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

[Snoopy]

There is something odd about those HY2021 / 2HY2021 results. The figure that stands out is the very high 'operational cashflow' over HY2021. If you look at the HY2021 cashflow statement, the big drop is the 'Payments to Suppliers & Employees' which dropped by nearly 20%, while the receipts from customers fell by just 7%. That 'explains' the dramatically improved cashflow over HY2021 but it doesn't explain what caused it.

I thought that I had found the answer with the 'wage subsidy' going directly to paying employees, meaning the company did not have to pay those people from its own coffers (hence the big drop in payments to employees and suppliers). However if that were the explanation, I would have expected even larger positive cashflows in the second half, as most of the wage subsidies were paid in the second half. In fact, cashflows from operations were negative in the second half! So I am still baffled as to what is going on here.

I haven't yet found the answer to explain why HY2021 took in $134.644m of revenue from customers but only paid out $109.446m of payments to employees and suppliers over the same period. This mismatch is well out of step with previous years. However, eliminating some possibilities will get me closer to an answer, I hope! So here goes:

From AR2021 p36

On the general subject of accounts:

"Payment is generally due within 30-60 days from the invoicing of a contract. There is no significant financing component in any of the group's contracts with customers."


Now, back a little further on the same page:

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

Revenue Recognition from Contracts

"Revenue is recognised once value has been received by the customer, where performance obligations have been satisfied and control has transferred."

Revenue Earned on Temporary Placement

"Revenue from temporary placements <snip> including the wage costs of these staff is recognised when the service has been provided."

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

In both of the above instances, it would appear that the end line customer is billed over more or less the same time-frame that the worker doing the work is paid. So there does not appear to be a time gap between paying a worker and on billing that service to the customer. If there was a time gap, this could result in the end line customers being billed before the workers who did the job were paid. But that doesn't look like what has happened here.

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

Revenue earned on Permanent Placements

This income "is recognised at the date after an offer is accepted and where a start date has been determined"

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


Payment will be a lump sum based on salary costs. So it follows that in this instance it is possible that the bill to the end line customer will significantly exceed the costs to provide the service (seeking and vetting all the candidates). However if this was the cause of the mismatch between 'billed revenues' and 'costs incurred', it would imply that a disproportionate number of permanent placements were made in the 6 months following the onset of Covid-19 restrictions. This is contrary to comments made by senior Accordant management and so this whole presumed scenario seems very unlikely.

To summarise, the above is an assessment of what didn't happen. What did happen to allow customer receipts to be so significantly out of whack with supply costs is a mystery yet to be solved.

SNOOPY

[winner69]

Snoops

Does the RECONCILIATION OF NET PROFIT AFTER TAX TO CASH FLOWS FROM OPERATING ACTIVITIES per Note 5 throw further light on your mystery

[winner69]

Snoops - I think they treated the wage subsidy payments in the cash flow statements differently in H1 and H2

[Snoopy]

Snoops

Does the RECONCILIATION OF NET PROFIT AFTER TAX TO CASH FLOWS FROM OPERATING ACTIVITIES per Note 5 throw further light on your mystery

Thanks for the clue Winner (I presume you are referring to note C5).

RECONCILIATION OF NET PROFIT AFTER TAX TO CASH FLOWS FROM OPERATING ACTIVITIES

	HY2020 (pcp)	HY2021	2HY2021 (calculated)	FY2021
Net Profit After Income Tax {A}	$1.321m	$3.712m	$2.485m	$6.197m
Adjustments for operating activities non-cash items
Depreciation & Amortisation	$3.285m	$2.618m	$2.668m	$5.286m
Impairment	$0m	$7.000m	$0m	$7.000m
Loss/(Gain) on disposal of Property Plant & Equipment	$0.060m	$0.043m	($0.005m)	$0.038m
Movement in doubtful debt provision plus bad debt write off in current year	$0.099m	$0.187m	$0.151m	$0.338m
Movement in deferred tax	($0.506m)	($0.333m)	($0.369m)	($0.702m)
Equity Settled Share Based Payments	$0.066m	($0.124m)	$0.202m	$0.078m
Interest on contingent consideration to the vendor of JacksonStone and Partners	$0.0m	$0.062m	($0.050m)	$0.016m
Fair value movement on contingent consideration to the vendor of JacksonStone & Partners	$0.0m	$0.000m	($1.285m)	($1.285m)
Total Non Cash Items {B}	$3.004m	$9.453m	$1.316m	$10.769m
(Increase)/Decrease in trade receivables, and contract assets	$5.185m	$28.587m	$1.207m	$29.794m
Increase/(Decrease) in trade payables, contract liabilities and provisions	($2.657m)	($21.706m)	($4.036m)	($25.742m)
(Increase)/Decrease in taxation payable	$0.022m	$1,904m	($1.025m)	$0.879m
Total movement in working capital {C}	$2.550m	$8.785m	($3.854m)	$4.931m
Cash flow from operating activity {A}+{B}+{C}	$6.875m	$21.950m	($0.053m)	$21.897m

HY2021 (1st April 2020 to 30th September 2020) is the period that covers most of the Covid-19 lock down period and the comparison with the pcp HY2020 is illuminating.

1/ The first point to note is the large $7m impairment charge, unique in HY2021, which is a non-cash item. However, I personally would not class a change in impairment as an 'operating item'. So while creating an impairment does affect cashflow, I am surprised that it changes 'operating cashflow'.

2/ Following down, the rest of the two columns of numbers are broadly similar, until we look at the decrease in trade receivables and the decrease in trade payables. This HY2021 period is concomitant with the first six months of the Covid-19 period where demand for hiring workers significantly reduced. With no new 'on the job demand', the need to pay those temp workers wages, who were not needed, rapidly decreased as well. So I can weave a story that makes the figures look like they make sense. But why is the difference between the changes in 'jobs invoiced' and the changes in 'paid work to fulfill those jobs' so large between:

HY2021 ( $28.587m - $21.706m = $6.879m ) AND

HY2020 ( $5.185m -$2.617m = $2.568m ) ?

This imbalanced difference has boosted cashflow in HY2021 vs the pcp by $4.311m.

Combine this with the $7m impairment imbalance and we get a total imbalance of $11.311m. This certainly tallies with the lions share of increased operational cashflow from HY2020 to HY2021 ( $21.950m - $6.875m = $15.075m ). But it doesn't explain the inclusion of 'impairment' as an operational matter. Nor does it explain the dramatic increase in the difference between the 'accounts receivable balance' and the 'accounts payable balance' when we compare HY2021 and HY2020. The real reason for the sharp uptick in both as at HY2021 is that a 'Grant Income Receivable' is recorded in 'Trade & Other Receivables' and 'Deferred Grant Income' is recorded in 'Trade and Other Payables' in the comparative FY2020 year. These entries relate to the wage subsidy that was paid in advance.

Now Looking at 2HY2021

The other interesting point to note is that although the cash flow from operations was extraordinarily high for FY2021, for the second half of HY2021 cashflow was negative! That fact seems to have been washed aside with all the hype of the full year result.

SNOOPY

[winner69]

Snoops ...the other view highlights that cash flows are very dependent on when they get paid and when they pay the bills eh (all that contract stuff)

At least the wage subsidy doesn’t confuse the cash flow so much ...it’s all the profit figure.

Stil can’t see why they didn’t show the $22m subsidy in the H1 cash flow...the interim report said they had received it after year end 2o and before September.

[Snoopy]

Snoops ...the other view highlights that cash flows are very dependent on when they get paid and when they pay the bills eh (all that contract stuff)

So your explanation is that the customers paid their bills very promptly, before Accordant had to pay wages to their own crew that did that work, so operational cashflow improved?

AR2021 p19 suggests the opposite was happening.

CASH FLOW

"Net cash flow from Operations was unfavourable. The Group paid out to suppliers, contractors and employees more than was recovered from customers which illustrates the impact of COVID-19."

At least the wage subsidy doesn’t confuse the cash flow so much ...it’s all the profit figure.

Still can’t see why they didn’t show the $22m subsidy in the H1 cash flow...the interim report said they had received it after year end and before September.

Under note C5 (AR2021 p53) in the full year report "RECONCILIATION OF NET PROFIT AFTER TAX TO CASH FLOWS FROM OPERATING ACTIVITIES", the total 'Cash flow from operating activities' comes to $21.897m. There is no mention of the wage subsidy in that note. Now go back to the Cashflow statement (AR2021 p29) The 'Cash flow from operating activities" is the same $21.897m. But this time the $33.323m of wage subsidies are in the cashflow statement. This suggests to me that the wage subsidies are in the operational cashflow table under Note C5, but reported in another category, and not described as 'wage subsidies'.

Now go back to the half year report (HY2021) and page 22 "RECONCILIATION OF NET PROFIT AFTER TAX TO CASH FLOWS FROM OPERATING ACTIVITIES". This aligns with the equivalent reconciliation in the full year report. Next go back to the half year cashflow statement in HY2021 and, as you observe Winner, the wage subsidy is not listed there. However the wage subsidy was paid in HY2021. p16 of HY2021 confirms that (net payment $11m,). So I think it must be in the HY2021 cashflow statement because 'the subsidy' was actual and measurable cashflow over HY2021. It can't be left out if p16 of HY2021 indicates the cash payment was made. The subsidy is there but under another header. Could the subsidy have been netted off against accounts payable?

Likewise that net $11m subsidy payment over HY2021 must be in the "RECONCILIATION OF NET PROFIT AFTER TAX TO CASH FLOWS FROM OPERATING ACTIVITIES" in HY2021 as well. The wage subsidy must have been put in another bucket with a different label. But that doesn't mean it is not there.

SNOOPY

[bull....]

if agl get back to consistant dividends thats 16cps as previous years it represents round about 14% gross yield at current prices. i own some

[winner69]

Snoops - I'm glad you have finally sussed it out

[Snoopy]

Time to update the bad debt performance of the group. This is a good thing to keep an eye on if a company has substantial debt on its balance sheet already.

The 'Impairment Losses Recognised' may be found in AR2020 Section C6 p52.
The 'Impairment Losses Reversed' may be found in AR2020 Section C6 p52.
The 'Write-offs to bad debts during the year' may be found in AR2020 Section C6 p52.
The 'Provision For Impairment Balance' may be found in AR2020 Section C6 p51.

	2014	2015	2016	2017	2018	2019	2020	Row Sum
Impairment Losses in P&L {A}	($0.358m)	($0.306m)	($0.510m)	($0.699m)	($0.655m)	($1.109m)	($0.301m)
Impairment Write backs P&L {B}	$0.291m	$0.137m	$0.100m	$0.228m	$0.594m	$0.360m	$0.046m
Net Impairment in P&L {A}+{B}	($0.067m)	($0.169m)	($0.410m)	($0.471m)	($0.061m)	($0.749m)	($0.255m)	($2.182m)
Actual Trade & Receivables Write down	($0.088m)	($0.204m)	($0.163m)	($0.163m)	($0.815m)	($1.034m)	($0.123m)	($2.414m)
Provision for Impairment Balance	$0.377m	$0.342m	$0.589m	$0.897m	$0.143m	$0.229m	$0.361m

Over time, the second to last two rows should sum to about the same total. We can see that for FY2020 the declared result (Net Impairment in Profit & Loss) has incorporated a loss almost double the actual figures written off. But looking at the cumulative effects of 'declared' verses 'actual' write offs over the years, the summed difference of $0.232m is not material. The one thing that strikes me about this table is that the 'write backs' have been quite high as a percentage of the declared losses. The possible exception to this is FY2020 where the write back percentage was 'only' 15%. One way to interpret that is that the initial write offs were overly conservative. I guess that is a good thing.

For FY2020, the end of year 'Provision for Impairment' balance has gone up from what look to be abnormally low levels from the previous two years. It is now a high percentage of the actual impairment losses. This offers the potential for declared impairment losses to be manipulated. The potential manipulation I allude to is for losses that should have been written off to be held in a bloated provision figure. However, because the absolute level of impairment losses has shrunk, any such manipulation, if it exists, should not have a material effect on the annual net profit result. With the FY2019 result I suggested that the 2019 provision balance, given it is now meant to reflect probabilistic losses that might occur, could have been too low. IMO raising the end of year provision for FY2020 has gone some way to fixing this.

Time to update the bad debt performance of the group. How did it go through the Covid-19 period?

The 'Impairment Losses Recognised' may be found in AR2021 Section C6 p55.
The 'Impairment Losses Reversed' may be found in AR2021 Section C6 p55.
The 'Write-offs to bad debts during the year' may be found in AR2021 Section C6 p55.
The 'Provision For Impairment Balance' may be found in AR2021 Section C6 p55.

	2017	2018	2019	2020	2021	Row Sum
Impairment Losses in P&L {A}	($0.699m)	($0.655m)	($1.109m)	($0.301m)	($0.342m)
Impairment Write backs P&L {B}	$0.228m	$0.594m	$0.360m	$0.046m	$0.005m
Net Impairment in P&L {A}+{B}	($0.471m)	($0.061m)	($0.749m)	($0.255m)	($0.337m)	($1.873m)
Actual Trade & Receivables Write down	($0.163m)	($0.815m)	($1.034m)	($0.123m)	($0.205m)	($2.340m)
Provision for Impairment Balance	$0.897m	$0.143m	$0.229m	$0.361m	$0.493m

The 'Net Impairment Losses Recognised' in the income statement (AR2021 Note A4 p41) should over time sum to the same total as the 'Actual Trade & Receivables Write Down'. The fact that it sums to less is an indication that over the last five years, profits have been overstated by.

$2.340m - $1.873m = $0.467m

The difference being a subtraction from the bad debt provision on the balance sheet. Of particular interest over FY2021 is that, unlike previous years, the write back was almost nothing. This may have been part of a realisation that debts that looked unrecoverable, very likely were -in a Covid-19 world. Having said that, the 'net impairment' over FY2021 was only the third highest in the last five years. This points to AGL handling the debtor ledger 'quite well' during the Covid-19 pandemic.

This makes the comment in the "Financial Commentary" ( AR2021 p19 )

"CASH FLOW Net cash flow from Operations was unfavourable. The Group paid out to suppliers, contractors and employees more than was recovered from customers which illustrates the impact of COVID-19."

rather incongruous. To my thinking, that comment doesn't make sense in this context.

SNOOPY

[nztx]

Keep up the good work - Snoops -- the SP seems to be headed the right way ..