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

[Snoopy]

The exercise of trying to normalise results is not always easy, as there are always 'judgement issues' to consider. And whatever numerical tools you think you have to assist with your investment decisions, you must still use judgement to assess the validity of those tools.

Management in AR2016 and AR2017 have gone on about this 'one off' bad debt, but haven't adjusted for it in AR2016 (when they still produced their own 'underlying earnings' figure). While a big account going wrong like this is unusual, is it unusual enough to distort the normal earnings of the business? I am forced to conclude that while management have put in extra checks and will no doubt learn from the experience, there is still a good chance it will all happen again. In this instance I have taken my queue from management, and not made any 'underlying adjustments' for this account gone bad. Doing nothing in this instance is also the more conservative thing to do. Conservatism, when valuing an investment, gives you an extra safety factor.

By contrast I have now decided to adjust my 'normalised results' for property, plant and equipment sales under the broader concept of adjusting for asset sales. Once an asset it sold, it cannot be sold again. So it seems right to remove property plant and equipment sales to give a better picture of operating results. However the actual adjustments in relation to profit are quite small (for example in FY2017, $50,000 on a $6.324m normalised profit is less than 1%). So doing this breaks my other rule of 'keeping things as simple as possible' and not being distracted by minutiae. However I decided to do it anyway, because not all asset sales are trivial. And if I am going to include the non-trivial asset sales when they occur, I need to include the trivial ones of today to be consistent.

AWF hold a personal quarantee from Mr Godek

He's an Aussie and the Compromise Offer said he had recently divorced and had little assets and the guarantees were worthless

I'd say good luck to AWF in getting much out of this mess ....seems $600k of $1.4m is a pipedream

Cant see auditors allowing this to be carried forward .....another abnormal one off Snoops

Very good sleuthing Winner, to trace all this.

Deciding what should be taken in or out of results to normalise them is a judgement call. And depending on your view, one investor can legitimately take a position that a particular transaction is beyond the norms of formal business practice and should be ignored when judging the ability of a company to earn going forwards. Another investor might judge the same transaction as part of normal, and who are you or I to say who is right or wrong?

If you read my own take on this issue, as I have re-quoted above, you will see that I have not made any adjustments to profits either above or below the provisions that management already have on the books for this default. If another $0.6m comes off the result this year, AWF will 'take it on the chin' and as a shareholder so will I: Not nice, not pleasant for fellow shareholders. And yes another deal in the future could go wrong along the same lines. Nevertheless, If others want to conclude that this $1.4m deal gone bad is in fact a one off, I see that as a legitimate alternative position, albeit one that I don't personally agree with.

My valuation of the company is based on capitalized dividends. If the dividend to be paid in FY2019 is cut, then my valuation will be affected, albeit for only one year out of my five data input points. The previous dividends declared and my own normalised earnings calculations were all done assuming $800k has already been written off on this deal. So far I see no reason to change my fair valuation of the company from $2.70.

SNOOPY

[winner69]

Very good sleuthing Winner, to trace all this. Deciding what should be taken in or out of results to normalise them is a judgement call. And depending on your view, one investor can legitimately take a position that a particular transaction is beyond the norms of formal business and should be ignored when judging the ability of a company to earn going forwards. Another investor might judge the same transaction as normal, and who are you or I to say who is right or wrong?

If you read my own take on this issue, as I have requoted above, you will see that I have not made any adjustments to profits either above or below the provisions that management already have on the books for this default. If another $0.6m comes off the result this year, AWF will 'take it on the chin' and so will I. Not nice, not pleasant for shareholders. And yes another deal in the future could go wrong along the same lines.

SNOOPY

In some ways you are almost saying ‘normalising earnings’ is amost meaningless and doesn’t really give any insights into what might happen into the future (if things are ‘normal’)

Isn’t it best to assume bad stuff happens in some years and in some years some good stuff happens ......and over time (ie the future which you are assessing) the good and the bad neutralise each other .....or if there is more bad stuff than good stuff over time it’s normal stuff anyway.

Companies that ‘normalise’ things always seem to be problem children of the market .....and to me any ‘normalisation’ attempts is a red flag

Back to AWF bad debt the real issue is it’s a worry they had a $1.5m bad debt in the first place ....as mini says they must have been really slack in managing this customer.

[Snoopy]

In some ways you are almost saying ‘normalising earnings’ is amost meaningless and doesn’t really give any insights into what might happen into the future (if things are ‘normal’)

Isn’t it best to assume bad stuff happens in some years and in some years some good stuff happens ......and over time (ie the future which you are assessing) the good and the bad neutralise each other .....or if there is more bad stuff than good stuff over time it’s normal stuff anyway.

For bad debts, yes IMO. But there were a whole lot of costs incurred around acquiring Madison. No more acquisitions are planned AFAIK. Management seem comfortable where they sit now. So I think it is absolutely legitimate to remove those costs from the FY2014 result. I use a similar argument to remove the one off acquisition costs spent acquiring Absolute IT in FY2017. Likewise putting to bed the legacy group software in FY2017, I see as a 'one off' that distorts the real earnings capacity of the group.

Companies that ‘normalise’ things always seem to be problem children of the market .....and to me any ‘normalisation’ attempts is a red flag

That is why I like to do my own normalizations! But I too find it unsettling when companies try to normalise their own results. Normalisation is best left to the judgement of well informed individual shareholders.

SNOOPY