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

[KJMLimited]

Replacement of cheap labour with robotics will eventually severely damage the operating model. But that's a while away.

[Snoopy]

Trade and other receivables verses the equivalent payables were well controlled in FY2020, pointing to an improving pattern of debt collection.

	Trade & Other Receivables {A}	Trade Payables {B}	Net Receivables {A}-{B}
FY2018	$41.101m	$28.527m	$12.574m
FY2019	$32.629m	$24.186m	$8.443m
FY2020	$53.071m	$46.169m	$6.902m

It looks like FY2020 was another year of incremental debt collection improvement?

	Trade & Other Receivables {A}	Trade & Other Payables {B}	Net Receivables {A}-{B}={C}	Net Receivables Ratio {C}/{A}
FY2017	$45.533m	$28.107m	$17.426m	38.3%
FY2018	$41.101m	$28.527m	$12.574m	38.6%
FY2019	$32.629m	$24.186m	$8.443m	38.3%
FY2020	($53.071m - $22.286m)	($46.169m - $21.778m)	$6.340m	20.6%
FY2021	$23.271m	$20.180m	$3.091m	13.3%

Notes

1/ FY2020 figures now adjusted for consequential wage subsidy assets and liabilities.

On p19 of AR2021 we learn:

"Net cash flow from Operations was unfavourable (Net cashflow from operations: -$5.658m (FY2021) vs $12.685m (FY2020)). The Group paid out to suppliers, contractors and employees more than was recovered from customers, which illustrates the impact of COVID-19."

At first glance that comment does not dovetail with the table above, which shows that, in relative terms, the rate of debt collection has not blown out. This leads me to a couple of possible unfortunate conclusions as to why that operational cashflow turned negative.

1/ Due to Covid-19 peripheral effects, many contracts during the year must have been loss making. Equally unpalatable is
2/ Underlying core running costs of the business are now far too high.

Am I being too negative here, by observing that it was only the $33.323m wage subsidy that lent any respectability to the FY2021 result? Winner always says 'follow the cashflows'. I don't think this bodes well for FY2022, especially as a new CEO generally goes through the accounting closet looking for skeletons.

SNOOPY

[Snoopy]

I am not going to pretend that the likes of Warren Buffett would find AWF a suitable investment at this time. So we need to use an alternative method for valuation. I choose the 'capitalised dividend valuation' method as appropriate here.

Time for my FY2021 (estimate) update! I am assuming a cash issue in FY2021 and because of the need to preserve capital no dividend over FY2021 either.

	eps	dps (imputed)
FY2017	19.6	16.0
FY2018	15.8	16.2
FY2019	6.2	16.2
FY2020	9.4	16.2
FY2021(e)	?	0.0
Total	51.0	64.6
5 year Average		12.9

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

= (12.9c / 0.72) / 0.08 = $2.23

However as a result of the expected cash issue, I foresee the number of AWF shares on issue to increase by one share for every four in existence right now, or 25%. This will reduce my share price valuation accordingly.

$2.23 / 1.25 = $1.78

This is based on a net dividend per share (dividend declared) of 12.9c/1.25 = = 10.3c

Whether you believe that valuation or not depends on how well you think that AWF Madison will recover compared to pre-Covid-19 earning and dividend levels.

With Accordant announcing the reinstatement of dividends, it is worthwhile looking at how the dividend recapitalisation valuation model updates. While doing this I need to remind readers of the crudeness of this model. All I am doing is looking at the actual dividend per share paid over the last five years and projecting that forward over the next five years. Whether actual earnings over the next five years will allow such dividend payments is another matter. The cancelling of dividends during the year following the Covid-19 arrival is reflected forwards too. But as a counter to this I have not backed out any wage subsidy which I am currently forecasting will not be repeated.

	eps	dps (imputed)
FY2017	19.6	8.0 + 8.0
FY2018	15.8	8.2 + 8.0
FY2019	6.2	8.2 + 8.0
FY2020	9.4	8.2 + 8.0
FY2021	18.1	0.0 + 0.0
FY2022	?	8.2 + ?
Total	69.1	64.8
5 year Average		13.0

The non payment of dividends over FY2020 plus the government wage subsidy has allowed the Accordant debt to come under control. So unlike my previous attempt at this exercise (my post 822) , I am no longer expecting a cash issue to shore up the balance sheet.

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

= (13.0c / 0.72) / 0.08 = $2.26

SNOOPY

discl: Not yet buying more on the strength of just this.

[winner69]

That $33m of corporate welfare which shows up on the Cash Flow Statement is pretty impressive

[Snoopy]

That $33m of corporate welfare which shows up on the Cash Flow Statement is pretty impressive.

Yes, particularly as at the half year ended September 2020 result, there was nothing in the cashflow statement indicating the level of wage subsidy being received. You have to hunt down in page 16 of the HYR2021 notes to find it.

"During the six month period ended 30 September 2020, Group eligible entities claimed $13.2m and repaid $2.2m under the New Zealand Government’s COVID-19 Wage Subsidy Schemes. This was in addition to the amount claimed under the initial 12 week COVID-19 Wage Subsidy Scheme referred to in the Group’s annual financial statements for the year ended 31 March 2020. Under the initial 12 week COVID-19 Wage Subsidy Scheme, the Group applied for $22.9m (for 3,451 employees) subsequently refunding $1.4m (for 231 employees). Under the initial 8 week extension of the COVID-19 Wage Subsidy Scheme, the Group applied for $13.2m (for 2,992 employees) subsequently refunding $0.8m (for 198 employees)."

"These grants supported the Group’s ability to retain personnel and pay remuneration throughout New Zealand’s COVID-19 Alert Levels 4 and 3. The grants have been offset against employee benefits expense in the statement of comprehensive income."

If I read that note correctly, the net wage subsidy claimed by Accordant over the period 01-04-2020 to 30-09-2020 was: $13.2m - $2.2m = $11m. Read on and the note says the refund on the $13.2m of wage subsidies applied for was only $0.8m. I presume the difference ( $2.2m vs $0.8m ) was due to a refund relating to the previous period but paid back during the FY2021 half year?

If we take the 'Wage Subsidy Cashflow' figure for FY2021 ($33.323m) and subtract from that the net $11m subsidy for the first half year, that means the wage subsidy paid during the second half year was a massive: $33.323m - $11.000m = $22.323m. I find it very surprising that most of that wage subsidy was received in the second half year, from 01-10-2020 to 31-03-2021.

SNOOPY

[winner69]

Snoops ...just keeping up their record of confusing you I think

[Snoopy]

If we take the 'Wage Subsidy Cashflow' figure for FY2021 ($33.323m) and subtract from that the net $11m subsidy for the first half year, that means the wage subsidy paid during the second half year was a massive: $33.323m - $11.000m = $22.323m. I find it very surprising that most of that wage subsidy was received in the second half year, from 01-10-2020 to 31-03-2021.

FY2021	HY2021 +	2HY2021	= FY2021
Declared NPAT less Impairment	0.72 x $7,000 + $3.712m = $8.752m	$2.485m	0.72 x $7,000 + $6.197m = $11.237m
less Wage Subsidy	0.72 x $11.000m= $7.920m	$16.073m	0.72 x $33.323m = $23.993m
equals Earned NPAT	$0.832m	-$13.588m	-$12.756m

Notes

1/ The impairment referred to above is a $7m write down of goodwill from the Madison business unit.

The above table shows why I am very cautious about AGL. The fact that the first half of the year was significantly affected by Covid-19 was understandable. I am prepared to look through what happened in HY2021. But what is of concern is 2HY2021 where the Covid-19 recovery picture was emerging. The underlying picture at AGL over 2HY2021 was a massive loss. I was not surprised to hear that permanent replacement job positions were well down. Nevertheless I would have expected a better underlying second half than that which I calculated in the table above. Thank goodness the debt position of AGL is now under control. Because it does appear that the current underlying structure of AGL makes it very likely currently loss making!

SNOOPY

[winner69]

I hope that your workings don’t show AGL ‘profited’ from that chunk of corporate welfare

[Snoopy]

One way to assess how vulnerable a company is , is to look at the interest bill that the bank charges them.

The net interest rate paid on last years (FY2020) average net loan balance can be estimated as follows:

Interest Rate = $1.401m / 0.5x($26.643m + $29.822m) = 5.0%

So ASB doesn't seem too worried about the situation. Or are they just fulfilling their contractual obligations?

From AR2020 Note C7 pg54

"The Group has complied with all covenant requirements during the year. Interest is calculated on a floating rate and the annual weighted average rate is 3.13% (2019: 3.90%). The rate is reset every three months. The loan is an interest only loan and is repayable on 1 October 2021"

One way to assess how vulnerable a company is , is to look at the interest bill that the bank charges them.

The net interest rate paid on last years (FY2021) average net loan balance can be estimated as follows:

Interest Rate = $0.707m / 0.5x($13.205m + $29.822m) = 3.3%

From AR2021 Note C7 pg56

"The Group has complied with all covenant requirements during the year. Interest is calculated on a floating rate and the annual weighted average rate is 2.21% (2020: 3.13%). The rate is reset every three months. The loan is an interest only loan and is repayable on 1 October 2022 (2020: 1 October 2021)"

This means that over the last year, the loan facility was renewed early. As part of this renewal, the maximum amount that can be borrowed from the ASB reduced from $36m to $30m. Actual term borrowings reduced to just half that figure ($15m).

"The banking facilities require the Group to operate within defined financial undertakings."

My post 870 confirms all banking covenants are being complied with. But all of this is through the obligatory historical lens. What about profitability over FY2022?

SNOOPY

[Snoopy]

Snoopy, and have a look at HIT.ASX (HiTech Group). best performed recruiter on the ASX, almost pure IT recruiter play (contractors and permanents). Mkt cap of about $55-60m, net cash position of ~$7m (c/w AWF's huge debts), consistent dividend payer, multi-year consecutive eps growth. eps CAGR of 20%+ over last five years. very heavy weighting to govt departments, so low bad debts / less vulnerable to economic slowdown. largest shareholder is founder (Hazouri), who is chair while his brother IIRC is CEO. on a P/e of ~17x. Disc: long-term holder.

I find it useful to look 'over the fence' to see how similar companies handled the pandemic. This one can be thought of as similar to the AbsoluteIT division of Accordant. HiTech is an Australian company, but they had to navigate their way through Covid-19, just as we did on this side of the ditch.

"During FY2020, despite the Covid-19 crisis, HiTech performed stronger than ever, a record result yet again, whilst maintaining a robust balance sheet and no debt which is unique in our industry. This demonstrates the strength of our business model that was designed in the recession of 1993 and how versatile HiTech is to cope with the tough times. The fact that we have managed to navigate through this once in a lifetime event, is testament to the resilience of the culture of the HiTech Group."

Amazingly, I have looked through the FY2020 HIT accounts and can see no mention of any government assistance (*). For reporting purposes AbsoluteIT is lumped in with Madison and Jackson Stone. So we don't know exactly how well AbsoluteIT did after Covid-19 hit. The interim report said AbsoluteIT was down 10% in revenue (IRFY2021 p5). But if it followed the HIT example over the rest of the year, you would have to think AbsoluteIT will be doing 'quite well'.

SNOOPY

(*) While true, I make the observation that over 95% of HIT's business is fulfilling state and government contracts.