Cashflow Position (FY2021 perspective)
Quote:
Originally Posted by
Snoopy
The key line in the above cashflow statement is the 'Payments to Suppliers' line. My contention then, is that, during the Covid-19 lock down, and in the months of doubt that followed, the cashflow was saved by not installing new customer equipment for the equivalent of several months. The ceasing of this work had a big effect on 'cash out'. But capital previously spent meant that the existing capital installations(*) were cash cows that kept churning out revenue. Thus capital spending (*) at suppliers stopped, but revenue kept coming. This is my explanation for the dramatic positive change in cashflow at the operational level over FY2020!
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(*) The 'capital installations' and 'capital spending' I am referring to here is what I call 'micro capital spending' on equipment dedicated to one customer that would be recovered from that customer as part of the operational business model. I am not talking about the generally larger spending on networks that service many customers with an indeterminate payback date that I would be class as 'Investment cashflow'.
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If I am correct in reading this situation, then once the FY2021 results are released, the operational cashflow will drop back by at least $5m, confirming we are not in a bold new era of generating large excesses of operational cash.
Well it looks like I called this one wrongly! Updating the operating cashflows.
|
FY2016 |
FY2017 |
FY2018 |
FY2019 |
FY2020 |
FY2021 |
Operating Free Cashflow |
$8.241m |
$7.121m |
$7.680m |
$7.102m |
$13.698m |
$13.351m |
The Operating Free Cashflow over FY2021 continues to be strong. So let's have a look at the Cashflow Statements for the last three years to try and unpick this.
|
FY2021 |
FY2020 |
FY2019 |
Cash flows from Operating Activities |
Cash provided from: |
Receipts from Customers |
$33.094m |
$37.197m |
$35.865m |
Net GST Receipts |
($0.114m) |
$0.212m |
$0.087m |
{A} |
$32.980m |
$37.409m |
$35.952m |
Cash applied to: |
Payments to Suppliers & Employees |
$17.798m |
|
|
Payments to Suppliers |
|
$11.061m |
$15.968m |
Wages & Salaries |
|
$9.840m |
$9.659m |
Interest Expense net of Realised FX Gain/Loss |
$1.771m |
$1.652m |
$1.133m |
Income Tax Paid |
$0.060m |
$1.158m |
$2.090m |
{B} |
$19.629m |
$23.711m |
$28.850m |
Net Cashflows from Operating Activities {A}-{B} |
$13.351m |
$13.698m |
$7.102m |
When discussing last year's Operating cashflow result I wrote:
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To figure out what has happened we need to step back and think about how this company operates. A new bespoke job will typically involve a large payment up front for hardware, software and installation. This money, plus a profit margin, is recovered by Vital gradually over some years.
From p2 of AR2020 we learn
"Overall, we did see an impact to revenue, and we are experiencing a delay in forecasted orders, with some projects being postponed out to future years."
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I wonder if the reason for the good operating cashflow remains the same (set up costs for new contracts postponed)? Perhaps, when making that AR2020 commentary, they had assumed the RFP contract bid would have been sorted out by now?
Looking at other costs, the suppliers and employees gobbled up $3m less cash over the year (that's good). The income tax cash payment was down a million, although that seems a payment timing issue. The thing that most concerned me about the result was that, although the cashflow is good, the depreciation and amortization is large and real with the wireless assets (wireless assets are not long lived assets like fibre in the ground). Almost all of the welcome new wireless revenue looks to be offset by an equally large increment in depreciation. Meanwhile wired revenue dropped by a million, but the running costs of Vital's 'fixed fibre broadband' wired network barely moved.
Capex is tipped to be $5.3m for FY2022, despite the company announcing that it has completed its own major capital investments. Granted that $5.3m is not 'operating cashflow'. But that figure does show there is considerable demand on redirecting the surplus operating cashflow Vital does have into reinvestment. Does the $5.3m include future investment, assuming an RFP win? In the new 'work from home' era, is there a path back to recover some of that inner city fibre revenue from city offices scaling down or closing? I don't know the answers. I also don't feel the compelling urge to own the shares!
SNOOPY
discl; I am not and have never been a holder
Changes in Goodwill Valuation Parameters
Quote:
Originally Posted by
Snoopy
I happened to notice that testing for impairment modelling of goodwill has changed (AR2020 p27). Both the discount rate of future earnings of 9.69% ‐ 9.84% (c.f. 2019: 7.37% ‐ 7.71%) and terminal growth rate 1.0% (c.f. 2019: 0.0%) has gone up. However the overall goodwill on the books for both the wired and wireless networks has not changed. This would suggest to me that Vital needed the sales growth into the future to increase above past expectations, in order justify the same amount of goodwill on the books. If this is not happening, we could be looking for a goodwill write-down once the FY2021 accounts are done and dusted. I wonder if the announcement on 15th June 2021 that the Head of Sales and Marketing is to leave, with no indication of what 'the next phase of his career' might be (contrary to the announcement of the Chief Technology Officer leaving in March) is tied in to this sobering profit outlook picture?
Something a little odd going on here to justify the valuation of goodwill on the books. I am looking at note 14 in the FY2021 accounts, and have tabulated the equivalent figures from the previous two years.
|
Discount rate of Future Earnings |
Terminal Growth Rate |
Goodwill on Books EOFY |
FY2019 |
7.37%-7.71% |
0% |
$17.038m |
FY2020 |
9.69%-9.84% |
1% |
$17.038m |
FY2021 |
10.23%-10.28% |
1% |
$17.038m |
The actual goodwill on the books hasn't changed. But to justify the goodwill valuation, the discount rate keeps going up! That could mean a couple of things (?).
1/ The modelled earnings power of the assets that contain the goodwill have not changed. But the modelled time needed to achieve the implied earnings power of those assets has been pushed further out into the future - hence the rise in the discount rate.
2/ The modelled earnings power of the assets that contain the goodwill have not changed and neither has the modelled time needed to achieve the implied earnings power of those assets. But in the interim profits are down more than expected. So this means from an 'annual growth ' perspective, the business will have to grow faster than last year to meet the book valuation goal. And because the business will have to grow faster, that introduces more uncertainty into the business model. Hence the increase in discount rate.
Is there any other way to interpret the changes in these figures? Is this confirmation of a 'hope the business improves' strategy? Is hope even a strategy?
SNOOPY