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

[minimoke]

The concept of analysing a company by looking at cashflow has a certain raw appeal. Profits are ultimately important. But a company can manipulate declared profits several ways:

1/ By classing a bad debt as collectible when it is not.
2/ By carrying goodwill on the books using optimistic future sales scenarios when those sales levels will be very difficult to achieve.
3/ By setting up bad debt provisions that allow the shifting of profits from one financial period to the next.

However, cashflow is 'day to day' important, because having a cash dividend deposited into your bank account is a gold standard kind of investment return that cannot be manipulated. Money in your bank account is tangible and spendable, contrasting with declared profits that amount to an indirect promise of a return of cash in the future.

I want to carry on with Winner's analogy and imagine you as a homeowner are running an in house business putting your tweenagers out to work selling lemonade at the end of the driveway, while simultaneously giving them free spending (pocket) money. Now tweenagers demand some pocket money, and generally use their accumulated (lack of) wisdom to make poor decisions and waste it, or use it on instant gratification. Nothing wrong with that, it is all part of the learning and budgeting experience. From a homeowners perspective, the pocket money paid out is analogous to a company paying dividends to shareholders. Once the pocket money is paid out, all control of what happens to it passes from the homeowner's hands.

To support the lemonade venture, our homeowner uses some leftover household cashflow, plus bumps up the mortgage to buy a brand new fridge. As well as being more efficient than the original fridge, it is much bigger to hold the vast litres of ice cool lemonade to satisfy the summer satiated pedestrians walking by the end of the driveway. Selling lemonade becomes a highly profitable home business for our homeowner. When discussing their finances, the homeowner could say:

1/ they borrowed money from the bank to pay the tweenagers pocket money (which doesn't sound too responsible) OR
2/ they could say money was borrowed from the bank to buy a new fridge to support the home business venture (which sounds much savvier).

But both of these explanations could be seen as correct though, depending on how an outside observer chooses to see the historic path, along which the homeowners cash was spent.

On the day cash is cash. Whether you give $500 out as pocket money, or put that $500 towards a new fridge, $500 cash will come out of the household bank account. However, no business person plans to invest $500, with a business plan to only recoup $500 from that investment. There has to be a profit at the end of the year. It is the new fridge that enables the selling of the lemonade and our little home business able to operate. After eight years, perhaps a new fridge will be required to allow the lemonade business to continue. Our hapless home owner may once again be forced to draw down the house mortgage to buy it. At this point the value of the original big fridge has been lost (cash value zero). But what hasn't been lost is the utility of using that old fridge over the preceding eight years. Yes the original big fridge capital has gone. But the cashflows from selling the lemonade over an eight year using that fridge were very real.

So what is the moral of this story? On the day, the negative cash effect of giving tweenagers pocket money OR spending that money on a new fridge is the same. But over time, the fridge delivered a positive cash return to our homeowner, while the pocket money simply disappeared (from our homeowners perspective). Thus although all cash starts out as being equal, over time it can end up not being equal. Or coming back out of the analogy, offsetting cash taken in over a one year period with cash spent on something that will produce a return over a multi year period is akin to subtracting apples from apples (from a snapshot perspective) but subtracting oranges from apples (from a multi year perspective).

SNOOPY

Much simpler to get the tweenager to mow the neighbours lawn for $20 and give the tweenager $15 pocket money. The only decision is cashflow - do you pay out the pocket money before or after the lawns are mown and paid for.

[Snoopy]

Much simpler to get the tweenager to mow the neighbours lawn for $20 and give the tweenager $15 pocket money. The only decision is cashflow - do you pay out the pocket money before or after the lawns are mown and paid for.

Let's say that you as a parent only have $30 spare cash at the end of the week. If you pay the tweenager $20 to mow the lawn first, then after that give them $15 as pocket money, the bank manager might say that you have drawn down the mortgage to pay pocket money to your kid, not so good? If OTOH, you pay your kid $15 pocket money first, then go to the bank to draw out the last $5 you need to make up the balance to pay the kid for mowing the lawn, then the bank manger might laud you for supporting youth entrepreneurship. But which decision would be the best parenting decision, bearing in mind there may be other factors in the background that I haven't outlined? You and I could argue the pros and cons. But from the bank managers perspective it doesn't matter. Either way, $5 has been drawn down on the mortgage.

My argument would be that you can look at each payment on the day from a straight cashflow perspective. But I would argue that $15 spent on pocket money is longer term less valuable than $15 put towards mowing lawns. Because if the Tweenager does a good job mowing the lawn, there is every chance they will be invited back to mow the lawn again. And that potential for more work in the future has some present day value. And that is why IMO, you should be careful in judging a business just on present day cashflow.

SNOOPY

[minimoke]

Let's say that you as a parent only have $30 spare cash at the end of the week. If you pay the tweenager $20 to mow the lawn first, then after that give them $15 as pocket money, the bank manager might say that you have drawn down the mortgage to pay pocket money to your kid, not so good? If OTOH, you pay your kid $15 pocket money first, then go to the bank to draw out the last $5 you need to make up the balance to pay the kid for mowing the lawn, then the bank manger might laud you for supporting youth entrepreneurship. But which decision would be the best parenting decision, bearing in mind there may be other factors in the background that I haven't outlined? You and I could argue the pros and cons. But from the bank managers perspective it doesn't matter. Either way, $5 has been drawn down on the mortgage.

My argument would be that you can look at each payment on the day from a straight cashflow perspective. But I would argue that $15 spent on pocket money is longer term less valuable than $15 put towards mowing lawns. Because if the Tweenager does a good job mowing the lawn, there is every chance they will be invited back to mow the lawn again. And that potential for more work in the future has some present day value. And that is why IMO, you should be careful in judging a business just on present day cashflow.

SNOOPY

Long and short of it is - if you want to borrow from the bank you want to be making a decent job with your borrowings. Remember back in the IPO days. $74m revenue = $3.1 profit. What do you reckon it will be this year. $280m revenue and $5.5m profit? Doesn't seem to me that cashlfow is the thing to be looking at.

[Snoopy]

Long and short of it is - if you want to borrow from the bank you want to be making a decent job with your borrowings. Remember back in the IPO days. $74m revenue = $3.1 profit. What do you reckon it will be this year. $280m revenue and $5.5m profit? Doesn't seem to me that cashlfow is the thing to be looking at.

My institutional memory doesn't go back that far! But I would imagine Simon Hull working out of a small hut shouting out instructions to temps to 'board a bus', with a street side megaphone on a public pavement office, represented a rather cheaper corporate overhead structure than the multi-office multi brand branch offices used today. Health and Safety rules would have been much easier to comply with back then too.

You have to make investment decisions today, based on the investment story being played out today. Cashflow is but one tool in the investment analyst toolbox. Where

1/ the cash coming in greatly exceeds the net profit AND
2/ the company is not overgeared,

-the situation I would say that fairly represents AWF Madison today-,

then I wouldn't put too much weight on Cashflow.

SNOOPY

[minimoke]

My institutional memory doesn't go back that far! But I would imagine Simon Hull working out of a small hut shouting out instructions to temps to 'board a bus', with a street side megaphone on a public pavement office, represented a rather cheaper corporate overhead structure than the multi-office multi brand branch offices used today. Health and Safety rules would have been much easier to comply with back then too.

Interesting if it were true. At IPO, 21 locations, 90 staff with their own software and proprietary systems. 8,000 in its labor "crew" pool. Health and safety obligations no different from today. (17 years prior to that you are probably right)


Today 22 locations and 3,500 working each day in their crew.

What they are doing is working harder to generate more cash (Eg Census contracts), but less smarter to generate less profit.

[minimoke]

Or howabaout this as a simple number.
Cash revenue = $280m = $5.38m per week or $1,537 per Crew member or $38 an hour. Doesent seem like a lot for the Madison / IT part of the business.

[winner69]

Wasn't that many years ago AWF touted the fact 'we are one of the few companies on the NZX that carries no debt'

Now AWF is one of the more indebted companies on the NZX with $33.5m debt v $37.8m equity.......gearing about 47% (debt to (debt+equity}) ........which is a lot higher than even the likes of FBU which is under 40% (even before the capital raise)

Heck what am I saying here .......

[Snoopy]

Or how abaout this as a simple number.
Cash revenue = $280m = $5.38m per week or $1,537 per Crew member or $38 an hour. Doesn't seem like a lot for the Madison / IT part of the business.

What you have figured out 'minimoke', is that not everyone's salary goes through the AWF Madison book as a gross payment.

I see you have annualised the 1HY2018 revenue for the AWF group, which is probably a reasonable starting estimate for FY2018. But not every deployment means that person is on the books for 365 days. You have taken the (up to) 3500 AWF business unit workers said to be deployed and assumed 3500 workers are deployed 52 weeks per year.

{ $280m Revenue / 52 weeks = $5.38m per week. $5.38m/ 3500 crew = $1,537 per crew member per week. }

That might be true for some, for example construction workers in Auckland. But it wouldn't apply, for instance, to fruit picking and sorting and packing jobs in the regions. Also AWF deploys both 'temps' and 'contractors'. 'Temps' I think means a non contracted worker on a fixed employment work period with a third party employer to accomplish a specific task. That could last anything from a few days to six or more months. It would only be the AWF directly employed contractors that would be on the books for 52 weeks/year though. AWF would only get a commission on the temp's wages, and they wouldn't pay the temps wages (that would be up to the third party employer). I do not know what the breakdown would be between 'temps' and 'contractors'. But the AWF revenue breakdown between these two worker classes through the AWF books would likely be of the order 1 : 10.

If you go to slide 9 of the AR2017 presentation, you will see, over and above those 'up to' 3500 AWF unit workers, Madison deploy 'up to' 1,100 workers daily and Absolute IT deploy 'up to' 450 people daily. But nearly 50% of Madison's deployments are one off permanent replacements (33% for AbsoluteIT). I imagine Madison would earn a one off fee for such a one off placement, probably based on the annual salary package being offered (this is a guess, I am happy to be corrected) . Slide 13 is interesting as it shows the Madison unit alone will deploy 3,000 workers (that shows this is unusually high for Madison deployment, maybe 5 times the number of workers they might normally deploy per month) for a peak period of only a couple of weeks. But on an annualised basis, Madison would employ only 250 Census people per month. The relatively short duration of most of the workers on this project will severely affect the 'average' number of days employed and possibly the average hourly rate too of Madison

What I am saying here is, working out an 'average deployment pay per hour' is a lot more difficult than your original 'back of the envelope calculation might suggest!

SNOOPY

[Snoopy]

Wasn't that many years ago AWF touted the fact 'we are one of the few companies on the NZX that carries no debt'

Now AWF is one of the more indebted companies on the NZX with $33.5m debt v $37.8m equity.......gearing about 47% (debt to (debt+equity}) ........which is a lot higher than even the likes of FBU which is under 40% (even before the capital raise)

Heck what am I saying here .......

You are saying that being a much less capital intensive business than Fletcher Building, and generating higher margins than Fletcher building, and not going through the same boom bust cycles as Fletcher Building (actually AWF Madison is more profitable in a business slump), that AWF Madison can afford to be more indebted over the business cycle?

SNOOPY

[minimoke]

Ive had a look at that slide.
Given its an annual report Id take it that the figures referred to are based on an annual basis. So that is 3,500 temps working for AWF a day for each working day of the year. Plus 1,100 people working for Maddison a day each working day and 340 IT people working every working day.

Where it gets confusing is they are reporting gross profit in total, not gross profit per person deployed. A one off permanent replacement will not be a daily deployment. What would be interesting is total revenue and net profit per division.

Just an off the cuff observation. Seems Madison has twice the staff and twice the daily deployments but arent making twice IT's profit. So dont look well equipped to manage a census contract. Whereas AWF have twice their profit with a few extra staff - they seem the ones set up to run 3,000 census workers profitably.

Edit: GP per staff has Madison lowest ranked at $160,000 a staff and AWF the highest at $290,000 a staff member. That Madison acquisition not looking so good.