Wow, they just announced a 20% DROP in profit.
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I calculate 2014/15 profit to be:
2013 Profit from continuing operations $5.4mil
+50% increase (as stated in annoucement) of $2.7
TOTAL $8.1 mil
That's an eps of .341
Puts AWF on a pe < 10
So the acquisition certainly makes sense.
However, the amount of debt($36 mil) on the BS and recent poor(profit) performance certainly means the stock doesn't justify the high pe that it once had. Remember, this is a cyclical stock
The market seems to like it - up 9% at the open.
From the notice of meeting;"AWF's underlying EPS could exceed 30 cents for the 2014/15 financial year. This compares with EPS of 20.7 cents reported by AWF in the 2012/13 financial year.Such an increase in earnings would allow significant headroom for a steady lift in dividends while providing for the Company to adopt an appropriate debt programme."
"The new opportunities which are expected to be created as a result of the Madison acquisition and the wider sector involvement available to the integrated AWF/Madison group is expected to significantly lift the AWF Group's attractiveness to clients.Any financial benefits in this respect have not been quantified in the above forecasts."
Very positive.Use of the word "significant" twice in the announcement is a very strong buy signal.!! lol.
Bit of a wake up call for us.
Yup. Simon may have to park the boat for a spell and crack the whip back at the mill.
disc. out today but disappointed nonetheless.
Interesting comments, snapiti.
I halved my remaining holding on the announcement to reduce the risk. I still like the yield, but seemed like one for the chop as I re-balance the portfolio to "neutral" after recent price moves across the market.
I think it is the nature of the beast that AWF have trouble attracting the best trades-people.[as do all temp agencies]
They are recruiting overseas to improve their pool of trades people.
Also the Madison acquisition will help drive stable earnings by moving into the white collar market.
Great ROE,strong balance sheet,good management make the outlook " of interest."
The talk is pretty bullish on Madison , supppose they could go gangbusters and the rest of the group could drag them down ....
https://www.nzx.com/files/attachments/185387.pdf
Nice to see Milford have joined us as shareholders.
Will we see a stampede of Milford coat-tail hanger-oners following them?
Hi Percy, Think he got the initial lot in the 5 % placement . Since the last update have sold a few ( by the looks of things to him !! ) to get into PEB amongst others ....
Happy holding the balance , positioned for the upturn in earnings when Madison kicks in .....
Yeah - kinda surprised when I saw this as hadn't seen any vol recently? But pleasing for Holders no less
As expected a "challenging year" for labour hire.
I think the coming year will be more rewarding going from statements in the announcement.;
"The AWF Group is winning SIGNIFICANT new business as a direct result of the combined AWF and Madison business proposition."
"The new opportunities Madison is providing in the permanent recruitment sector have countered the challenges of the light labour supply and the business should provide balance for the AWF Group in the future."
"Mr Huddleston said at this early stage of the 2015 year the Group was performing well and to plan."
PSI [percy significant index] With the word significant only used the once in the announcement,AWF rates as a strong hold.!
Percy , just wondering did you have a hand in the annual report ? Seems to be an abundance of " well positioned " in the first few pages .......
https://www.nzx.com/files/attachments/196069.pdf
Who ever wrote it thankfully must never look at sharetrader..!!!! I could not stop laughing.!!!! lol.
Right.Now we talk Turkey,well The PSI.The PSI is offcourse The Percy Significant Index.With the use of the word "significant" twice in the Letter from the Board we have moved onto Red Alert.Strong Buy signal has been given!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
I note the AWF agm is tomorrow.
I will again miss it.May I ask for a report from those of you who will be attending it.
Would one of you please ask whether they are on track to deliver the eps of 30 cents they referred to above. [notice of meeting to approve Maddison acquisition].
thanks in advance.
Not much depth if I wanted out....In fact no depth whatsoever now the two small buyers have gone..
I went to the AGM today. I think there were 2 keys themes:
1. The company is on target for underlying NPAT of $8mill. This is the target they set last year.
2. A capital raising of 8-10 million will be undertaken around October. Shareholders made it clear that they wished to participate.
Without a capital raising, the FY15 eps= 31c. At today's close of 2.40, it puts it on a pe of 7.84
If we include the additional shares issued as part of the capital raising, it would obviously change the pe. So lets assume $9mill raised at $2.20. This would equate to an extra 4090909 shares.Now the pe = 9.06
This is a HUGE discount to the average pe on the NZ market (16???)
even more huge than you think noodles .... some have the NZX PE at 18 to 19
Thanks for your post.
I found the presentation very confusing.
Thought it was written by someone suffering bipolar disorder.
Talk of tough times,then set for record result.Increasing the dividend,then needing a capital raising??
Thanks for working through the eps.At 31cents they will beat the 30 cents target when Maddison acquisition was voted on.
Whatever way we look at it the fundamentals are very modest.ie low PE with high dividend yield.
Seems ridiculously cheap eh noodles
Market stupid? or does the historical baggage still hand around its neck
haven't really followed lately so don't know much
The CEO of Maddison also spoke. He said that usually temp is strong and perm is weak (or vice versa). However, both are currently strong. This has never been experienced by Maddison before.
So clearly the Maddison business is doing very well.
The extra capital raised would be used to retire debt, so less interest to pay in the second half. This would also affect the PE. However I can't see the share price moving to much until the debt and capital raising issues are worked through. Capital raisings generally put downward pressure on the share price, so buyers will mostly hang off until there is more clarity.
In general I got the impression that the outlook was good, once these immediate issues have been dealt with.
Thanks Zigzag.
I had been waiting for the presentation.[Had hoped to go the the agm].Had a very quick read of the presentation,then went for a walk and had lunch,then read it again.Still did not make sense.Thanks to Noodles' and your posts, I coming to see I was "not alone" it thinking it was a very messy presentation.I share Brian Gaynor's concerns.
Thinking about the capital raising. They could avoid it if they had a fully underwritten dividend reinvestment plan. This means that the company can declare a dividend, but not have any cashflow impact. They could probably raise the amount they need in a couple of years of dividends.
I remember CLH.AX employed this strategy.
ABA also uses a DRP to manage capital ratios. My impression is that the major shareholder, Simon Hull, who owns 60% of the company, likes to get the dividend and at the same time does not want his holding diluted through a DRP. The fact that Simon owns such a large proportion of the shares also restricts liquidity and complicates capital raisings.
I believe that Madison can grow organically. The debt is being retired as a matter of prudence, and they also noted that analysts preferred that they improve the debt ratio. They said they were coping comfortably in the present environment, but if the economic situation changed, then the debt would become more of a burden.
Spoke to Mike Huddlestone this morning.Really do enjoy talking to him.A real straight shooter who is on top of his game.
Yes, they are carrying too much debt.Rather than muck around for years bringing it down,do the figures and sort it out,which they will do September/October.He noted from the agm shareholders want to be involved.No need for extra money for future acquisitions, as there are plenty of opportunities to grow the business organically,which will also include more services for customers .
Trading well and all targets will be met.
Update confirms they are trading well and all targets will be met.
Can't ask for more!! Result for half year ending 30th september will be announced 30th October,and details of capital raising before the end of the year.
The update mentioned above
https://www.nzx.com/companies/AWF/announcements/254916
Half year result out.
CRACKER.
Sales up 58%.
Net profit up 54%
interim dividend increased 12.5% to 7.2cents.
Underlying earnings ?? rose 78% and the dividend was 54% of the underlying earnings.
Still looking at balance sheet options; "In the meantime the excellent operating cashflow is permitting debt reduction to be commenced and continued on an ongoing basis."
Seem to find myself sitting on a lot of the same shares as you Mr Percy!
Agree with your earlier comments on Madison (and acted on them).
Value increased from 3.21 to 3.98 in my model. Been a long wait.
While we are waiting for details and timing of the capital raising it is pleasing to see the appointment of Wynnis Armour to the AWF board.Winnis is one of the vendors of Madison Group recently acquired by AWF.
Funny the share price is below where it was at the time of the Madison deal - with the uncertainties that surround any acquisition; Madison has proven to add to both profitability and stability of earnings through labour market cycles (permanent recruiting does better in a tight labour market and temporary in a loose one). Looks like very good value right now.
I agree the likely cash issue is having an impact. Haven't held SKE for a few years but I see they are on very low multiples - do you see this as being due to exposure to the mining sector, or some broader trend which may be relevant here?
Mostly due to exposure to mining , however they are exposed to the general economy through manufacturing which is in a big downtrend .... The CEO is departing which was a telegraphed move not a surprise, probably didn't help that he sold some shares 3 months ago , but it was probably his retirement fund . Anyway one to watch for when the mining sector bottoms out ( who knows when ) They are particularly exposed to the Gas sector these days , which has been hammered due to the oil price . Just like with AWF companies will probably take on temp labour first when coming out of recession , so think there is a future here ...it's just a matter of timing .
AWF 29/01/2015 17:14 FORECAST PRICE SENSITIVE REL: 1714 HRS AWF Group Limited FORECAST: AWF: Steady Performance Expected From AWF Group AWF Group Ltd (AWF) has advised that the Group expects a steady finish to its 31.3.15 financial year. CEO Mike Huddleston noted: - that turnover was likely to be in the vicinity of $196m - $198m - net profit after tax expected to exceed $5m (+circa 31%)* - EBITDA** is likely to be in the range of $12m-13m (+ circa 50%)* - Underlying earnings*** per share after tax are expected to lift by over 39% to approximately 26 cents per share. "As we move towards the new financial year, we are encouraged by the outlook and expect to see continued growth in all of our business units, driven from strong activity in the main centres" Mike Huddleston said.
Looking the goods
No mention of the capital raise they've been talking about, this announcement or last.
Debt is 32.6m, or 40% of total assets of 40.6m (estimates allowing for Madison second payment of $6m and repayment of some debt from current period surplus.)
With strong trading figures, maybe they're planning to repay debt from earnings now instead of a capital raise?
Yes I would like to see an announcement on the capital raise.
Either do it, and move on,or say they will repay debt out of earnings.
It has been hanging over the share price for too long.
I think they did mention they were comfortable paying it from cashflow but no official announcement .
I'd like to see them lock in some cheap long-term debt and chip away at the debt over the next few years, aiming to reduce debt to a third of assets, and applying what's left to dividends.
Getting debt down to a third of assets would take thee years by my calculations.
'What's left' , at current profit levels and recent growth, should still be enough to boost dividends by around 12% each year.
My system value is $4.29, but it probably deserves a decent discount for small size, and illiquidity.
Debt is relatively cheap just now - so why not use it instead of raising equity?
Say they lock in some debt now.
There's a chance interest rates could go a little lower - no great harm done.
There's also a chance they could go a lot higher - possible big gains.
AWF aren't in the business of interest rate speculation but all the same debt seems better than equity just now.
OTOH - if they did a small cap raise - they'd be free to increase the div payout a lot, which these days should be very good for the SP.
So after all that, I have to agree with you! Either decision is good, indecision isn't.
1:4 rights issue @ $ 2.10 ,
Also an update out if anyone has missed it .
You may have missed the retirement of huddleston. Simon Bennett will take over and as I recall he was a madison hire charged with getting madison on the nzx. I disliked MH so will now take more notice of awf
Well positioned .... and another name change !!!
28 May 2015 AWF Group (AWF) has delivered a significant lift in earnings for the year ended 31 March 2015 in line with guidance provided. Revenue rose 33% to $197.5 million and net profit lifted 37% to $5.4 million. Underlying earnings after tax - which, in the opinion of the Board, more clearly reflect the operating performance of the business - lifted 45% to $6.8 million (25.8 cents per share) As a consequence of the strong earnings achieved the company has declared a final dividend of 8 cents per share (up 5% on last year) payable on July 1 to shareholders registered as at 24 June. Directors noted that total dividend for the year at 15.2 cents (fully imputed) represents an 8.6% increase overall, and that this steady lift in dividend was consistent with earlier indications given.
Hi All,
I have looked at AWF Limited before. But it always looked a bit expensive to my superficial analysis. I was also concerned about liquidity and how I might have to bid up the share price just to get a modest stake.
However, during the rights issue period I got a call from my broker. A shareholder with a decent stake wanted to sell up and move to Australia. Was I interested in picking up a decent sized parcel of shares? A back of the envelope calculation and I was in. I have been a bit distracted with other life matters since. So I haven't had a chance to have a closer look at AWF until now. I hope you fellow (and potential shareholders) will find my AWF 'snoopshot' treatment interesting!
SNOOPY
The Annual Report for FY2014 says that: (AWF Limited) is New Zealand's largest recruitment company. This is a position achieved through 27 years of growth from modest beginnings.
The company mission statement is:
"To be the leading provider of quality recruitment and staffing solutions to NZ business."
Measured by their own standard, AWF have already fulfilled their vision as they are 'number 1' already. The scale requirement for the business is therefore satisfied.
Conclusion: Pass Test
SNOOPY
Snoopy. Buying into a down trending stock - thats brave.
I must have a closer look at the numbers but a quick glance at sales I didn't think they looked too flash.
1/2 year September = $98.6m in sales. Full year should at least be double so they have manged to tread water in second half.
Also need to account for maddison revenue. In 2013 that was around $50m. Not sure what it is now but worth looking at.
First glance rosy picture seems to be helped by maddison acquisition rather than actual growth in sales.
interesting test snoopy. It's the only player listed on the local market. So comparative numbers hard to come by.
And we don't have a definition of your "top" or awf's "largest".
But credit it where it's due: awf is big so in your context and back of an envelope analysis I'd probably give it a pass on this test as well
For this exercise I have removed the group's foray into the healthcare sector. I am referring here to the groups purchase of Panacea Healthcare on 04-10-2010, the additional purchase of Nursing NZ on 19th March 2012 and the subsequent sale of the lot on 31-08-2012.
Earnings figures calculated are adjusted net profit after tax.
2010: $2.002m/26.125m= 7.7cps
2011: ($3.212m - $0.003m +0.7x($0.465m) )/26.125m = 13.5cps
2012: ($2.877m +0.72x($0.167m+$1.100m) )/26.125m = 14.5cps
2013: $4.952m/25.805m = 19.2cps
2014: ($3.952m+0.72x(0.095m+0.257m) )/25.804m = 16.3cps
2015(*): $5.416m/ 32.463m =16.7cps
Notes:
1/ Panacea Healthcare NPAT (an non continuing business stream) removed from results for FY2011, not included in FY2012 and FY2013.
2/ Business acquisition costs removed from FY2011, FY2012 and FY2014.
3/ Goodwill impairment removed from FY2012.
4/ Due diligence cost removed from FY2014
(*) FY2015 results based on abbreviated results released. When full result becomes available it may require adjustment.
There was one dip in the underlying earnings trend following FY2013, but apart from that the eps path is steadily upwards.
Conclusion: Pass test
The eps trend is solidly upwards. Not that this in itself is sufficient reason to buy in. But it is sufficient reason to look a little deeper.
I am not too worried myself about what has happened in the last half year. I intend to hold my AWF shares for many years.Quote:
I must have a closer look at the numbers but a quick glance at sales I didn't think they looked too flash.
1/2 year September = $98.6m in sales. Full year should at least be double so they have managed to tread water in second half.
Also need to account for Madison revenue. In 2013 that was around $50m. Not sure what it is now but worth looking at.
First glance rosy picture seems to be helped by Madison acquisition rather than actual growth in sales.
The eps trend is still improving despite all of the extra shares issued in the recent rights issue. I have not looked at whether the previous business or the Madison acquisition has contributed to this growth. IMO it is unfair to judge that until Madison is bedded down. But everything is all one happy family now. So to some extent trying to discern what part of the business is doing the growing is less important than finding out if the overall business is still growing, which it is.
SNOOPY
ROE= (Net Profit)/(EOFY Shareholders Funds)
2010: $2.002m /$18.588m= 10.8%
2011: $3.535m /$19.913m = 17.7%
2012: $3.789m /$19.201m = 19.7%
2013: $4.952m /$21.607m = 22.3%
2014: $4.205m /$20.763m = 20.3%
2015(*): $5.416m/$35.931m =15.1%
The big improvement from FY2010 has been sustained. A significant drop in the FY2015 is because of the newly enlarged equity base. But even with this, AWF is earning well above its cost of capital.
Conclusion: Pass test
SNOOPY
Margin = Net Profit/Sales
2010: $2.002m /$70.329m = 2.85%
2011: $3.535m /($95.800m - $7.000m) = 3.98%
2012: $3.789m /($119.264m-$14.349m)= 3.61%
2013: $4.952m /($138.852m - $8.375m)= 3.79%
2014: $4.205m /$148.691m = 2.83%
2015(*): $5.416m/$197.5m = 2.74%
Note: For FY2011, FY2012 and FY2013 I have removed the healthcare unit profit and the associated turnover.
Margins were certainly raised above inflation between the base year FY2010 in comparison with the next subsequent three years. The last two years have seen a decline back to FY2010 margin levels. Is this because Madison is inherently 'lower margin'? AWF have already shown they are prepared to deal with below par margin businesses. That is why they sold their healthcare assets. So I am prepared to back AWF management and let them work some margin magic going forwards, as they have done before.
Conclusion: Pass Test
SNOOPY
I can answer that for you. Awf is a very simple business. There are only two ways to make money. High volume and Low margin or low volume high margin. Madison ought to be the later. If it isn't then the business is in trouble. Awf labour hire will be lower margin. If Madison is propping up awf labour hire them that's a problem
I sold a small parcel on Friday... somehow got 2.45 a share. Held for just over a year and walk away with a small gain.
Reason I sold was the stock is just not liquid enough. Founder holds over half the company. Never seems to realise its full value. In saying that seems pretty fully priced at the moment based on its result. When Chch winds down things could get a lot worse...
Welcome aboard Snoopy . Surely with all your analysis on this you would have read the major shareholder ( S Hull 66 % ) was going down to around 50 % from memory . So maybe he has gone to Australia ? There were some big parcels of rights crossed through the market which I presumed was him selling. Been a bit frustrating this , a lot of promise ( CHCH rebuild ) no delivery . I am still a long term believer . I have been trading SKE.ax , not for the feint hearted , my reasoning was more people go to part time work hire in a downturn such as the Aussie mining sector . Been a bumpy ride, on the positive side for now :)
Minimoke, I think you sum up the two driving forces for the future direction of AWF very well. It isn't clear to me that AWF will choose to 'segment out' Madison from the legacy business so that shareholders can get a feel for the margin of 'Madison' and 'Everything Else'.
Prior to the Madison acquisition, the following rather strange statement appeared in the FY2012 annual report
"Shareholders may have noted the Groups reference to the additional reporting of ‘UNDERLYING EARNINGS’. This is because now that some borrowings are being committed as part of the growth programme, given the nature of the acquisition targets (in accounting terms), containing high levels of identifiable intangible asset components (and requiring amortisation according to NZ IFRS requirements), the AWF Board considers that the resulting non cash adjustments distort true performance. Underlying earnings adjust for non cash items and in the opinion of the Board more correctly reflects the operating performance of the Group."
I am unclear if that was written with Madison (acquired November 2013) on the investment horizon. But I have never heard of any NZ IFRS requirement that means that intangible assets must be written off upon acquisition. Indeed I thought the law had been changed so that exactly the opposite happened. I.E. intangible assets were only to be written off if they were impaired. If intangible assets are forced to be written off on acquisition, doesn't that mean the acquirer paid too much for those assets? I certainly hope that all the cash spent on Madison so recently is not being written off already!
SNOOPY
Firstly Snoopy, thnask for sharing yoru tests. I think it always great as to see how others arrive at theri decisosns and is useful for learign.
And in hte intersts of healthy debate I hope you dont mind if I add a few observationsI think this test raises a huge red flag (ie a SELL, not BUY) for three reasons.
Firstly I'm wondering if you are setting your sights too low. Inflation is just above zero and we are facing the prospect of deflation. To pass this test a company only has to make the teeniest of profits to pass. Perhaps the threshold should be a bit higher. Maybe the OCR rate, or 1 year Fixed term interest rate. Obviously its your test but I'd be looking for something a bit more aspirational.
Secondly, the trend is our friend. Margin shrinkage consistently over the past four years - despite an environment where there should have been opportunity.
Thirdly 2.74%!!!. So a company has all its capital tied up with a large branch network, loads of staff, product / service diversity, IP in a market where business confidence is high (meaning companies will spend on temp workers) and the best it can do after all that effort and angst is generate 2.74% margin.. That is seriously low and the best thing that can be said, is at least it is profitable. This leaves them very vunerable to a new player with resources to come in and undercut their market, or for the market to shift very slightly and all of a sudden you are facing a loss.
So its a Fail. Yet you are stil prepared to back a management that has overseen disastrous acquisition in healthcare (and lets not go to their previous disasters) and falling margins. I'd have a vote of no confidence in management.
So its stil a fail for me on this test.
Minimoke, raising margins above the rate of inflation means consistently improving margins (above rate of inflation), not a margin higher than the rate of inflation as you outlined.
My understanding of Buffett's view on margins is a company's profitability depends not only on having a good profit margin (generally above industry averages) but also on consistently increasing it and make that assessment after looking at 5 years plus numbers. A high profit margin indicates a company is executing its business well .....but increasing margins means management has been extremely efficient and successful at controlling price and more importantly expenses.
I would think Buffett wouldn't be too impressed with Allied's margin of 2.7% and Snoopy's numbers don't really show they are improving it. Like you minimoke a fail on this test (Allied does have returns on capital though even though margins are razor thin)
Note: the 'snoopshot' is based on Buffett methodology, at least it was years ago. Probably served Snoopy well over the years
I should add that these four tests are 'indicators'. Passing these four tests means that I can apply my 'growth model' to check the fair value of this share. You will note that none of these tests say anything about fair market value. It is fair market value that determines if AWF is a buy, not passing these four tests!
A fair criticism.Quote:
And in the intersts of healthy debate I hope you dont mind if I add a few observations
I think this test raises a huge red flag (ie a SELL, not BUY) for three reasons.
Firstly I'm wondering if you are setting your sights too low. Inflation is just above zero and we are facing the prospect of deflation. To pass this test a company only has to make the teeniest of profits to pass. Perhaps the threshold should be a bit higher. Maybe the OCR rate, or 1 year Fixed term interest rate. Obviously its your test but I'd be looking for something a bit more aspirational.
What I am looking for in test 4 is some indication that in a company's relatively recent history they have been able to increase margins. Going from 2.85% (FY2010) to 3.98% (FY2011) is a ratio of:
3.98/2.85 = 1.40
That represents a 40% increase in margin, way, way in excess of inflation. Granted all that margin expansion has been undone in subsequent years. But the point of the test is can management increase their margins? Is there any evidence at all that they can? If they can do it once, then maybe they can do it again? In a competitive market, I think it is too much for any company to expect an increase in margin year on year.
I do take your point though that 'Test 4' may be the weakest of the four indicator tests.
I would say that should margin shrink again in FY2016, then the argument that management is still capable of increasing margins going forwards would be looking shakey.Quote:
Secondly, the trend is our friend. Margin shrinkage consistently over the past four years - despite an environment where there should have been opportunity.
2.74% as a margin? Yes I would like to see it higher. But this is, IMO, likely an industry margin parameter, rather than something specific to AWF.Quote:
Thirdly 2.74%!!!. So a company has all its capital tied up with a large branch network, loads of staff, product / service diversity, IP in a market where business confidence is high (meaning companies will spend on temp workers) and the best it can do after all that effort and angst is generate 2.74% margin.. That is seriously low and the best thing that can be said, is at least it is profitable. This leaves them very vulnerable to a new player with resources to come in and undercut their market, or for the market to shift very slightly and all of a sudden you are facing a loss.
All businesses in a competitive market are vulnerable to competition. But I don't think the largest player in the market will be dangerously damaged within a ten year timeframe (addressing this issue is the reason for Test 1).
To give management their due, they got out of healthcare quickly and made a nice (one off) profit on the way through.Quote:
So its a Fail. Yet you are stil prepared to back a management that has overseen disastrous acquisition in healthcare (and lets not go to their previous disasters) and falling margins. I'd have a vote of no confidence in management.
Events are open to different interpretations. I respect that your interpretation of events has lead to a somewhat different conclusion to mine. I am prepared to say that you may end up being right and I may end up being wrong. I haven't said the investment case for AWF is clear cut. For the moment though there are enough positives, to my way of viewing things, to keep me invested in the AWF game.Quote:
So its stil a fail for me on this test.
SNOOPY
OK, I kinda get this test. But if we have faith in management (which we must surely do) shouldn't we be looking at numbers warts and all. If you are cherry picking bits to take out shouldn't you also therfore remove the Madison acquisition from latest years results?
From the number of shares quoted to me, I don't think the shareholder selling down was Hull. From memory the number of shares being quit in total was some 200,000. A lot of shares for most people, but only a drop in the bucket of Simon Hull's shareholding.
SNOOPY
I took out the healthcare results because there is no indication that 'healthcare' will form part of the business going forwards. 'Healthcare' sounded like a good expansion path at the time, but proved not to be so. We investors today have the benefit of that hindsight, and so should look forwards with that hindsight.
By contrast Madison is at the core of 'AWF Madison' going forwards. To remove it would be tantamount to saying that Madison will not be a significant part of the business going forwards. Management is still backing Madison. So I think that looking forwards, you have to regard Madison and the rest of the legacy business as one investment package.
SNOOPY
If we are talking about "raising" margins shouldn't the margin actually be raised. So say we have a margin of 10% and inflation is running at 3% shouldn't we be seeing a new margin of 13%. Other wise all we are doing is looking at a margin greater than inflation.
Minimoke, the ROE test is a strong pass. Even if the FY2015 ROE result had dipped below 15%, the test is a pass.
The FY2015 ROE is significantly lower than last year because I am using the end of year capital to judge the return on capital for the whole year. AWF I am sure would use some weighted average capital measure and produce a higher ROE figure for FY2015. AWF didn't even receive the cash issue capital until just before the end of the year. The fact that they couldn't make a serious return on this capital for the single day they had it (cash issue closed 31st March, the EOFY balance date) comes as no surprise. To see how well AWF can utilise this new capital, shareholders will have to wait until FY2016.
In summary, while the drop in ROE for 2015 looks shocking, it is really a quirk in the calculation method, caused by the timing of the capital raising, that has produced this figure. For that reason I wouldn't read too much into that 15.1% value.
SNOOPY
I might guess that AWF would say that you cannot separate Madison from the legacy business going forwards anyway. Madison was bought so that customers could go to AWF as a one stop employment solution. If you want a combination of white and blue collared shirts to do the job, now AWF can do it. Such a job may have been lost to AWF before. You are assuming that the Madison acquisition would create a series 1+1=2 jobs for AWF. AWF is telling you that acquiring Madison will create profit using the formula 1+1=3. AWF is getting incremental business that neither Madison nor the old AWF would have got if they were still separate stand alone entities.
That's the story. Whether 1+1 really does equal 3, I guess we will find out in due course.
SNOOPY
I love it when the FA's get the abacus out, us minions can pull up a chart and check out the SP entry/exit capital risks. Thanks Snoopy, you're a Legend.
This is a weekly chart, it looks pretty anaemic for the past couple of years, has no respect for the 200day EMA (39EMA on the weekly chart), but has developed a very symmetrical trading pattern, and is poised to test the 39EMA weekly / 200EMA daily, again, right now. A break out above the 39EMA, then the descending trend line would give confidence, but a rise above $2.54 would suggest a breakout has some legs.
Attachment 7386
Thanks,
BAA
AWF Limited is showing a strong return on equity profile. One way to do this is to borrow heaps. Unfortunately this method of increasing ROE usually comes back to bite shareholders. So has AWF currently leveraged their balance sheet to help make this important statistic look good?
My preferred method of answering this question is to look at what happens if all profits are redirected to repaying debt. In reality this is unlikely to happen. Shareholders like their dividends, and businesses must invest for the future. Also a debt free company may not be 'capital efficient'. Nevertheless 'MDRP' does provide a gauge of just how quickly a company could eliminate their debt should they (or their bankers decree!) that they do so. A figure over 10 years I regard as suspect. A figure under three years I regard as very good. So how does AWF measure up in 2015?
Bank debt in the FY2015 results announcement is as follows:
Cash & Cash Equivalents: {A} $3.151m Non Current Borrowings: $0 Current Borrowings: $21.759m Total Borrowings: {B} $21.759m Total Net Borrowings: {B}{A} $18.608m
Net profit after tax: $5.416m
MDRT = $18.608m/ $5.416m = 3.4 years
This I regard as quite acceptable. AWF are not overleveraged, and considering their cash issue had just been banked on this balance date, probably close to their targeted leverage.
SNOOPY
They say history is no guarantee of future results. But I have created the following table, charting earnings per share in a calendar year verses dividends per share in a calendar year. This is representative of AWFs cash flow position for the respective years. This differs from the companies declared results because the final dividend is always paid in the subsequent year. I am more comfortable using actual cash flow though, which is why I choose to present the eps/dps results in this way.
I have left out the one off dividend of 3cps paid in FY2014 as a result of the capital gain made on the sale of the healthcare business. One off sales do not represent repeatable sustainable dividends from ongoing operations.
eps dps 2007 7.0 8.93 2008 7.2 5.8 2009 8.2 6.5 2010 7.7 4.5 2011 13.5 8.3 2012 14.5 11.4 2013 18.7 14.4 2014 16.4 15.6 2015 16.7 14.8 Total 109.9 90.23
Over the last nine years, AWF have paid out 82% of their ongoing earnings as dividends. The 18% of earnings retained (together with the cash issue earlier in 2015) have been used to grow the business. ROE has been maintained at good levels from FY2011 to FY2014 inclusive. This indicates retained earnings have been used wisely. This bolsters my case for AWF Limited to be regarded as a 'growth company' for financial modelling purposes.
SNOOPY
Using
1/the 82% payout ratio and
2/ an historical average PE of 13.0 (as at 31st March, just before results are announced, taken over 9 years) THEN
the Mary Buffett style 'Growth Model' calculation looks like this:
Year Assets SOFY eps dps Retained Earnings 2016 $1.11 16.7c 14.8c 1.9c 2017 $1.13 20.0c 16.4c 3.6c 2018 $1.16 20.6c 16.9c 3.7c 2019 $1.20 21.3c 17.4c 3.8c 2020 $1.24 22.0c 18.0c 4.0c 2021 $1.28 22.7c 18.6c 4.1c 2022 $1.32 23.4c 19.2c 4.2c 2023 $1.36 24.1c 19.8c 4.3c 2024 $1.41 24.9c 20.4c 4.5c 2025 $1.45 25.7c 21.1c 4.6c 2026 $1.50 26.5c Sum $1.83
Using a PE of 13.0 at the start of FY2016 the projected AWF share price is:
P/E x E = 13.0 x $0.265 = $3.44
Based on an acquisition price of $2.30 (where I bought in during the rights issue) the ten year compounding net annual return 'i' is projected as:
$2.30(1+i)^10 = ($3.44+$1.83) => i= 8.6%
That looks decent, if not mortgage your house compelling. But sometimes the numbers do not tell the whole story.
The above projection assumes that the Madison acquisition works. IOW the 1+1=3 formula for generating new business can be cashed up. Yes this is what management plans. But from an investor perspective AWF are sailing into new territory. There is an execution risk here that falls outside what AWF have done before. So I am calling AWF only as 'fair value' based on this calculation. I can see better investment options in other shares in the market right now. I will be following how AWF use the funds from their recent capital raising. But I won't be actively chasing more shares until I can see the forward strategy bedding down. If the share price were to weaken below $2, then I will definitely be looking to buy more.
SNOOPY
$2.54(1+i)^10 = ($3.44+$1.83) => i= 7.6%
That is 100 base points worse than the return I would be getting (per annum). This is the reason I wouldn't use charts to 'enhance' my return on an investment such as this. Another point: The dividend is a relatively high percentage of the overall return both historically and in the forward projections. So the chart data is not complete.
Of course as a chartist there is no need to make any assumption about the 'legs' of any break out. You simply ride it and exit once the trend ends. With this share though, I have a pretty good idea of the breakout potential. The underlying drivers of share price improvement are earnings improvement and valuation multiple improvement. The current valuation multiple is not out of line with the history of this share. So there is unlikely to be a boost in share price from that perspective. Long term earnings growth is something like 3.3% compounding per year. So it is unlikely we will see big leaps in the share price. More like sensibly sized steps from small legs.
With investment it is always a good idea to grab the low hanging fruit. My strategy is to grab an extra 24c of value before the likes of Baa would jump in. So Baa would give away the easy profit, and enter at significantly higher level? I am sorry, but none of that makes any sense to me as part of an investment strategy with AWF Limited.
SNOOPY
Well done snoops, I like it
One question - is the jump in ROE in 2017 to 17.7% related to your 1+1=3 discussion? (Forgive for not checking back)
You seem to have short changed yourself on the dividends or is there a reason for not including 2026?
She a pretty smart gal that Mary, Warren owes a lot to you I reckon
So from many years posts Warren wouldn't be buying AWF ....his 15% pa hurdle.
Good work
Far be it for me to take on a guru and FA expert, however being alerted to this company by Snoopy whom I have great respect for, I pulled up a chart and saw to my surprise that it is in a pattern of sustained capital erosion over the past two years.
Roughly 33% of capital from the May17'2013 high has been lost, which if the trend continued would make it unwise imho to enter now with a new holding, or increase an existing holding, as the risk is further loss of capital and thus erosion of dividends. There's nothing right now that suggests the trend has changed.
My usual 10/14 weekly EMA would be unreliable on this chart as the stock is not strongly trending. Even the 200EMA is unreliable as that the price has reverted quickly after each breakout during the past two years.
My point I thought was simple, it is not about enhancing ROI it is about whether the trend of capital loss reverts to capital gains and at what price would give confidence to take a position, enjoying capital growth and dividends. The chart is just a timing tool, it helps I think with better understanding the market sentiment around AWF.
Respectfully,
BAA
Sorry, I retracted my questions from previous post after re-reading Snoopy's posts, that a price below $2 is a good entry. That implies the downtrend may continue, which will of course bring down the EMA's as well. I'd still prefer buying a confirmed breakout of the descending pennant though, with the risk being that I miss the easy profit, assuming the price rises from a $2 entry and does breakout of the trading range.
BaaBaa, Snoopy says $2.might interest him.
From that May 13 high of 321 AWF is down ....all of 85 cents. You could say one reason is eps being down but market sentiment has played a part as well with the PE falling from 17 to 14
Lower earnings impact 34 cents and the market sentiment (PE down) impact is 51 cents
Double whammy and the chart shows it.
I think Snoops hypothesis is earnings have recovered and will grow and that in 10 years time it will deserve a PE of 13. Reading snoops mind I don't think he gives a stuff how the share price gets to his model value of $3.45 in 2026, as long as it that price then. But isn't it spooky,really spooky, that his target of $3.45 is about what it was 2 years ago. Just shows how wrong / stupid the market was 2 years ago. That change of sentiment reflected in your charts.
So I'd watch that chart .....once it turns and snoops hypothesis turns into reality good gains to be made.
Often when sentiment changes like it has for AWF over the last 2 years the rerating will overshoot on the underside - like go to a PE of 10, ouch a share price of 170. Sometimes they become a pariah of the market and languish at low PEs. Sometimes something excites the market and a downtrend can eeverse quiet quickly.
Your charts will tell what eventuates won't it BaaBaa.
Like you I would be buying just now either
But Mary a smart lady. She be telling Warren over a cuppa don't buy above 136 'remember that 15% pa hurdle dear"
Thanks winner, nice mediation, bringing together varying perspectives all looking for a bright future through differing lenses. Hopefully the sum of the parts equals more clarity.
Baa, I don't think that pulling up a chart and looking at it without further thought has produced a true picture of what has been happening at AWF over the last couple of years.
From FY2013 the following dividends have been declared and paid:
8, 6.4, 12.2, 6.4, 7.6, 7.2 (all cps)
I am not including the most recently declared dividend of 8cps, as we are not yet past the ex dividend date for that one.
So total dividends paid over your 'period of concern' amount to 47.8cps (fully imputed).
There has also been a one for four rights issue at $2.10 declared on 4th March 2015. On 4th March 2015, the AWF share price was $2.40. For every four of those shares held, shareholders got the right to subscribe for a new share at $2.10.
This means the theoretical ex-rights issue share price at the ex-rights date was:
(4($2.40) + $2.10)/5 = $2.34.
That means 6c of 'value' that you might deem lost is solely due to shareholders being able to buy new shares at a discount. This discounted share offer was a good thing for shareholders, not a bad thing.
In summary, the total value transferred to shareholders, after tax, over your 'period of concern' was:
47.8c + 6c = 53.8c
I put it to you that the capital loss that you think you see in the chart has actually been transferred to shareholders pockets. Returning capital to shareholders is good, because it gives them the choice as to whether to reinvest that capital or not. The capital loss that you thought you saw is only there because you didn't take into account the other transfers of capital not shown in your chart. Thus I submit there is no pattern of capital erosion as you claim, and no pattern of capital loss to avoid.
Your suggestion that dividends may erode is spurious too as the earnings per share trend is steadily increasing not decreasing. In short by not doing your homework fully, your chart has painted a picture which is the exact opposite of what is really happening with AWF.
SNOOPY
Winner the first line in my earnings table, relating to FY2016 refers to the current year which includes the dividemd of 8c declared but not yet received. I have assumed the second dividend payment for this year does not change (is 7.2cps) as no forecast of a dividend increase has been made.
The jump you noted, in the FY2017 year, is because I am assuming an ROE of 17.7% in that year and all subsequent years. The 17.7% comes from the actual ROE figures from FY2010 to FY2015 inclusive that have been averaged. The actual ROE figures for each year that I have used to generate 17.7% were:
10.8%, 17.8%, 19.7%, 22.3%, 20.4%, 15.1%
It is only since FY2011 that AWF has been generating decent ROE returns. One could argue I should leave the FY2010 data point -at 10.8%- out. But I have included it because all businesses do occasionally have bad years. The 15.1% ROE for FY2015 is probably artificially low because it includes the capital raised by the company on 31st March from the rights issue. The company was not able to use this new capital at all during FY2015, even though it is there at the end of year balance date. All things considered, I believe my 17.7% ROE figure is reasonable, maybe a bit conservative. But then again I have made now allowance for any Madison execution strategy risk.
I have always included 10 years worth of dividends Winner, not 11. This is the way Mary Buffett does it. I guess you could devise an alternative method using say 9 or 11 years of dividends. I'll have to give it some thought.Quote:
You seem to have short changed yourself on the dividends or is there a reason for not including 2026?
For those who don't know, Mary Buffett is Warren's estranged daughter in law and author of the 'Buffetology' series of books. So I don't think Warren himself will be worrying too much about Mary these days.Quote:
She a pretty smart gal that Mary, Warren owes a lot to you I reckon
So from many years posts Warren wouldn't be buying AWF ....his 15% pa hurdle.
I must admit have relaxed that 15% return hurdle for myself in recent years. It is hard to be that staunch when the alternative is earning 3.5% at call!
SNOOPY