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

[Snoopy]

Much prefer PPE on the asx - value AND growth.

PPE or 'People Infrastructure Limited', an Australian listed company, offers staffing solutions, business services and operational services:

• in speciality industry verticals where we can develop the market leading position; AND
• in industries with a strong growth profile.

From slide 15 of PR2020.

----------------------------

"As a result of Covid-19, People Infrastructure saw an immediate downturn in its business meaning that a number of its business units qualified for Jobkeeper support. As a result of this support People Infrastructure was able to keep a number of staff employed that would have otherwise been stood down or made redundant."

"• People Infrastructure received a total of $9.25m from Jobkeeper support of which
• $2m was paid to People Infrastructure internal employees. As a result of receiving this Jobkeeper support, People Infrastructure made the decision not to stand-down or terminate a large number of employees.
• $7.25m was paid to employees in the field. Over 50% of this relates to topping up hours for employees who did not work sufficient hours to be fully entitled to wages equivalent to their Jobkeeper payments. Further benefits were also passed directly onto clients.
• Senior management and the board took a reduction in salaries from April through until the end of June and have foregone bonuses for FY20, in keeping with the spirit of Jobkeeper and the hardships endured by their employees."

---------------------------

"Jobkeeper" is the Australian wage subsidy scheme introduced as a result of Covid-19. The $9.26m of assistance received over the period represents a 0.7 x $9.26m = $6.48m after tax adjustment. Compare that to net profit of $14.446m and it represents a 'profit boost' of:

$6.48m / ($14.446m - $6.48m) = +81.3%

That Jobkeeper subsidy certainly made a significant difference to the financial result for the year. However if we do the same calculation for AGL.NZX:

0.72 x $33.323m = $23.993m

$23.993m / ($11.237m - $29.993m) = -128 %

That minus sign indicates the NZ subsidy made all the difference between making a profit and making a loss.

Notwithstanding the fact that industries in which AGL and PPE operate are not strictly comparable (PPE is heavily exposed to Health and Community services - not a market for AGL), it is clear that AGL was far more affected by Covid-19 than PPE. One reason for this is that PPE has no term debt. For comparative purposes, AGL has effectively borrowed money to operate a business not operating on all cylinders. Thus AGL meets the cost of what is in figurative terms an 'underperforming engine', PLUS the interest costs on the capital required to buy it (a cost not faced by PPE).

Like AGL, PPE has an IT recruitment division about which they say this (slide 12 PR2020).

---------------------------

"The perm recruitment section of IT Division still has not entirely recovered and this is expected to occur in the next 6 months. This represents approximately 14% of People Infrastructure profit.
• The contractor section of the IT Division has experienced a more gradual decline and this is due to some client concentration in this part of the business.
• The IT recruitment industry as a whole has recovered strongly and we expect this to start being reflected in our numbers in the first half of FY21."

---------------------------

In summary, from an operational perspective overlaid with the Covid-19 shock, AGL is substantially underperforming both the PPE and HIT (see my post 880) Australian recruitment businesses.

SNOOPY

[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.

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.

It is hard to keep a good Keen(an) man down. An announcement to the market today ( 03-06-2021 ) states that Chairman Ross Keenan has just bought 50,000 more shares on market for a consideration of $67,500. That means the average purchase price for Ross's latest incremental purchase was:

$67,500 / 50,000 = $1.35

Nevertheless with Ross indicating that this year's AGM will be his last as Chairman, he will, after six months or so in retirement, be able to sell down his holding without further disclosure to the market, should he choose to do so. (Edit: although generally true I have realised that due to being a top 20 shareholder (and it looks like his wife is as well) we will indeed find out if the Keenans become less keen (sic) on AGL into their retirement).

Also supporting the share price is the promise to purchase 1,000,000 shares on market as part of the new CEO's long term performance incentive. So far just 76895 shares have been bought towards that 'million' goal. So plenty to go.

SNOOPY

[Snoopy]

From p6 of HY2021 report

"We have benefited from a suspension of the March 2020 final year dividend and the various cost reduction measures have had a significant impact. These included rent reductions, employee salary sacrifice, reduction in marketing spend and travel. Your Board also sacrificed fees of 20% for a 3-month period.

All sorts of claims were made by different companies about how much money was 'saved' by tightening the belt over the Covid-19 outbreak. Now the report card is out in the form of AR2021. To see what salary was actually sacrificed, I think it is a worthwhile exercise to go over the higher salary earners in AR2021 and compare the salaries paid to the equivalent total paid to the same number of people in AR2020. For combined salary sub totals, I will assume each salary lies in the middle of any declared salary band.

Salary Band	No. of Employees FY2021	Salary Band Total ($)	No. of Employees FY2020	Salary Band Total ($)
$100,000-$109,999	12	$1.260m	N/A	N/A
$110,000-$119,999	10	$1.150m	9	$1.035m
$120,000-$129,999	10	$1.250m	7	$0.875m
$130,000-$139,999	3	$0.405m	8	$1.080m
$140,000-$149,999	6	$0.870m	10	$1.450m
$150,000-$159,999	4	$0.620m	5	$0.775m
$160,000-$169,999	6	$0.990m	1	$0.165m
$170,000-$179,999	1	$0.175m	3	$0.525m
$180,000-$189,999	1	$0.185m	2	$0.370m
$190,000-$199,999	0		1	$0.195m
$200,000-$209,999	2	$0.410m	4	$0.820m
$210,000-$219,999	3	$0.645m	4	$0.860m
$220,000-$229,999	1	$0.225m	0
$230,000-$239,999	0		2	$0.470m
$240,000-$249,999	1	$0.245m	1	$0.245m
$250,000-$259,999	3	$0.765m	1	$0.255m
$260,000-$269,999	3	$0.795m	2	$0.530m
$270,000-$279,999	0		1	$0.275m
$280,000-$289,999	0		2	$0.570m
$290,000-$299,999	0		1	$0.295m
$300,000-$309,999	1	$0.305m	2	$0.610m
$330,000-$339,999	0		1	$0.335m
$360,000-$369,999	0		1	$0.365m
$380,000-$389,999	1	$0.385m	0
$480,000-$489,999	0		1	$0.495m
$660,000-$660,999	0		1	$0.665m
$690,000-$699,999	1	$0.695m	0
Grand Total	70	$11.375m	70	$13.260m

We can see from this table that the 'salary sacrifice' was real at:

$11.375m - $13.260m = -$1.885m.

Perhaps what is not so satisfactory was that in squashing down the salaries of the senior staff, CEO 'the Bennster' has somehow increased his own take home pay by $30k. Not a good look.

If we go to AR2021 p69, we can see that the directors took a $3k pay cut during the year, except for the Chairman who took a $6k cut. That works out at $18k in total.

Presumably over FY2022, those salary sacrifices and reduced board fees will be reversed. This will affect the NPAT for Accordant for FY2022 to the tune of:

0.72x -($1.885m + $0.018m) = -$1.370m

SNOOPY

[winner69]

Can’t wait Snoops ...hope the right hand column is greater than the middle one

[Snoopy]

From IR2021 p6.

"We have benefited from a suspension of the March 2020 final year dividend and the various cost reduction measures have had a significant impact. These included rent reductions, employee salary sacrifice, reduction in marketing spend and travel."

I am not clear whether the 'rent reductions', referred to above, represent the result of an arm wrestle with 'wedded to their ways' landlords who did not want to bend under Covid-19 pressure, or the rehousing and/or combination of existing business units into a more efficient office footprint.

p27 of AR2021 shows $2.264m of current lease liabilities at EOFY2021, verses $2.501m at EOFY2020. This would suggest the reduction in lease liabilities to be written off in the current year will be:

$2.501m - $2.264m = $0.237m

less than in the previous year (FY2020).

If this number was a reflection of the 'temporary rent reduction', shareholders might expect rent rates to be restored with a consummate:

$0.237m x 0.72 = $0.171m

of profit reduction in FY2022. However, it is not clear that any 'rent reduction' -as such- was ever granted.

If we look on p11 of AR2021

"Substantive COVID-19 response measures (including business changes, cost-containment, wage subsidy, reduction in working capital and the 12-month suspension in dividend) have allowed us to reduce our debt profile."

In this updated Covid-19 commentary, rent reduction isn't even mentioned. Even if it had been mentioned, my calculated $0.171m of prospective rent adjustment is very small. This means that for future earnings projections, I believe no restoration of supposedly previously charged higher rents would stand up to scrutiny.

SNOOPY

[Snoopy]

AWF Madison still claims to be the largest placer of workers in NZ. The competitive advantage of the company is said to be size and the fact that it is locally owned. That means it can react rapidly to local market dynamics.

Conclusion: Pass Test

'Accordant' colours up images of 'harmoney', 'being together', 'growing together', 'treating people with respect', 'nurturing their development' and 'driving around in a Honda Accord with a dent'. OK maybe the creators of that name didn't have that last image in mind, when they renamed the 'AWF Madison' company. But 'baking a cake' with a theme of 'personnel recruitment' is an image I can relate to. Our cake ingredient list consists of:

1/ AbsoluteIT: digital technology and software (branches Auckland, Hamilton, Wellington, Christchurch)
2/ Madison: entry level and support roles to professional and management positions (branches Auckland, Hamilton, Wellington, Christchurch)
3/ JacksonStone: Global executive recruitment up to CEO level (branches Auckland, Wellington)
4/ Select Recruitment: 'Matching people to jobs of all types' (Dunedin)
5/ AWF: Entry level, semi-skilled and skilled workers in 'blue collar' roles (on the end of a megaphone in Kaitaia, Kerikeri, Whangarei, Auckland, Waihi, Tauranga, Rotorua, Hamilton, New Plymouth, Hawkes Bay, Whanganui, Palmerston North, Petone, Wellington, Nelson, Blenhiem, Christchurch, and Invercargill) The former Dunedin branch has been incorporated into 'Select Recruitment' and the Hawera branch has been closed.

It is clear that the old name 'AWF Madison' was underselling what the company has become.

Competitors are the likes of 'OneStaff' (16 branches nationwide in the industrial and commercial recruitment space); Sheffield (Executive recruitment in Auckland, Wellington and Christchurch); Beyond Recruitment: Technology Transformation and Digital; Property Construction and Architecture, Human Resources, Accounting and Corporate support (Branches in Auckland, Wellington and Tauranga); and Ranstead: Accounting, Construction & Architecture, Education (Auckland, Wellington, Christchurch).

Accordant are not dominant in any recruitment sector. But they are a major player in all recruitment sectors - bar education and healthcare. As a top three player in all the recruitment sectors they choose to participate in, the passing of the 'company scale test' is not in doubt.

Conclusion: 'Pass Test'

SNOOPY

[Snoopy]

Just to show there is more than one way of doing things, I have slightly changed the way I am calculating underlying profit. I am now removing property plant and equipment sales profits/losses from all of my calculated profit figures.

2014: ($3.952m-$0.025m+0.72x($0.095m+$0.257m) )/ 25.805m = 16.4cps
2015: ($5.416m+$0.031m)/ 32.463m = 16.7cps
2016: ($5.202m+$0.008m)/ 32.463m = 16.0cps
2017: ($5.867m-$0.050m+0.72x($0.262m+$0.443m) )/ 32.463m = 19.6cps.
2018: ($5.048m+$0.224m-0.72x($0.170m) )/ 32.555m = 15.8cps


Notes:

1/ Due diligence cost for "Madison" removed from FY2014. "Madison Business" acquisition costs removed from FY2014.
2/ "Absolute IT" acquisition costs removed from FY2017. Legacy software write down removed from FY2017.
3/ Refund from partiual failure of AbsoluteIT earn out provision removed from FY2018 result.

Conclusion: Fail Test

I am now removing property plant and equipment sales profits/(losses) [$0.050m (FY2017), ($0.224m) (FY2018), ($0.064m) (FY2019), ($0.120m) (FY2020), ($0.038m) (FY2021)], reference Annual Report 'Section C5 or C6 Cash and Cash Equivalents', from all of my calculated profit figures.

FY2017: ($5.867m-$0.050m+0.72x($0.262m+$0.443m) )/ 32.463m = 19.6cps
FY2018: ($5.048m+$0.224m-0.72x($0.170m) )/ 32.555m = 15.8cps
FY2019: ($2.013m+$0.064m+0.72x($0.014m) )/ 33.423m = 6.2cps
FY2020: ($2.677m+$0.120m+$0.260m+0.72x($0.263m))/ 34.325m = 9.5cps
FY2021: ($6.197m+$0.038m-$1.370m+0.72x($7.000m - $1.285m) )/ 34.325m = 26.2cps


Notes:

1/ "Absolute IT" acquisition related costs expense ($0.262m) removed from FY2017. Legacy software write down ($0.443m) removed from FY2017.
2/ Refund from partial failure of 'AbsoluteIT' earn out provision ($0.170m) removed from FY2018 result.
3/ 'Select Recruitment' acquisition related costs ($0.014m) removed from FY2019 result.
4/ The after tax capitalising of leases cost, from IFRS16 ($0.026m) and acquisition related costs of purchasing JacksonStone ($0.263m) -refer AR2020 p68- removed from FY2020 result.
5/ The 'salary sacrifice' (my post 883 of $1.370m) has been reversed and included as an extra expense in the FY2021 profit result.
The impairment of 'Madison Goodwill' ($7.000m) has been added back to the FY2021 profit result. Against this, the gain from the lessening of the contingent consideration payable on the balance due to former owners of JacksonStone - $1.285m - has been removed.

Conclusion: Fail Test

SNOOPY

[Snoopy]

ROE= (Net Profit)/(EOFY Shareholders Funds)

2014: $4.180m / $20.763m = 20.1%
2015: $5.447m/ $35.931m = 15.2%
2016: $5.210m/ $36.274m = 14.4%
2017: $6.325m/ $36.935m = 17.1%
2018: $5.150m/ $36.859m = 14.0%


Conclusion: Fail test

FY2017: $6.325m/ $36.935m = 17.1%
FY2018: $5.150m/ $36.859m = 14.0%
FY2019: $2.087m/ $34.820m = 6.0%
FY2020: $3.246m/ $33.734m = 9.6%
FY2021: $8.980m/ $40.099m = 22.4%

Conclusion: Fail Test

SNOOPY

[Snoopy]

Net Profit Margin = Net Profit/Sales

2014: $4.180m /$148.691m = 2.81%
2015: $5.447m/$197.514m = 2.76%
2016: $5.210m/ $214.589m = 2.43%
2017: $6.311m/ $256.428m = 2.46%
2018: $5.153m/ $279.303m = 1.84%

This is a picture the opposite of what we are looking for. A sorry story of a five year weakening of net profit margins with barely any respite!

Conclusion: Fail Test

Net Profit Margin = Net Profit/Sales

FY2017: $6.325m/ $256.428m = 2.47%
FY2018: $5.150m/ $279.303m = 1.84%
FY2019: $2.087m/ $267.805m = 0.78%
FY2020: $3.246m/ $263.527m = 1.23%
FY2021: $8.980m/ $205.482m = 4.37%

The turnaround in profit margin form over the last three years looks good. However the bumper normalised profit over FY2021 is entirely due to the wage relief scheme which injected $33.323m of cash into the business over FY2021. Without this, FY2021 would have been catastrophic to the point where banking covenants would have been breached and there would have been a very real prospect of administrators being called in. The level of government assistance (over three times declared profit) suggests to me that it was really the government that pulled Accordant through FY2021 and not management. Sure management have contributed, with the sharing of floor space at AbsoluteIT and Madison (for example). But with government assistance pulled for FY2022, it will take until FY2022 wraps up before we can truly see the lasting damage that Covid-19 has done to the Accordant Group. For example, the closure of the borders to many migrant workers is potentially very bad news for Accordant. If we regard the profit margin for FY2021 as an externally band-aided aberration, the conclusion on this test becomes obvious.

Conclusion: Fail Test

SNOOPY

[Snoopy]

The above comments are from 05-02-2019, before the Full Year 2019 (or Second Half Year 2019) dividend payment. It is interesting to look at the half yearly operational cashflows since.

Finance Period	Operational Cashflows	'Dividend Declared' minus 'DRP Reinvestment' (1)
HY2015	$8.330m	($1.986m)
2HY2015	($2.145m)	($1.916m)
HY2016	$6.495m	($2.660m)
2HY2016	($4.437m)	($2.392m)
HY2017	$11.399m	($2.636m)
2HY2017	($3.773m)	($2.602m)
HY2018	$11.879m	($2.476m)
2HY2018	($0.370m)	($2.645m)
HY2019	$6.143m	($1.931m)
2HY2019	$3.334m	($1.906m)
HY2020	$6.875m	($1.959m)
2HY2020	$3.014m	Nil

(1) From the HY2018 dividend, the 'capital preserving' dividend reinvestment plan was introduced.

I have used operational cashflows because I believe that best reflects the picture of the ongoing business as a going concern. You can see from the above table that the old formula of 'borrowing to pay the second half dividend' has gone after 2HY2019. Dividends are now paid out of profits, (except in the case of 2HY2020 where the dividend has been withheld because of Covid-19 uncertainty). There was certainly money there to pay it to previous years levels had macro-economic conditions been different. The problem with tables like this is that all the information is historical. No-one, not even the Bennster, really knows how AWF will trade over FY2021. Sensibly he has pushed out the AGM from July to September. By then the Bennster should at least have an initial feel as to how things are going. My gut feeling is that there will be a capital raising. I think that the 'EBITDA'/I banking covenant is in danger of being breached. And that means buying in today at what in historical terms looks to be a good price, might not be the wisest thing to do.

Finance Period	Operational Cashflows	'Dividend Declared' minus 'DRP Reinvestment' (1)
HY2015	$8.330m	($1.986m)
2HY2015	($2.145m)	($1.916m)
HY2016	$6.495m	($2.660m)
2HY2016	($4.437m)	($2.392m)
HY2017	$11.399m	($2.636m)
2HY2017	($3.773m)	($2.602m)
HY2018 (1)	$11.879m	($2.476m)
2HY2018	($0.370m)	($2.645m)
HY2019	$6.143m	($1.931m)
2HY2019	$3.334m	($1.906m)
HY2020	$6.875m	($1.959m)
2HY2020	$3.014m	($1.919m)
HY2021	$21.950m	Nil
2HY2021	($0.053m)	Nil
HY2022	?m	($2.815m)

Notes

(1) From the HY2018 dividend, the 'capital preserving' dividend reinvestment plan was introduced.

I have used 'operational cashflows' because I believe that best reflects the picture of the ongoing business as a going concern.

There is something odd about those HY2021 / 2HY2021 results. The figure that stands out is the very high 'operational cashflow' over HY2021. If you look at the HY2021 cashflow statement, the big drop is the 'Payments to Suppliers & Employees' which dropped by nearly 20%, while the receipts from customers fell by just 7%. That 'explains' the dramatically improved cashflow over HY2021 but it doesn't explain what caused it.

	HY2021	2HY2021	FY2021
Declared NPAT less Impairment	0.72 x $7,000 + $3.172m = $8.212m	$3.025m	0.72 x $7,000 + $6.197m = $11.237m
less Wage Subsidy	0.72 x $11.000m= $7.920m	$16.073m	0.72 x $33.323m = $23.993m
equals Earned NPAT	$0.292m	-$13.048m	-$12.758m

Notes

1/ The impairment referred to above is a $7m write down of goodwill from the Madison business unit.

I thought that I had found the answer with the 'wage subsidy' going directly to paying employees, meaning the company did not have to pay those people from its own coffers (hence the big drop in payments to employees and suppliers). However if that were the explanation I would have expected even larger positive cashflows in the second half, as most of the wage subsidies were paid in the second half. In fact, cashflows from operations were negative in the second half! So I am still baffled as to what is going on here.

The 27th May 2021 full year report letter stated the reasoning behind reinstating the dividend.

"More recently, the Group has seen a significant increase in hiring activity across both temporary and permanent markets. Together with a robust year-end balance sheet, this has given the Board confidence to resume dividend payments (following a 12-month suspension) with an 8.2 cents per share final dividend"

My reading of that is that 'Things are looking up' BUT 'If we don't get the uptake in business that we hoped for then we can just borrow to pay the dividend'. By my way of thinking this is an 'operate and hope' business model that does not fill me with confidence, especially as the immediately preceding half year was 'cashflow negative'. Nevertheless the formula of 'borrowing to pay the second half dividend' that was there before 2HY2019 and had been done in many past years. So maybe it is some 'seasonal effect' that I do not understand?

My main concern with holding AGL as a 'good dividend payer' concerns the expectation for the restoration of a dividend of 16.2cps, as was the case pre-Covid-19. This dividend rate was well ahead of profits over FY2019 and FY2020. The reason that paying dividends greatly exceeding profits has happened in the recent past is that cashflow has supported this. And this 'extra cashflow' is largely determined by the amortisation of both 'Customer relationships' and 'Restraint of Trade' assets. If you look on p48 of AR2021 you will see that both of these amortisations have almost 'played out' (a total of $3.379m or 9.8cps left). Thus it would seem obvious that looking out beyond FY2022, dividends will be more closely tied to operational profits. Unless annual profits rise to around $6m per year on a consistent basis (a figure well beyond recent profitability), then dividends from FY2023 onwards could reduce.

SNOOPY