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

[Snoopy]

	eps	dps (imputed)
2014	16.2	15.6
2015	16.8	14.8
2016	16.0	15.2
2017	19.6	16.0
2018	21.6 (*)	16.2
Total	90.2	77.8
5 year Average		15.6

(*) Based on projected FY2018 NPAT earnings for the year of $7m.

For a leading market player in a nevertheless fragmented service profession I would accept a 7.5% gross dividend yield. However, with the vulnerability to weather permissible building projects as evidenced in the first half, I am pushing out my acceptable gross dividend yield to 8%

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

= (15.6c / 0.72) / 0.08 = $2.70

Last sale on the market was $1.80. Using this valuation model, I think AWF Madison is now trading at a 33% discount to fair value.

SNOOPY

discl: holder

The DRP announced recently is new information.

I have decided to modify my valuation based on an expected 10% share dilution as a result of the new DRP operating over the next four years. Clearly if the same dividends are going to be spread over an increased number of shares (11/10), then the value of the shares will decline by the reciprical of that factor multiplied by my previous valuation.

Fair value is therefore: 10/11 x $2.70 = $2.45

So FAIL FAIL FAIL

Hope you raise your ‘expected return’ to allow for risk when you come up with a reasonable price to buy more.

I have lowered my expected return to $2.45. That is still a good premium to the last market price of $1.90. AWF may have failed the Buffett growth model tests, but for this dividend hound, I still see value. I have taken a couple of bites over the last few months, and will look to accumulate more in the future. Very few shares are worth buying on the NZX at the moment. But I am still keen on AWF. At $1.90 the forward PE is only 12, based on current depressed earnings, and maybe 10 on more normalised earnings. You don't need growth going forwards if no growth is already priced in, and the investment can be justified on dividend yield alone.

SNOOPY

[Snoopy]

Bank debt in the FY2017 results announcement is as follows:

Cash & Cash Equivalents: {A}	$1.225m
Non Current Borrowings:	$33.500m
less Current Borrowings:	$0.0m
less Overdraft:	$0.108m
equals Total Borrowings: {B}	$33.608m
Total Net Borrowings: {B}{A}	$32.383m

Net profit after tax: $6.324m

MDRT = $32.383m/ $6.324m = 5.1 years

Quite a large increase in leverage at AWF in the last couple of years. The acquisition of "Absolute IT" last November funded by bank debt would have something to do with that. However going from and MDRT of 3.4 at EOFY2015 to 5.1 today I would see as a move up, but still within, the medium debt spectrum. Not too much to worry about here, but the debt situation deserves monitoring.

Net Bank debt in the FY2018 results announcement is as follows:

	FY2018
Cash & Cash Equivalents: {A}	$6.269m
Non Current Borrowings:	$36.000m
less Current Borrowings:	$0.000m
less Overdraft:	$0.000m
equals Total Borrowings: {B}	$36.000m
Total Net Borrowings: {B} - {A}	$29.731m
Net profit after tax {C}	$5.153m
MDRT {B} - {A} / (C}	5.8 years

The net debt has gone down, but the ability to repay debt has gone down as well :-(. I do prefer this figure to be less than five years. But with the DRP, AWF have taken measures to reduce debt going forwards. The debt situation should continue top be monitored. But there is nothing here to make me tuurn off my investment tap based on this information.

SNOOPY

[minimoke]

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

SNOOPY

"OneStaff is New Zealand's leading industrial recruitment agency. "

Beyond Recruitment = "We’re the largest 100% Kiwi-owned multi-specialist recruitment agency in New Zealand."

Parker Bridge = "As New Zealand's leading full-service Commerical Accounting, Professional Services and Executive & Business Support recruitment partner,"

They cant all be top dog

[Snoopy]

"OneStaff is New Zealand's leading industrial recruitment agency. "

Beyond Recruitment = "We’re the largest 100% Kiwi-owned multi-specialist recruitment agency in New Zealand."

Parker Bridge = "As New Zealand's leading full-service Commerical Accounting, Professional Services and Executive & Business Support recruitment partner,"

They cant all be top dog

They are top dog if you include all the white collar and blue collar placements combined.

SNOOPY

[Snoopy]

I finally found time to play the webcast of the AGM.

http://www.awfmadison.co.nz/video-aw...ting-july-2018

I somehow think it would be better if Keenan and Bennett would just publish the text of their speeches straight, rather than taking us through all the video banter. But I guess we wouldn't know that just retired director Ted van Arkel is now the proud owner of a personally named AWF high visibility vest without that! Also we learned that this is to be Ross Keenan's last year with the business.

Nevertheless as a shareholder a few useful things were clarified for me.

I have read Simon Bennett's CEO report in AR2018 twice now, and I have to admit a new cloud of confusion has descended as a result to baffle me.

Bennett gives a backhanded serve to the new labour lead government. He mentions something about employing triangles.

The 'Triangular Employment" proposed legislation will give contractors the same rights as employees. While being open to this as 'emerging legislation', I took Simon Bennett's tone of this change to be negative for AWF. However, later on answering a shareholder's a querstion about the 'LSG Sky Chefs' (suppliers of catering to airlines docking at Auckland Airport) court case, in which the temps were not supplied by AWF, Bennett's tone changed.

http://www.etu.nz/labour-hire-court-win-lsg-sky-chefs/

Bennett said AWF tendered for this contract, but were well beaten. Part of the problem is that the 'successful' agency was paid a lump sum and subsequently dished this straight out to their 'independent contractors' leaving it to the workers to pay their own tax. The IRD are never happy when they fail to get their slice! Bennett took the view that industry regulators were not at the top of their game, and that the suppliers of blue collar workers may require to be licenced in the future. This could play into the hands of the more responsible industry participants like AWF. He also said that the Skychef's case highlighted the need for health and safety and holiday's act compliance, both of these being a focus for AWF but not for some of their 'fringe' competitors.

Bennett said pricing Blue Collar work was difficult when there are few industry standards. He left the impression that Triangular Work agreements might actually end up playing into the hands of AWF, as the 'fringe competitors' failed to cope.

Then goes into a long diatribe on the latest buzz-phrase 'Managed Service'. Please feel free to correct me if I have this wrong.....

'Managed Service' is about managing a long term temporary workforce. (it is always worrying when I open a paragraph with a tautology). Put simply, AWF lends workers to an organization, then takes the worker back to redeploy elsewhere. However the place to which the worker was originally deployed is 'kept in the loop'. They are told where the worker has been sent to, what new training they are getting and how their skills are developing. The idea is that later that same worker can go back to where they were originally deployed, as an upskilled higher paid more desirable 'work unit'. And that previous employer deployments are kept salivating as they embrace the career development of their former charge.

"For the candidates or workers , it allows certainty for periods of work with the client and future opportunities as they cycle out of the assignment."

How does cycling in and out of an assignment create certainty for the worker again?

'Managed Service', as pioneered in scale on the census contract, required the contracting company (AWF Madison) to:

1/ Assess
2/ Deploy
3/ Manage and
4/ Pay

the contracted staff. This is a far cry from delivering staff to the door of the department of statistics and collecting a one time fee. AWF were also reponsible for the training and replacement of census employees. He also predicted that margins would rise once the customers realised just what they were paying for. NZ has only about half the 'contingent workforce', in terms of the percetage of such people employed, that Australia has. So 'managed service' could well be the 'growth engine' for Madison going forwards.

Bennett noted that the best market conditions for the AWF Madison group was not when the economy was doing best, as there was a fall off in demand for contingent labour in thes circumstances. The exception to this observation was in the IT space where 'Absolute IT' were going gangbusters irrespective of business confidence. 'Absolute IT' are currently no.1 in IT placement within NZ. Bennett notes that the business is changing. Artificial Intelligence, Technology, Machine Learning and the very nature of work could be seen as threats. But Bennett sees these changes as opportunities.

AWF are very pleased to have ASB as their new bankers, and plan to renew their banking facilities early.

Asked about future acquisitions, once the debt is paid down, Bennett suggested that something in the 'service space', perhaps bringing some of the compliance procedures 'in house' could be on the agenda, ahead of buying out an agency competitor. Asked about the threats from the software space (for example 'Linkedin' and 'Seek') Bennett said he saw the real value of AWF in the personal referrals, contacts and deep knowledge of the local market. These personal contact advantages, he did not think were under threat from generic algorithmic software tools.

SNOOPY

[minimoke]

The 'Triangular Employment" proposed legislation will give contractors the same rights as employees. While being open to this as 'emerging legislation', I took Simon Bennett's tone of this change to be negative for AWF.

This is not emerging legislation . It has been around since the last Labour Govt with Darien Fenton
[QUOTE=Snoopy;726847]However, later on answering a shareholder's a question about the 'LSG Sky Chefs' (suppliers of catering to airlines docking at Auckland Airport) court case, in which the temps were not supplied by AWF, Bennett's tone changed.

...

Bennett said pricing Blue Collar work was difficult when there are few industry standards. He left the impression that Triangular Work agreements might actually end up playing into the hands of AWF, as the 'fringe competitors' failed to cope.[QUOTE=Snoopy;726847] Hopefully Bennet explained to you that the laws only apply to good employers who follow the laws. The Sky Chef arrangement was dodgy from the start and Labour Inspectors should have been all over this. Same as the Plastic company that also exploited these types of arrangements and made the owner megabucks on sale of the company.

Hopefully he explained to you the new law will put labour hire people (employees and "contractors) on the same footing as the main employers own employees. That pulls the rug out of the main competitive advantage labour hire companies have over employers running their own in-house pool of temps.

'Managed Service', as pioneered in scale on the census contract,

Nothing "pioneering " in htis model. It may be that its just AWF's first shot at it. required the contracting company

He also predicted that margins would rise once the customers realised just what they were paying for.

Seriously? AWF had not already sold the benifits of the solution and hte value of it already? Cripes.

NZ has only about half the 'contingent workforce', in terms of the percetage of such people employed, that Australia has. So 'managed service' could well be the 'growth engine' for Madison going forwards.

Thats comparing apples with carrots

[Snoopy]

Hopefully Bennet explained to you that the laws only apply to good employers who follow the laws. The Sky Chef arrangement was dodgy from the start and Labour Inspectors should have been all over this. Same as the Plastic company that also exploited these types of arrangements and made the owner megabucks on sale of the company.

Well, LSG Sky Chefs got their comeuppance through the courts in the end. I am not sure at what point the inspectors should have pulled Sky Chefs up. But I think this very point of better governmental oversight was the 'positive' that Bennett saw for the reputable operators going forwards.

And if that plastics guy is the one I am thinking of - the one who sold his plastic storage box manufacturing business to the Americans - did he not include in that sales agreement, a number of job years guaranteed for his NZ employees, with the rentention of their existing wage rates and conditions? He sounded like a guy who really wanted to look after his ex-workers!

Hopefully he explained to you the new law will put labour hire people (employees and "contractors) on the same footing as the main employers own employees. That pulls the rug out of the main competitive advantage labour hire companies have over employers running their own in-house pool of temps.

Nothing "pioneering " in this model. It may be that its just AWF's first shot at it. required the contracting company

I guess it is hard to compete with a customer who has their own pool of temps. The reason that AWF exists is that most companies do not have their own pool of temps. Once a business gets large enough, I guess having your own pool of temps will always be the better option. This evolution sounds like 'par for the course' for any sufficiently growing client customer though.

Curiously both the Department of Statistics and Inland Revenue are both reasonably sized organizations. Yet both have now chosen to go with AWF 'Managed Service' for some parts of their operations, whereas before they did their own recruiting hiring and firing. This must be positive for AWF's 'Managed Service' offerings going forwards?

Seriously? AWF had not already sold the benifits of the solution and the value of it already? Cripes.

I don't think it was a question of AWF not selling the benefits of offering superior health and safety and making sure all the payments to contractors included the right holiday pay. I think it was a question of rival firms offering cheaper deals that did not take health and safety seriously enough, and ended up incorrectly calculating contracted staff entitlements to 'save money'. IOW Bennett thought that those who went for the 'cheaper option' have now learned their lesson and would come back to AWF.

SNOOPY

[minimoke]

One side of the triangle's view: https://www.stuff.co.nz/business/107...-job-earn-less

[winner69]

Snoops .......do you think that one day things will go alright with Allied with having to report bad news

Looks like profits going backwards again

http://nzx-prod-s7fsd7f98s.s3-websit...389/288702.pdf


Could call these one offs and show normalised profits going gangbusters so no worries

[Snoopy]

Snoops .......do you think that one day things will go alright with Allied with having to report bad news

Looks like profits going backwards again

http://nzx-prod-s7fsd7f98s.s3-websit...389/288702.pdf


Could call these one offs and show normalised profits going gangbusters so no worries

So we quietly crept up to $1.89 in anticipation of the half year result. Then today we are back to $1.82, about where we have been bumping along post the last dividend payment. The profit forecast announcement was a bit ambiguous to me. I get the $800,000 provision against two building companies in Christchurch and one in Auckland going bad. Although I note with interest there has been no change in management announced as a result. No 'fall guy' this time! Next they say:

"The costs of repositioning our (temporary) workers and those not immediately deployed in the first six months was approximately $1.0m."

then they say

"We expect the impact on the AWF Madison group business will mean a half year profit will be $1.0m to $1.5m lower in the first half year."

$800,000 + $1,000,000 = $1,800,000

If all of those costs are tax deductible then I get a net profit effect of:

0.72 x $1,800,000m = $1,296,000m, say $1.3m

So why the vagueness of a projected $1.0m to $1.5m net profit reduction?

The half year ended on 30th September. So with 'books closed', it seems odd that AWF can't be a bit more precise with what is happening. Perhaps they are trying to diddle their full time temps out of holiday pay to appease shareholders, and are not quite sure if they can get away with it yet? I as a shareholder would abhor such behaviour. The $800,000 provision seems firm. But why is there a 50% 'unknown' concerning the half year net profit? Is there some other legal fiddle that AWF can do that will reduce or increase these losses to window dress the accounts?

Last years's interim net profit for six months was $3.418m. So we are looking at between $1.648m and $2.148m for HY2018? That is a fall in profit of between 37% and 52%! Ouch , and double ouch because HY2017 was down on HY2016 as well! Last years interim dps was 8cps. I am picking that with the DRP in place AWF will swallow the dead rat and keep the interim dividend steady. I only say that because of the positive outlook the company has, with the purchase of 'Select', an established permanent and temporary recruitment agency in Dunedin. They wouldn't be splashing out money on that without having a fairly clear idea that earnings for the full year will be back on track.

I had a quick look at the 'Select' website:

https://www.select.co.nz/

I see the long standing CEO (20 years in the job) Karen Bardwell passed away suddenly in December 2017. Looks like a one branch operation based in Dunedin. 13 staff have their own website profiles so quite a good sized operation. AWF Madison don't do white collar recruiting in Dunedin, so it looks like a good fit. I wonder how much AWF Madison paid for it?

SNOOPY