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

[Snoopy]

What about bicycles! Make use of some of those expensive cycleways that hardly a cycle is seen on.

Yeah, a few 'on yer bike' notices to the idle Accordant staff wouldn't go amiss. Win/win for the cycleways and Accordant?

SNOOPY

[nztx]

What about bicycles! Make use of some of those expensive cycleways that hardly a cycle is seen on.

That would never do .. having to dodge all Tory's water leaks & broken water mains

How much signage can you get on a 2 wheeler ? ,, and then some green pratt might decide to steal it
for a joy ride instead of a day holed up somewhere else

[nztx]

And there it is... tossed out onto NZX just after 5.00 pm today:


Accordant Group FY24 Annual Report


https://www.nzx.com/announcements/431991

Accordant Group reports return to growth for AWF, Public Sector spending affects white collar businesses.

• Revenue $212.4 million and NPAT of $(10.0) million post goodwill impairment

• Net operating cashflow $2.3m

• 7.9% growth in AWF revenue

• Public sector revenue down 12.4%

Accordant Group Limited [NZX:AGL] today announces an after-tax loss of $10.0 million for the year ended 31 March 2024.

Many pairs pruned and as expected this:

The Board has resolved to suspend dividend payment during the current economic climate where a good portion of clients exercise restraint in hiring.

Summary of Year: How to wipe away almost 1/3 of Shareholders Funds in one swoop, when impairing amassed Intangibles becomes no longer deferrable


A Repeat in close succession could be interesting - likely diagnosis & possible treatment of Ills: Need a Cap Raise or mates gather in a cozy circle wanting to take things private in a hurry ?


The big question: What will Mr Market value shares in a thinly traded company encountering significant head wind with little fat around the rump to weather a good storm at tomorrow ?


For many a year this sector was seen as a brilliant gold mine ripe for the picking for all those who ventured in.. but alas, is it now ?

[Snoopy]

OK the FY2024 results are not out yet. But there are a few clues we can put together to assess what the FY2024 balance sheet might look like. Madison and AbsoluteIT are two divisions roughly equivalent in size and profitability. We know that Madison goodwill is going to be trimmed. Given that AbsoluteIT has also been restructured, I think goodwill there will need a trim too. I think goodwill for each will be reduced to $6.000m. That makes for a total goodwill 'haircut' of:

($13.223m-$6.000m) + ($7.836m-$6.000m) = $9.059m

We need to remember that his is not cash. But it was cash - once. There is no way to sugar coat this: Accordant has overpaid and overpaid significantly for both Madison and AbsoluteIT.

The problem with making predictions is, when the actual results come out, if those predictions are badly awry, you can end up looking really stupid. But at the risk of being put up for ridicule, let's see how I did.

I guessed Madison goodwill would be cut by $6.0m. The actual goodwill haircut was $6.5m. I will take that as 'pass' as I wasn't too far out.

What has surprised me is that AbsoluteIT retains all of its goodwill. Did I hear about some staff restructuring at AbsoluteIT at the AGM videocast? Perhaps there is a positive message here that whatever right sizing has occurred at AbsoluteIT, the results are already paying dividends?

From AR2024 p8:
"Absolute IT has also transitioned through restructure to ensure that the business is fit for the future."
No points scored by me on my prediction of an AbsoluteIT write down then. Although conversely from my shareholder perspective, I am quite pleased about that!

Lastly the big surprise for me: A $4.5m writedown of goodwill at blue collar business unit AWF, which was:
(AR2024 p8)"To recognise the uncertainty in New Zealand’s rate of growth in the medium term, we have taken a more prudent approach to assessing AWF’s carrying goodwill."

To me this was a strange one, as AWF is already showing the 'green shoots' of recovery
(AR2024 p8) "AWF’s revenue finished more than 7% up on prior year with an accelerating 16% in the final quarter,"

Perhaps we can understand this goodwill writedown by looking at the respective underlying goodwill assumptions for AWF in AR2023 (before the writedown) and subsequently in AR2024?

(p56 AR2023) "AWF has forecast an increase in temporary staff per day of 5% for FY25 and FY26 to return to pre-COVID levels, and thereafter annual EBITDA growth of 2.5%. The terminal year sales growth starting FY29 assumes a constant growth rate of 2.5% (2022: 1.5%). The discount rate used to discount the forecast cash flows is 10.09% (2022: 9.48%)."

(p51 AR2024) "AWF has forecast sales growth of 9.0% for FY26 and FY27 as a result of an increase in average temporary staff per day of 2.4% for FY26 and FY27. Annual sales growth returns to 2.5% per annum for FY28 and thereafter."
"In determining the value in use for each CGU (excluding Hobson Leavy) the Group has applied a post-tax discount rate (‘WACC’) of 11.51% after making adjustments to reflect the cash flow risks inherent in the forecasts."

The big change here between years is the dropping of the phrase 'return to pre-COVID levels'. That is a grim message to the wider economy as well as Accordant, which I would translate as:
"We will never see blue collar employment back to pre-COVID levels EVER AGAIN."

The predicted rise in staff per day has gone down from 5% for FY2025 and FY2026 to only 2.4% over those years. Growth is back to HALF of last years projections!!! And on top of this the discount rate has risen again to 11.5% (it was only 9.5% two years ago). I am really surprised the discount rate has got that high. But I guess the auditors must have OKed it as realistic.

The other strange change is the change in reference from 'EBITDA growth' to 'revenue growth' when calculating goodwill. They are not then same thing. So has the method of calculating goodwill changed from year to year? I would be interested to hear from others if an implied 'change in method' for calculating is even allowable!

I score no points here on AWF goodwill. That AWF goodwill writedown came out of the blue to me .

Nevertheless, although I got the ingredients wrong, my forecast total writedown of $12m wasn't far off the actual total writedown of $11m. So I am rewarding myself with a 'C' pass overall for my efforts, even if that included a bit of luck on my way to estimating the total.

SNOOPY

[Snoopy]

Financial Year	2017	2018	2019	2020	2021	2022	2023	2024
EBITDA (Snoopy produced) {B}	$12.751m	$11.751m	$7.679m	$8.795m	$14.230m	$7.901m	$6.627m	$5.639m
Finance Cost {C}	$1.193m	$1.297m	$1.380m	$1.502m	$0.723m	$0.684m	$1.343m	$2.347m
Interest Coverage {B}/{C} (target >3)	10.7	9.0	5.6	5.9	19.7	11.6	4.9	2.4
Net Bank Debt {D}	$32.383m	$29.731m	$26.643m	$29.822m	$13.205m	$13.028m	$21.546m	$24.308m
Leverage ratio {D}/{B} (target <3)	2.5	2.5	3.5	3.4	0.93	1.65	3.3	4.3

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)

FY2022: EBITDA = NPBT + I + DA = $4.705m+($1.095m-$0.411m)+($4.941m-$2.429m) = $7.901m (with I=$0.684m)

FY2023: EBITDA = NPBT + I + DA = $3.077m+($1.683m-$0.318m)+($4.628m-$2.443m) = $6.627m (with I=$1.343m)

FY2024: EBITDA = NPBT + I + DA = (($10,153m)-($11.000))+($2.791m-$0.305m)+($4.947m-$2.641m) = $5.639m (with I=$2.347m)

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

The 'interest rate cover' covenant is now feeling the pressure of higher interest rates and higher debt, and is now busted. The 'leverage ratio' has returned to worse than Covid problem levels by my calculations. This is in contrast to the company's own statements that it is in compliance with all of its covenants. Note that I have reversed the goodwill write-down of $11m for FY2024 as this is a non-cash item.

Following these 'disappointing covenant calculations' I went straight to the borrowing section of the report C8 (AR2024 p57)
"The banking facilities request the Group to operate within defined financial undertakings. The Group has complied with all covenants requirements during the year."

This means one of two things. Either I have made a mistake in my banking covenant calculations (I invite readers to find it) , OR the banking arrangements that Accordant have with ASB Bank are now allowing them more rope. But whatever the explanation, there is little doubt that Accordant is in the worst position it has been in since I started calculating these covenants back in FY2017.

SNOOPY

[Snoopy]

Following these 'disappointing covenant calculations' I went straight to the borrowing section of the report C8 (AR2024 p57)
"The banking facilities request the Group to operate within defined financial undertakings. The Group has complied with all covenants requirements during the year."

This means one of two things. Either I have made a mistake in my banking covenant calculations (I invite readers to find it) , OR the banking arrangements that Accordant have with ASB Bank are now allowing them more rope. But whatever the explanation, there is little doubt that Accordant is in the worst position it has been in since I started calculating these covenants back in FY2017.

Sometimes I rehash my tables from year to year, and the origin gets lost in the mists of time. Well I have decided to 'delve back into the mist' and find where I got my covenant information from. It is from the FY2017 shareholder presentation slide 8 (if you count the introductory cover as slide 1) here:
https://accordant.nz/wp-content/uplo...esentation.pdf

I noted that the in AR2017 under note c8 on borrowings, Accordant had a joint lending arrangement with both the ANZ Bank and the ASB Bank. But by the time AR2018 rolled around the sole banking establishment used was the ASB Bank. So it is possible the banking covenants did change when the bank arrangements were revised. But if I look on slide 10 of PR2018 the same covenant information is presented. So it would seem that the wholesale change of putting all banking facilities with ASB Bank did not change the covenants. There was no information on banking covenants given in PR2019. But there would be nothing to stop a bank revising its own covenants at a later date.

Another possible explanation has just occurred to me. Perhaps these covenants as presented are 'management targets' rather than strict bank hurdles. I recall either Ross or Simon talking about gearing ratios before. The talk was to use borrowings against existing business assets to add new business arms. Then as the new business arm became integrated debt would gradually be paid back down. Such an argument does not preclude strict bank covenant hurdles as well. But these remain undisclosed, apart from the comment in the annual report that "The group has complied with all covenant requirements during the year".

Yet going back to the reference in the link I gave, there was a line 'Bank Covenants' immediately above the information "Interest coverage > 3' and 'Leverage ratio < 3'. That certainly gave me the impression that the covenants were delivered 'from the bank'.

SNOOPY

[Nor]

If like me you held a tiny handful of little worth would you double down now?

[Snoopy]

If like me you held a tiny handful of little worth would you double down now?

I am still digesting the result Nor. I have lost about 75% of my capital invested in this so far. But not enough of my money has been lost so that I have to drive around in a Honda Accord with a dent. I have had a few good divvies along the way of course. But not enough to wipe out those capital losses. The thing with investments is that it is very easy to invest using the rear vision mirror, assuming 'what I have invested in before' will 'bounce back'. I want to take the time to assess what lies ahead for Accordant going forwards, including how they will tackle their debt burden. Whatever happens, it looks like no dividend 'for a while'. So this means I can take my time with my decision. I have capital to invest. But I have to be disciplined and put that capital towards what I think will be the best investment going forwards. And that may or may not be in Accordant.

I haven't lost faith in the company though. I still think there is a place for me investing in the largest job agency in New Zealand. I think Accordant are now in the middle of a perfect (job) storm. And they are operationally still cashflow positive. I am also heartened by management comments about not taking an axe to their workforce so much that it will impede their performance as the jobs economy eventually climbs out of its current funk. In the meantime, I have a bit more work to do.

SNOOPY

[Nor]

I had some experience with 3 temp agencies. AWF were ok, so was another, but based on my experience with a third, in Auckland I wouldn't be disappointed to see this sort of work banned, absolutely exploitative and slave mentality required, this third one. There are young guys embarking on this, a career of employment insecurity. So from my point of view outright banning would be the big risk, but not likely in this world I suppose.

[Snoopy]

I had some experience with 3 temp agencies. AWF were ok, so was another, but based on my experience with a third, in Auckland I wouldn't be disappointed to see this sort of work banned, absolutely exploitative and slave mentality required, this third one. There are young guys embarking on this, a career of employment insecurity. So from my point of view outright banning would be the big risk, but not likely in this world I suppose.

I guess there are always those who see the job market as a place where they can take advantage of others. There have been some sad tales of people paying significant money overseas to NZ sham organisations on the promise of a job in NZ, only to arrive here to below par accommodation and 'no job'. To stamp out this sort of thing I think we need more Accordants, not less. At least Accordant do deal in 'real jobs'. And of course not all temps are contracted to rogue employers. As I understand it, Accordant is the employer for some. IOW working as a 'permanent temp' for Accordant is a career path.

I am not sure I understand the argument you are trying to make though. It sounds a bit like campaigning to shut down all chemists because they are all drug dealers, and those illegal drug dealers do so much harm.

SNOOPY