.1%		7.2%
Revenue FY2020	$71.1m (1)	$67.5m (2)	$97.448m	$33.025m

Calculation Notes

(1) Estimated Apportioned revenue for Madison $138.569m x 51.3% = $71.1m.
(2) Estimated Apportioned revenue for AbsoluteIT $138.569m x 48.7% = $67.5m

Goodwill is created at the time a business is acquired. This is why the net profit margin at the time of acquisition is important. The more money a business is making, the more a buyer is prepared to pay for that business over and above asset value. Therefore the more goodwill will be created in such an acquisition. (note that there is no net profit on acquisition in relation to AWF, because AWF was never acquired. (AWF was the base from which all the other businesses grew from).

When goodwill at Madison was reassessed, the projected growth rate and terminal growth rate of cashflow, both 1.5%, were unchanged. However (from p17 HY2021):

"a revised discount rate of 7.62% was applied, assessed by a third-party, down from a rate of 9.14% at 31 March 2020. The reduction in the discount rate is a combination of lower risk‑free rate of return and an improvement in the Group’s gearing ratio."

That quote is interesting because a lower discount rate generally increases the value of future earnings and supports the value of any goodwill on the books. However, the fact that goodwill has been reduced as a result of these discount rate changes suggests that the projected earnings for Madison must be negative in the near future. If my interpretation is right, then surely the remaining $13.223m of Madison goodwill remains under threat. I don't think Accordant have fully face up to the goodwill book value issues of those Madison assets

SNOOPY

[nztx]

Thanks for the analysis Snoopy .. been out of this one for a while

A lot better looking & rewarding prospects elsewhere & also in the US markets

[Snoopy]

Our Chairman, Ross Kennan, has had a couple of bites of the equity pie in the last few weeks. A 2nd July disclosure showed he bought 10,000 shares for $13,600. That works out at $1.36 per share. That follows on from the purchase of 14,016 shares declared on 30th June for $20,320.20 at an average buy price of $1.45. These purchases have not inspired the market though. The share price closed at $1.29 on Friday. The chances of getting a cash issue away at $1.30 to strengthen the balance sheet look slim now.

I am now picking a 1 for 2 cash issue at $1 to raise $15m. Some of that might be wiped out immediately by, I am picking, a write-down of the 'Madison' white collar goodwill.

Our Chairman, Ross Keenan, has once again been busy on the market. On 3rd November he paid $29,000 for 20,000 shares. That works out at $1.45 per share. Looking at the recent share trading chart, that trade seems to have happened on October 30th. I guess it took a few days before that information was fed back to the share registry? The half year announcement came on 29th October. So 30th October would be within the window for 'good keen insiders' to accumulate shares. Following the announcement I notice that the AGL share price spiked to $1.50. Post Covid-19, $1.50 has become a share trading resistance point. With the uncertainties facing this business going forwards, I can see why Mr Market is not keen to bid the share price up further than $1.50. Save for a few 'Sharesies' players, it would seem that Ross Keenan was Mr Market last week. Since the half year results announcement,, the AGL share price has slumped back again to $1.35. $1.35 is where it ended up when bouncing back from the worst of the Covid-19 shock. My message from that is that the non-Kennan Mr Market is underwhelmed by the the heavily wage subsidised recovery so far.

I was right about the write down of the Madison goodwill, although I thought the goodwill write down might be even greater. Will I be right about the cash issue as well? Debt has come down a lot faster than I thought, mainly it seems as a result of the government wage subsidy cash injection. That allowed other money to be funnelled into debt repayment. Will business pick up enough to offset the loss of the wage subsidy going forwards? I guess the ASB, AGL's bankers, will have something to say about a cash issue if it doesn't.

SNOOPY

Discl: Still holding. Wanting more clarity into the future before I buy more

[na2m1]

man snoopy is reallyy providing in depth insight on AGL

[nztx]

Wonder if anything has changed since the Guy Last Year flew through the Bomb fire .. ?

SP last Nov 5th 2020 - $1.35
SP 24 Mar 2021 - $1.28

Net Move - ($0.07)


Only NZX Announcement since last Nov in March - Group Co Secretary retiring

Dividend still remains suspended - Last Pay Nov 2019

Coming up to 5 months of next to Nothing .. Fairly inspiring sort of stuff - huh ..

I'll leave Snoopy to make some further entries on AGL's CV here ..

[winner69]

Had a quick check on AGL share price today

Still seems to be languishing

Must be cheap as though - they intend to buy 1,000,000 shares themselves

What's up Snoops me old mate

[Snoopy]

Had a quick check on AGL share price today

Still seems to be languishing

Must be cheap as though - they intend to buy 1,000,000 shares themselves

What's up Snoops me old mate

Ever heard the story 'A tale of two numbers?'

The story goes something like this. On 26th June 2015, a young bright eyed and bushy tailed new CEO called Simon 'Bennster' Bennett took the reins of 'whatever this company was called then'. The share price was $2.35. Today, five and bit years later, the share price is $1.40. Dividends have been suspended. A new CEO is being sought. I think those two numbers tell you most of what you need to know Winner!

However, rather than sack Bennett, he is being kicked upstairs. There will be another ex-CEO on the board, (To add to the critical eyes of Simon 'Hullster' Hull and Wynnis 'Madi' Armour). Great for spooking the next CEO incumbent! Dear old Founder Chairman Ross Keenan, our famous 'Good Keenan Man', who, I must say, was the only director to express their support for the company by buying shares over the last year, is headed for the board room exit.

Those 1,000,000 AGL shares being sought 'on market' will be a reward for the next CEO as part of the long term rewards system within the company. I imagine 'The Bennster' didn't do particularly well with his equivalent version of the same plan. So it would be prudent for executive recruitment to keep that share price nice and low for a while, so the next CEO is able to maintain hiser long term focus.

The one positive of this announcement is that at least their bankers (ASB) must have approved the cash for this buyback. There was still $15m in borrowings on the balance sheet at the half year (30-09-2020), I imagine the recruitment market will be in a soft state, with all those temporary seasonal workers the likes of AWF have brought in for 'help with harvesting' permitently excluded. Yet the entire Accordant Group must still be generating enough cash to keep those lights burning in the Bennster's den. Phew!

SNOOPY

[Snoopy]

On 26th June 2015, a young bright eyed and bushy tailed new CEO called Simon 'Bennster' Bennett took the reins of 'whatever this company was called then'. The share price was $2.35. Today, five and bit years later, the share price is $1.40. Dividends have been suspended. A new CEO is being sought

We have a new CEO! A 'price sensitive' announcement. The share price went down 1c today. Is that good?

https://www.nzx.com/announcements/372519

"Jason has served as Group CEO and Co-Founder of Optic Security Group, Australasia’s leading converged security provider designed to mitigate the risks of Cyber and Operational Security for both Government and Enterprise organisations."

"He is a charismatic sales leader with significant success in scaling businesses and teams with strong culture."

Keenan said that Jason Cherrington demonstrated: "a willingness and capability to lead by a hands-on style with emphasis on growth whilst taking a highly motivated team with him."

On his appointment, Jason Cherrington said he was:

"Excited to join a business that is well-placed to respond to rapid changes in the employment and labour market." “As many of us have recently experienced, the changing nature and definitions of how, when and where we work signals a growing need to ensure that Aotearoa attracts, retains and optimises the essential talent needed to fuel our economic and well-being success”, he said. “I am therefore excited to join a business I feel is uniquely placed to deliver on the challenges of that dynamic market need,"

Wow, just wow that sounds fantastic! But what did he say? Jason's previous experience with security nets and mention of the 'scaling business' would suggest he is just the man to reNew Zealandise the local fishing industry. A way to squeeze out those Covid laden Russian seamen that seem to work our vessels. I sure hope he can do it. If not, I guess he just joins the board in due course?

SNOOPY

[nztx]

We have a new CEO! A 'price sensitive' announcement. The share price went down 1c today. Is that good?

https://www.nzx.com/announcements/372519

"Jason has served as Group CEO and Co-Founder of Optic Security Group, Australasia’s leading converged security provider designed to mitigate the risks of Cyber and Operational Security for both Government and Enterprise organisations."

"He is a charismatic sales leader with significant success in scaling businesses and teams with strong culture."

Keenan said that Jason Cherrington demonstrated: "a willingness and capability to lead by a hands-on style with emphasis on growth whilst taking a highly motivated team with him."

On his appointment, Jason Cherrington said he was:

"Excited to join a business that is well-placed to respond to rapid changes in the employment and labour market." “As many of us have recently experienced, the changing nature and definitions of how, when and where we work signals a growing need to ensure that Aotearoa attracts, retains and optimises the essential talent needed to fuel our economic and well-being success”, he said. “I am therefore excited to join a business I feel is uniquely placed to deliver on the challenges of that dynamic market need,"

Wow, just wow that sounds fantastic! But what did he say? Jason's previous experience with security nets and mention of the 'scaling business' would suggest he is just the man to reNew Zealandise the local fishing industry. A way to squeeze out those Covid laden Russian seamen that seem to work our vessels. I sure hope he can do it. If not, I guess he just joins the board in due course?

SNOOPY

And on today's Reports back to Dividend paying territory:

https://www.nzx.com/announcements/372980

The 30 June 8.2 cps looks like fully imputed as well (as plenty of tax credits in the bank)

[Snoopy]

AWF really took a hammering on the market today, down over 10%, albeit on just 28,770 shares. The share price is back to early April 2020 levels now. I wonder if the market is looking at how AWF might continue to service their substantial debt? I took a guess that the Bennster would have the finances for AWF on the right track by EOFY2020. So how did it all work out?

Financial Year	2015	2016	2017	2018	2019	2020
EBITDA (Snoopy produced *) {B}	$12.729m	$11.945m	$12.751m	$11.751m	$7.679m	$11.593m
Finance Cost {C}	$2.109m	$1.333m	$1.193m	$1.297m	$1.380m	$1.584m
Interest Coverage {B}/{C} (target >3)	6.0	9.0	10.7	9.0	5.6	7.3
Net Bank Debt {D}	$18.608m	$21.870m	$32.383m	$29.731m	$26.643m	$29.822m
Leverage ratio {D}/{B} (target <3)	1.5	1.8	2.5	2.5	3.5	2.6

(* I calculated EBITDA from the income statement using the formula: EBITDA = NPBT + I (not including lease expenses) + DA. Likewise finance cost 'I' does not include lease expenses)

The banking covenants look to be back on track, but only if you include 'Lease Depreciation' as part of the depreciation charges. However debt is still high, and won't go away until it can be paid off. So the big question is can EBITDA be maintained for FY2021, so that the bank maintains their confidence that debt load actually is manageable going into the future?

The dividend reinvestment plan raised a useful $1.703m in new capital over FY2020 (up from $1.569m in FY2019).

To answer the pivotal question first: EBITDA was more than maintained for FY2021

Financial Year	2017	2018	2019	2020	2021
EBITDA (Snoopy produced *) {B}	$12.751m	$11.751m	$7.679m	$8.795m	$14.230m
Finance Cost {C}	$1.193m	$1.297m	$1.380m	$1.502m	$0.723m
Interest Coverage {B}/{C} (target >3)	10.7	9.0	5.6	5.9	19.7
Net Bank Debt {D}	$32.383m	$29.731m	$26.643m	$29.822m	$13.205m
Leverage ratio {D}/{B} (target <3)	2.5	2.5	3.5	3.4	0.93

Notes

1/ Historically (up to and including FY2019), I have calculated EBITDA from the income statement using the formula: EBITDA = NPBT + I + DA.

2/Following the introduction of IFRS16, which had the effect of turning what were 'rent expenses' into a 'right of use asset depreciation' with an associated 'interest on lease liabilities', I have had to adjust the 'annual interest change' and 'annual depreciation charge' to remove this effect.

FY2020: EBITDA = NPBT + I + DA = $3.897m+($2.084m-$0.582m)+($6.194m-$2.798m) = $8.795m (with I=$1.502m)

FY2021: EBITDA = NPBT + I + DA = $10.929m+($1.228m-$0.505m)+($5.286m-$2.702m) = $14.230m (with I=$0.723m)

Not paying dividends for a year has brought the banking covenants well and truly under control. Yet more important than this was the $33.323m received in wage subsidies during the year (AR2021 p19). Without that subsidy from the government, those banking covenants would have been busted.

SNOOPY