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

[Snoopy]

And there was me thinking construction and civil were booming industries. I'm not sure what legislative compliance costs they are referring to - cant think of too many recent changes.

Probably just catching up with the implementation of what has been already legislated. Listening to the MDs AGM address from 2017, he said that even unqualified construction road workers have to be assessed as being "construct safe" (an industry procedure).

Followers of this stock need to follow the Triangular Employment relations bill going through parliament, as well as minimum wage

Why? Don't AWF "clip the ticket" no matter what the underlying wage rate is?

SNOOPY

[minimoke]

Probably just catching up with the implementation of what has been already legislated. Listening to the MDs AGM address from 2017, he said that even unqualified construction road workers have to be assessed as being "construct safe" (an industry procedure).

Thats not a legal requirement

Why? Don't AWF "clip the ticket" no matter what the underlying wage rate is?

SNOOPY

Generally clipping is done on a % basis. So there is a compounding effect when costs go up - which makes labour hire less attractive.

[Snoopy]

Thats not a legal requirement

Having a road worker passed as "Constructsafe" may not be in the legislation. But employers can choose their own standards. In the case of the NZ Transport Agency, from their website:

https://www.nzta.govt.nz/safety/zero...ctsafe-update/

"ConstructSafe provides a consistent and transparent way to independently check the competency of any person on site, regardless of their employer. It provides all of us with reassurance that those that are working on our sites are competent and safe to do so. ConstructSafe is not a training course; it helps us to ensure that training programmes meet the needs of our industry."

"From 1 July 2016, the scheme will be principal’s requirement for new and existing projects and contracts. There will be a 12-month implementation period to allow our supply chain partners to plan how people will access testing and how to increase the capability of those not meeting the Tier 1 (Foundation Health and Safety) competency standard."

So whether it is a legal requirement or not, workers on NZ Transport Agency projects will not be employed unless they are "ConstructSafe".

Generally clipping is done on a % basis. So there is a compounding effect when costs go up - which makes labour hire less attractive.

Yes, but are you not assuming that there is plenty of labour available? One of the remarks that CEO Simon Bennett made in the AGM 2017 speech

http://www.awfmadison.co.nz/video-aw...ting-july-2017

was that, unlike the old days, they had jobs for every competent man or woman who sought them. I deduce from that that if you want a skilled worker you now have to pay up. So AWF will clip a juicier ticket, thus increasing their profits. Roll on wage rises for skilled workers'....

SNOOPY

[Snoopy]

What margin are they achieving in the core business?

Divisional Net Profit Margin	FY2014	FY2015	FY2016	FY2017
AWF Net Margin	2.893%	2.706%	2.339%	2.990%
Madison Net Margin	1.788%	3.673%	3.040%	0.913%
Absolute IT Net Margin				2.931%
Net Margin Error: Modelled vs Derived	+2.38%	-11.5%	-5.44%	+5.23%

'Net margin' is 'divisional net profit after tax' divided by 'divisional turnover'.

SNOOPY

[minimoke]

was that, unlike the old days, they had jobs for every competent man or woman who sought them. I deduce from that that if you want a skilled worker you now have to pay up. So AWF will clip a juicier ticket, thus increasing their profits. Roll on wage rises for skilled workers'....

SNOOPY

You can keep clicking teh ticket until costs get so high automation or process redesign becomes economic

[Leftfield]

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

Appreciate your good work on this Snoopy. On a FA basis you may have found an unloved, undervalued stock, however, on a TA basis the Trend does not look to be your friend........yet?

I would be waiting for a 'golden cross' signal before getting too excited.

Disc - non holder.

[Snoopy]

Divisional Net Profit Margin	FY2014	FY2015	FY2016	FY2017
Madison Net Margin	1.788%	3.673%	3.040%	0.913%

It is an open secret that net margin crashed at Madison over FY2017. Simon Bennett's speech revealed what happened. All the 'hot shot' sales people in Auckland were run off their feet. So Madison decided to ramp up growth by putting a new person alongside every successful one and told them to go out and get new business while under the watching eye of a successful mentor. Business did not increase as expected and many of the underling 'growth staff' had to be laid off. Madison have 'learned their lesson' apparently.

Further on in the speech, Bennett outlined the very different business dynamics in the different business units. AWF is almost 100% a temping business. Madison is almost 50/50 temporary and permanent worker placement. Permanent employee placement means 'make a placement', 'get a fee' and then you have to start again. There is much more continuity, from an AWF Madison perspective, from running temp workers. The Madison business unit will therefore always be more volatile than the AWF business unit from an earnings perspective. The second half of the year FY2018 covered the period of the general election, and the coming to power of the Labour lead government. Traditionally the coming of a Labour government is unsettling to big private employers. Hiring decisions will be put on hold. So I am expecting a relatively poor performance from Madison again over FY2018 for new placements. As Simon Bennett so aptly put it:

"You live and die on those deals."

But on the temping side, I expect Madison to have a boost in the second half, because of the one off Census contract. Statistics NZ were hoping for 50% of us filling in the forms on line. Any less than that and AWF Madison should do consummately better than expected. More people will need to be hired on the ground to follow up! It will all be a one off though.

SNOOPY

[winner69]

Snoops - the company says FY18 (just completed) to be less than FY17. Your model has it higher

You than go on and think that FY19 will be a struggle as well .....maybe FY19 will be less than FY18

Doesn’t that suggest your 33% undervaluation ( to your dividend model) is a bit awry? Maybe hoping dividends will remain pretty high is a bit optimistic

[Snoopy]

Snoops - the company says FY18 (just completed) to be less than FY17. Your model has it higher

I have just read the March 1st press release Winner.

"As a consequence of the above, profit, as at 31 March 2018, is expected to be behind that of the prior year."

But what figure are they referring to when they say the prior year? One thing you may not have considered is that the acquisition 'Absolute IT" was only on the books for five months of FY2017. If you look on p55 of AR2017, you will see that the reference earnings performance for comparison with previous years will be $7.5m, not the actual profit declared for FY2017. My earnings projection for FY2018 is $7m, so it is a reduction.: A 7% reduction on the previous year.

You than go on and think that FY19 will be a struggle as well .....maybe FY19 will be less than FY18

On the contrary. I expect the performance of Madison will improve, albeit from a low base, once private business figures out the Labour lead government isn't so bad. 'Weather permitting', with construction still growing, I don't see why AWF shouldn't improve too.

Doesn’t that suggest your 33% undervaluation ( to your dividend model) is a bit awry? Maybe hoping dividends will remain pretty high is a bit optimistic.

The dividend capitalisation model is a crude tool, that is true. But I am basing my valuation on average dividends over the business cycle of 15.6cps. Over FY2018, the actual payout was 16.2c over the financial year. So I am modelling dividends to be modestly (4%) less than those paid over FY2018. The dividend capitalisation model does not depend on actual profits. But I put them in there anyway so that investors could see if their dividends were covered. The historical dividend payout ratio has been 86% averaged over the five years. I think it will take a significant fall in earnings for the directors to reduce dividends below 15.6c annually. So in this instance I feel the dividend capitalisation model gives a valuation that is credible.

The fly in this dividend picture is that Madison was only acquired in November 2013. So you could argue that dividend data from FY2014 and earlier is not representative.

SNOOPY

[winner69]

Snoops ...surely in saying that Fy18 Profit will be lower than prior year they mean it will be less than $5.9m - which is the reported prior year profit. Can’t be anything else.

If that $7.5m if IT division had been there all year is meaningful (ie normalised or something) than FY18 at less than $5.9m is a shocker eh (down 20% plus)

Cash flows ‘remain strong’ so maybe the 16 cent plus dividend will be maintained ....while still hoping that the ‘resilience’ and ‘optimism’ they talk about brings better results in the future.