BT1/ STRONG MARKET POSITION (Top 3 in chosen market sector) [perspective FY2020]
'Vital', as this company was rebranded in 2019, is a small niche overlooked share (you can tell that because since the company name changed from Teamtalk a couple of years ago, no-one has bothered to update the thread title). This indicates to me it might be 'worth a snoop'. So let me introduce them to you as a provider of infrastructure and communication services.
Vital has two divisions:
1/ 'Wired Networks' that principally consists of two wholesale fibre communication networks, one around the CBD in Wellington (acquired) and the other around the CBD in Auckland (built in house). Originally branded as 'Citylink', the Wellington network in particular, 32km of the 250km total, has been extensively rebuilt in the last few years. The 'old overhead cables' - that piggy backed on the now retired trolley bus line network - have migrated underground. They now goes through the old Powerco subterranean gas ducting. Of course the electronics on the end of the fibre have concurrently been updated to produce a more flexible product package range that tops out for maximum speed at 10Gbps (slightly higher than the maximum 8Gbps offered by top line Chorus hyperfibre). 'Citylink' serves business (including Dimension Data and Datacom) and the telecommunications industry (including Spark, Vodaphone and 2 degrees). Vital have a TAAS (Telecommunications as a service) contract with the Department of Internal Affairs to deliver telecommunications services for all government agencies. Further, 'Citylink' are contracted to operate Wellington's free Wi Fi service throughout the CBD. They also offer cloud based data storage capability to customers in Wellington and Auckland, and provide peering exchanges for ISPs to share data.
The original 'Citylink' Network was sold by the Wellington City Council in 1999 to investment firm 'Active Equities'. It was subsequently acquired by Teamtalk (as Vital was named then) in 2006.
2/ 'Wireless Networks' is New Zealand's only nationwide wholesale radio network for voice and data traffic, and it operates in the microwave spectrum. This division operates three networks, (1) 'ActionNet' the legacy network that is in the process of being replaced by a (2) new digital radio network equivalent (engineered by Tait Electronics of Christchurch). Customers may be found in the Civil Defence, Emergency Services, Health, Utilities, Public Transport Education and Logistics and Freight sectors. 'Wellington Electricity' and "Auckland Airport' are two of the more high profile customers. There is a dedicated network for emergency services too, with a new contract just signed for St Johns. In 2016, Vital launched (3) 'RT max' as an affordable entry level digital radio service based on Motorola's 'Linked Capacity Plus' technology.
A significant capital raise of $8.2m was made in FY2019 to go towards funding these upgrades, and a new computerised management system to support them. The current company policy (AR2019 p2) is to pay out 50-70% of NPAT as dividends to ensure enough cash is retained to keep investing in the networks.
For those students of history, there was a third division 'Farmside' that concentrated on selling satellite and fixed wireless internet in rural areas. However this division was sold to Vodaphone in two tranches of 1/ 70% on 1st June 2017, and 2/ 30% on 31st May 2018.
Conclusion: As (1) the only nationwide wholesale provider of a digital radio service and as (2) one of the top three in the fibre Wellington market (with Vodaphone and Chorus) and Auckland (with Vector and Chorus) , Vital PASSes this first test.
SNOOPY
BT2/ INCREASING EARNINGS PER SHARE TREND (one setback allowed) [perspective 2020]
eps = Normalised Profit / No. Shares on Issue at End of Financial Year
FY2016: 0.72( $4.569m + $0.229m ) / 28.369m shares = 12.2cps
FY2017: ($4.144m - 0.72($0.457m) ) / 28.369m shares = 13.5cps
FY2018: ($4.512m - 0.72($0.195m) ) / 28.369m shares = 15.3cps
FY2019: ($4.054m + 0.72($0.205m) ) / 41.381m shares = 10.2cps
FY2020: ($0.734m + $0.44m +0.72($0.211) ) / 41.381m shares = 3.2cps
Notes
1/ FY2016, FY2017 and FY2018 results have had operating returns from the now sold 'Farmside' division removed. Any profits from the sale of this division have also not been included in these earnings figures.
2/ In every year I have adjusted for the 'after tax effect' of any gain or loss in the fair value of derivatives (found in the 'Finance and Expense' note in each respective annual report).
3/ In FY2020 I have added back the claimed 'after tax effect' of the adoption of adoption of IFRS 16 on the treatment of leases. Reading p4 of AR2020, the contempt with which IFRS 16 is held is remarkable. The Chairman in effect says it is a non-cash adjustment that should be ignored!
4/ For years FY2016 and FY2017 I have changed the tax rate to the standard corporate rate of 28%. This removes the effect of previous years tax losses skewing the operational results for the current year.
Conclusion: Things were going well until the 'set back' of FY2019, which was 'Covid compounded' by the deferring of customer upgrades in FY2020. FAIL test!
SNOOPY
BT3/: RETURN ON EQUITY (>15% for five years, one setback allowed) [perspectiveFY2020]
Return on Equity = Normalised Profit / End of Year Shareholder Funds
FY2016: $3.455m / $20.209m = 17.1%
FY2017: $3.815m / $25.327m = 15.1%
FY2018: $4.372m / $29.766m = 14.7%
FY2019: $4.202m / $42.095m = 10.0%
FY2020: $1.326m / $41.740m = 3.2%
Conclusion: You could say within rounding errors that things were OK until the 'setback' of FY2019. This was then compounded by an even bigger setback in FY2020. FAIL test!
SNOOPY
BT4/ Ability to raise margins at above the rate of inflation [perspective 2020]
Net Profit margin = Normalised Profit / Normalised Revenue
FY2016: $3.455m / $32.923m = 10.5%
FY2017: $3.815m / $34.766m = 11.0%
FY2018: $4.372m / $34.225m = 12.8%
FY2019: $4.202m / $34.771m = 12.1%
FY2020: $1.326m / $32.868m = 4.0%
Conclusion: Good profitability gains between FY2016 and FY2018 which proves it can be done. PASS test!
SNOOPY
Grant Samuel Valuation Updated (FY2020 Perspective)
Quote:
Originally Posted by
flyinglizard
Very interesting chart, feed me at $0.77 -$0.75 if you do not want the share
I for one won't be feeding you any shares Flyinglizard, because I don't hold any. The Buffett style interrogation of the financials has thrown up a couple of unwelcome trends. But like all published information, it is historical. I think anyone investing from here will be looking for a recovery. Indeed that is what the Grant Samuel valuation report said back in 2017 when Spark made their takeover offer at 80c, and the Samualoid came back with a much higher valuation (refer to page 27 of the 'Independent Advisors Report' dated 23rd March 2017). Using a perspective from the last balance date, I have adjusted this valuation for:
1/ The sale of 'Farmside' AND
2/ There now being 41.381m shares on issue AND
3/ Current Net Term Debt being $1.8m - $14m AND
4/ A Capital Investment adjustment of $7.809m
to be between
Vital Valuation Summary (Adjusted GS) |
|
Low |
High |
Enterprise Value - Teamtalk Mobile radio |
$30.8m |
$38.5m |
Enterprise Value - Citylink |
$44.6m |
$52.7m |
Equity Proportion of Corporate Costs |
($5.7m) |
($5.7m) |
Combined Enterprise Value |
$69.7m |
$85.5m |
Net Debt for Valuation Purposes |
($12.1m) |
($12.1m) |
Capital Expenditure Adjustment |
($7.8m) |
($7.8m) |
Equity Value |
$49.8m |
$65.6m |
No. Shares on Issue |
41.4m |
41.4m |
Takeover Share Price |
$1.20 |
$1.58 |
Expected Trading Range (x0.75) |
$0.90 |
$1.19 |
The above also assumes that Vital will be able to execute their business plan successfully.
Grant Samuel in 2017 was looking at a CAGR (Compounding Annual Growth Rate) for revenue of 3.4% for Citylink and 4.6% for Radio up until FY2022. The actual revenue growth rate so far is as follows.
|
FY2017 Revenue |
FY2020 Revenue (Actual) |
FY2020 Revenue (GS Forecast) |
Citylink Revenue |
$14.599m |
$13.678m |
$16.139m |
Teamtalk Radio |
$20.167m |
$21.771m |
$23.080m |
Notes
1/ For annual growth rates, see GS Report p29 (Mobile Radio Growth, CAGR 4.6%) and GS Report p30 (Citylink Growth, CAGR 3.4%)
Comparing 'actual' to 'forecast' revenues, there is quite a lot of catching up to do. So it looks like that expected trading range of the share price that falls out of the GS modelling is a little high. So that could explain why the share price for VTL closed at 80c today. Maybe Mr Market isn't so stupid after all?
SNOOPY
Profit Forecast for FY2022 and FY2023
Quote:
Originally Posted by
Snoopy
Net Profit margin = Normalised Profit / Normalised Revenue
FY2016: $3.455m / $32.923m = 10.5%
FY2017: $3.815m / $34.766m = 11.0%
FY2018: $4.372m / $34.225m = 12.8%
FY2019: $4.202m / $34.771m = 12.1%
FY2020: $1.326m / $32.868m = 4.0%
HYR2021, a 25th February announcement, contains the following quote in the interim report covering letter.
-------------------
Outlook
Vital provides full year guidance for FY21 that Net Profit after Tax will be broadly in line to FY20.
-------------------
This statement is in the context of the previous year incorporating the initial Covid-19 lock down and the immediate business uncertainty that followed to 30th June 2020. That being the case, it is disappointing that there will be no improvement in NPAT this FY2021 year. The new St John Ambulance contract announced at EOFY2020 should have flowed into the HY2021 result. Revenue was up to $17.85m for the half year, which combined with 2HY2020 revenue of $15.978m, gives a half year annualised revenue of $33.828m (+3% on FY2020). Not disastrous, but still below FY2019, FY2018 and FY2017, despite all the new technology being deployed.
On the hunt for clues, 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?
Back to the half year profit announcement letter:
"Vital is also on track to achieve the savings target we set ourselves back in 2019, and to date we have identified $1.8m of the $2.0m annualised target. Approximately $1.1m is expected to be fully realised in FY22 financial year with the remaining identified savings to be realised in FY23."
Now let's say the new Head of Sales and Marketing is able to boost profits by half the modelled discount rate (4.85% - 4.92%) -say 4.89%- in each of FY2022 and FY2023. That would see underlying profits go up from $1.326m (FY2021 estimate unchanged from FY2020) to $1.391m (for FY2022) and $1.459m (for FY2023). On top of this, we can add the after tax benefits of the identified cost savings of 0.72 x $1.1m = $0.792m (for FY2022) and 0.72 x $2m = $1.44m (for FY2023). Putting all that together, my underlying profit forecasts for the future are (assuming 41.740m shares are on issue):
FY2022: $1.391m+$0.792m = $2.183m or 5.2cps
FY2023: $1.459m+$1.440m = $2.899m or 6.9cps
'Vital' trades at 79c on the market today. If my earnings predictions are accurate, then this trading price represents a PER 15.2 on FY2022 earnings and 11.4 on FY2023 earnings.
SNOOPY
Cashflow Position (FY2020 perspective)
Quote:
Originally Posted by
flyinglizard
They have completed three years network upgrading, so the future earning should go up again.
To garner the likelihood of flyinglizards prediction coming to pass, it might be useful to take all the reinvestment out of the equation and just look at the operating cashflows.
|
FY2016 |
FY2017 |
FY2018 |
FY2019 |
FY2020 |
Operating Free Cashflow |
$8.241m |
$7.121m |
$7.680m |
$7.102m |
$13.698m |
After a declining trend that bump in Operating Free Cashflow over FY2020 looks promising. So let's have a look at the Cashflow Statements for the last two years to try and see what happened.
|
FY2020 |
FY2019 |
Cash flows from Operating Activities |
Cash provided from: |
Receipts from Customers |
$37.197m |
$35.865m |
Net GST Receipts |
$0.212m |
$0.087m |
{A} |
$37.409m |
$35.952m |
Cash applied to: |
Payments to Suppliers |
$11.061m |
$15.968m |
Wages & Salaries |
$9.840m |
$9.659m |
Interest Expense net of Realised FX Gain/Loss |
$1.652m |
$1.133m |
Income Tax Paid |
$1.158m |
$2.090m |
{B} |
$23.711m |
$28.850m |
Net Cashflows from Operating Activities {A}-{B} |
$13.698m |
$7.102m |
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."
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!
---------------------
(*) 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'.
---------------------
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.
SNOOPY
Capitalised Dividend Valuation (FY2021 perspective)
Year |
Dividends as Declared |
Gross Dividends |
Gross Dividend Total |
FY2017 |
0c +0c |
0c + 0c |
0c |
FY2018 |
0c +0c |
0c + 0c |
0c |
FY2019 |
0c + 0c |
0c + 0c |
0c |
FY2020 |
3.5c + 0c |
4.86c + 0c |
4.86c |
FY2021 |
2.5c + 0c |
3.47c + 0c |
3.47c |
Total |
|
|
8.33c |
Averaged over 5 years, the dividend works out at 8.33c/5 = 1.67c (gross dividend) per year.
I have considered a capitalised dividend rate of 5% as appropriate for Chorus. However, taking account of VTL being a much smaller beast with a concentrated two area geographical market for broadband, I feel a 6% capitalised dividend rate is more appropriate here. This assumption, combined with the five year average of earnings gives a 'fair value' for VTL shares as:
1.67c / 0.06 = 28cps
SNOOPY
Buffett Test: Overall Evaluation Conclusion [perspective 2020]
I have been thinking about the Buffett test results for a few days, so this summary makes some sense of how the Vital business is operating. Vital have been operating in a couple of market niches where they have done well (a national coverage two way radio market in which they are the sole player, and fast internet in downtown Wellington and Auckland), and which show the potential for good profit margins. Vital have sold a third business arm (Farmside) that did not have such a positive outlook. They have spent significant capital upgrading their National Two Way Radio Service to digital, and have relocated (Wellington) and electronically upgraded (Wellington and Auckland) their two central city broadband fibre loops. BUT.....
Where is the revenue growth as a result of all this new investment (I use Chorus in the table below for comparative purposes)?
|
HY2020 |
HY2021 |
Increment (Decrement) |
Chorus Fibre Revenue |
$187m |
$228m |
+21.9% |
Vital Fibre Revenue |
$6.425m |
$5.896m |
(8.2%) |
Vital Wireless Revenue |
$10.467m |
$11.955m |
+14.2% |
OK at least Wireless revenues are growing. But Wireless are loss making at the EBIT level and the loss increased to ($0.883)m from ($0.804)m over the pcp. We also know the 'Head of Sales and Marketing', Phil Henderson left the company on 16th June 2021. Earnings per share sank over the initial Covid-19 year, which was not a surprise. Return on Equity slumped in sympathy. But in fact 'eps' was in decline a year before that. What perhaps is a surprise is that there is no 'eps' recovery expected from that Covid-19 low this year. With such a poor sales period, thoughts inevitably turn to the overall robustness of the company in such tough trading times. I have explored this on the 'Fibre Broadband' thread.
'Interest Cover' ( EBIT/I = 3.51 ) and overall ability to repay debt ( 'Net Debt'/EBITDA = 2.17 ), compare favourably with my comparative set of broadband network operators. That means I don't see any short term questions about the viability of Vital, even with its current depressed levels of profitability. However, in the recent past, Vital has shown that they will not hesitate to cut dividends if that capital can be put to better use reinvesting back into the company. This explains the rather low 'Capitalised Dividend Valuation' of 28cps (my post 846) that I have made of Vital. This 28cps value is historical. A dividend declared when the annual result is announced will bump this figure up, albeit to nowhere near where VTL has been trading of late - near 80c.
It has been said on this forum before that board appointments made of former politicians have in the past seen such appointments 'out of their depth'. I don't think you could say that about Chairman Roger Sowry though, who made this very prescient remark showing very good understanding of the business in AR2016. The comment IMO is still very apt today.
"Trading conditions continue to be tight, and as forecast, margins are under pressure as customers continually pursue more services at a lower cost. Unfortunately not all of our cost inputs necessarily follow the same path so we are constantly having to review the way we do things, as we continually strive to do as much as we can with our shareholders’ money."
In summary Vital looks to be on a well thought out business track. But customers want more and more for less and less and Vital can't rearrange that equation to give a decent profit outlook for shareholders. Buffett would not be investing (I guess you knew that before starting to read this post). And I would want to see a much more favorable progression along the business plan path, or alternatively a share price closer to 50c, before I would consider investing in VTL myself. That sounds like my cue to exit from this thread.
SNOOPY
discl: do not hold and do not plan to
Capitalised Dividend Valuation (FY2022 perspective)
Quote:
Originally Posted by
nztx
All the increases seem fine but VTL's Div Payouts in past 3 years (paid once a year in Oct) show the reverse:
2019 3.0 cps
2020 2.5 cps
2021 2.0 cps
(all fully imputed)
Well I have some good news. As a result of the declared dividend, that will be paid in FY2022, the 'capitalised dividend valuation' of this company has increased (was 28cps)!
Year |
Dividends as Declared |
Gross Dividends |
Gross Dividend Total |
FY2018 |
0c +0c |
0c + 0c |
0c |
FY2019 |
0c + 0c |
0c + 0c |
0c |
FY2020 |
3.5c + 0c |
4.86c + 0c |
4.86c |
FY2021 |
2.5c + 0c |
3.47c + 0c |
3.47c |
FY2022 |
2.0c +0c |
2.78c + 0c |
2.78c |
Total |
|
|
11.11c |
Averaged over 5 years, the dividend works out at 11.11c/5 = 2.22c (gross dividend) per year.
I have considered a capitalised dividend rate of 5% as appropriate for Chorus. However, taking account of VTL being a much smaller beast with a concentrated two area geographical market for broadband, I feel a 6% capitalised dividend rate is more appropriate here. This assumption, combined with the five year average of earnings gives a 'fair value' for VTL shares as:
2.22c / 0.06 = 37cps :t_up:
SNOOPY
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!
---------------------
(*) 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'.
---------------------
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:
---------------------
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."
--------------------
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
Slipping Away - a song biography
Quote:
Originally Posted by
Snoopy
Quote:
Originally Posted by
stoploss
Sorrry, I have gone a bit off topic here but I thought I would do a 'bit on the side review', since this song seems to have generated some interest.
Ferg has signed off on his music check list, but I was having some withdrawal symptoms so here is my own superficial research on this song.
Max Merritt (active 1956-2020) was a New Zealand-born singer-songwriter and guitarist. He is best known for his association with the group "Max Merritt & The Meteors", which performed as a group from 1959 to 1980. Naming a line up however is more difficult because 33 different individuals, including our own Bruno Lawrence, performed with the group over that time.
By 1975 the then current incarnation of 'Max Merritt and the Meteors' were an old guard act playing the pub circuit in London against the emerging punk scene. After 16 years on the road 'Slipping Away' became the groups biggest hit single making it to number 2 in the charts in Australia and number 5 in New Zealand over 1975/1976. 'Slipping Away' was released from the "A Little Easier" Album on the Aritsa label. The original video for Slipping Away was filmed at The White Hart in Harlesdon in London.
In a 2011 interview by Johnny Kempt, Max had this to say about the song
"l wrote Slipping Away at the time I had that band but I knew it wouldn’t suit the band. When I was writing that song I was trying to write a Phil Spector song, something like 'Be My Baby'. I wrote the thing in about five minutes, I really did. I played some drums on a pillow and all that sort of s?!t. I’m of the belief that if you write a song and you can’t remember it, then it ain’t worth keeping. That’s my working rule."
"I borrowed Dave Russell's bass and Stewie Speer’s drums and went into Command Studios, a little studio in London and did a demo of Slipping Away, with me playing drums and bass, as well as guitar and singing it. But it wasn’t until the band had actually broken up. Dave [Russell] picked up his bass from the studio, after I’d finished doing the demo, and went to the airport and back to NZ!"
"I took that demo to Andrew Bailey, who was at that time editor of Rolling Stone, and Slipping Away was the basis of getting that deal with Arista."
"It’s been covered maybe 20 or 30 times, but they all f?!k up, by trying to make it more than it is. It’s a nursery rhyme! We went in to mix it and I said we couldn’t cos we didn’t have a return phrase. Richard Dodd was the engineer and he took just the last words of the line and bounced them to another track to echo the line."
After 'Slipping Away' the group never reached such chart heights again.
After Max died on September 25th 2020, five fellow Australian musicians (Max was claimed by the Aussies as he left our shores to play there as early as 1965), -these being Marcia Hines, Andy Bull, Didirri, Russell Morris and Mia Wray- produced this montage tribute version of the song dedicated to Max.
https://www.facebook.com/TheMarciaHi...2675494192136/
SNOOPY
Goodwill Dilemma Resolved
Quote:
Originally Posted by
Snoopy
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?
|
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 |
FY2022 |
11.80%-13.60% |
1%-2% |
$0.0m |
AR2022 p27 on goodwill
"The base case recoverable amount approximately equals the carrying value of the net assets post impairment."
Chairman - gone. CEO - gone. It has been a tumultuous year, with the devastating blow of losing the new St John Ambulance contract, even if the old one has 3 years or so still to run. But to answer my last question first, hope isn't a strategy. The huge $17m of goodwill on the balance sheet has been carefully groomed through by the auditors and has formally been judged/confirmed to be worthless. I guess that represents a big thumbs down from the auditors about the company's fantastical future growth claims. Management makes brave talk in the Annual Report for FY2022. Talk that is based around how much more it would cost to roll out an equivalent radio network, -or indeed a central city broadband network in Wellington or Auckland today-, and how the whole company is now trading at well below network hardware replacement value. The important caveat being that these networks only have value if Vital can find the customers. But can they? Ah well, at least we have certainty on the goodwill issue.
SNOOPY
BT1/ STRONG MARKET POSITION (Top 3 in chosen market sector) [perspective FY2022]
Quote:
Originally Posted by
Snoopy
'Vital', as this company was rebranded in 2019, is a small niche overlooked share (you can tell that because since the company name changed from Teamtalk a couple of years ago, no-one has bothered to update the thread title). This indicates to me it might be 'worth a snoop'. So let me introduce them to you as a provider of infrastructure and communication services.
Vital has two divisions:
1/ 'Wired Networks' that principally consists of two wholesale fibre communication networks, one around the CBD in Wellington (acquired) and the other around the CBD in Auckland (built in house). Originally branded as 'Citylink', the Wellington network in particular, 32km of the 250km total, has been extensively rebuilt in the last few years. The 'old overhead cables' - that piggy backed on the now retired trolley bus line network - have migrated underground. They now goes through the old Powerco subterranean gas ducting. Of course the electronics on the end of the fibre have concurrently been updated to produce a more flexible product package range that tops out for maximum speed at 10Gbps (slightly higher than the maximum 8Gbps offered by top line Chorus hyperfibre). 'Citylink' serves business (including Dimension Data and Datacom) and the telecommunications industry (including Spark, Vodaphone and 2 degrees). Vital have a TAAS (Telecommunications as a service) contract with the Department of Internal Affairs to deliver telecommunications services for all government agencies. Further, 'Citylink' are contracted to operate Wellington's free Wi Fi service throughout the CBD. They also offer cloud based data storage capability to customers in Wellington and Auckland, and provide peering exchanges for ISPs to share data.
The original 'Citylink' Network was sold by the Wellington City Council in 1999 to investment firm 'Active Equities'. It was subsequently acquired by Teamtalk (as Vital was named then) in 2006.
2/ 'Wireless Networks' is New Zealand's only nationwide wholesale radio network for voice and data traffic, and it operates in the microwave spectrum. This division operates three networks, (1) 'ActionNet' the legacy network that is in the process of being replaced by a (2) new digital radio network equivalent (engineered by Tait Electronics of Christchurch). Customers may be found in the Civil Defence, Emergency Services, Health, Utilities, Public Transport Education and Logistics and Freight sectors. 'Wellington Electricity' and "Auckland Airport' are two of the more high profile customers. There is a dedicated network for emergency services too, with a new contract just signed for St Johns. In 2016, Vital launched (3) 'RT max' as an affordable entry level digital radio service based on Motorola's 'Linked Capacity Plus' technology.
A significant capital raise of $8.2m was made in FY2019 to go towards funding these upgrades, and a new computerised management system to support them. The current company policy (AR2019 p2) is to pay out 50-70% of NPAT as dividends to ensure enough cash is retained to keep investing in the networks.
For those students of history, there was a third division 'Farmside' that concentrated on selling satellite and fixed wireless internet in rural areas. However this division was sold to Vodaphone in two tranches of 1/ 70% on 1st June 2017, and 2/ 30% on 31st May 2018.
Conclusion: As (1) the only nationwide wholesale provider of a digital radio service and as (2) one of the top three in the fibre Wellington market (with Vodaphone and Chorus) and Auckland (with Vector and Chorus) , Vital PASSes this first test.
New management, and there has been a subtle repositioning of the 'market presence statement'. Fundamentally the story remains the same:
VTL operates in the communications networks market, across different network technologies:
• Wired: provides fibre networks in Auckland and Wellington; and
• Wireless: mobile radio technology. (Note: The legacy 'Action Net' network which started the company in 1994, and has now been replaced by the new digital network, was closed down in June 2021).
From the director and CEO commentary in AR2022
"Recurring revenue also declined, more so on the Wired,(i.e. fibre) network.(-12.1%),"
"The degree of work-from-home activity has likely played some part in soft demand for CBD fibre capacity in Auckland and Wellington."
Ouch! This is the part of the business that will have to carry Vital forward, once they lose the St John Ambulance Wireless contract. So not only did Vital Wireless get a huge sucker punch over FY2022. The rest of the business is bleeding profusely as well! The 'customers work from home' explanation is a worry, because that indicates to me there are less Vital Ltd connections, rather than just less data being shared over the network. IOW the reduction in business is permanent.
"The Company was unsuccessful with its tender for the PSN (Public Safety Network) contract, "
"Commenced remedial action during the year, including moving to change the sales model for the Wireless division."
What is interesting is that the successful PSN contract tenderer, a company called Silverstripe -which is also headquartered in Wellington and is a similar sized company to Vital-, does not appear to have a wireless radio network of their own. So Silverstripe will either have to build an equivalent (a very expensive exercise), or negotiate a contract to run across an existing operational network.
From Vital AR2022
"Mobile radio is utilised by organisations that supply critical services (e.g. electricity network providers) that require “always available” reliability, or have remote work in areas outside cellular coverage."
"Vital provides the only commercial nationwide mobile radio infrastructure across New Zealand."
Hmmm, I wonder who Silverstripe will have at the top of their network negotiation list?
Here is what AR2022 says about Vital's change in market presence emphasis:
"A key strategy change in Wireless during FY2022 has been the move to utilise channel partners."
"Wholesale agreements have been put in place with a number of regional mobile radio operators with the intent they will take over the servicing and support of a long tail of smaller clients that currently contract directly with VTL."
I read that to say that "it is expensive to deal with a plethora of rag tag retail customers" and "it makes more sense for Vital to 'concentrate on running the network' " and transition towards being a wholesale company only.
From the October 2021 market release on their emergency services tender failure:
"Vital remains open to partnering with the down selected parties along with NGCC (Next Generation Critical Communications) (NGCC is the government agency overseeing this project) to assist in delivering the outcomes that PSN (Public Safety Network) and emergency services require."
From the June 2022 newsletter:
"We are excellent at delivering fibre and radio networks while our partners – who are our customers– are best placed to build and maintain the end consumer relationships. This not only shows we understand where we fit within the development of our clients’ communications ecosystems, but it also mitigates the risk of being seen as a direct competitor by those we need to be working with more."
"This could see Vital step back from what could be described as a hybrid wholesale/retail model, placing a greater emphasis on our core position as a specialist utility network operator with both our niche radio and fibre network assets."
This sounds to me as though Vital are positioning themselves to offer their services to Silverstripe as a PSN system sub-contractor. So maybe not all is lost on the PSN job?
In conclusion, nothing has happened to upset the strong hardware position of both Vital's 'nationwide wireless network' and the 'CBD fibre networks'. Particularly so when Vital have redefined their business in a way that says losing end line retail customers does not matter. So as far as Buffett would be concerned, 'Vital' has PASSED this first test.
SNOOPY
IFRS16: The continuing confusion
I did manage to solve this issue for Skellerup at the transition date.
https://www.sharetrader.co.nz/showth...l=1#post926124
However, doing the same exercise at Vital is proving trickier.
Quote:
Originally Posted by
Snoopy
I wonder if anyone got to the bottom of the implementation of IFRS16 on leases on the Vital result from 2020? The answer to this question is not trivial as it affects the adjusted Net Profit after Tax by between 60% and 109%.
From AR2020 p4
"As with our interim results earlier this year, IFRS 16 which although non-cash impacting does impact our results. Our Net Profit after Tax at $0.734m takes into account the IFRS16 impact to Net Profit after Tax of
($0.44m)."
However, this is the only time the figure $0.44m appears in the annual report. So where did it come from?
From AR2020 p17
"For judgements relating to NZ IFRS 16 refer to the Changes in Significant Accounting Policies (Note 3a), and the disclosure notes in relation to Leases (Note 21)."
Note 3 talks about changes to the balance sheet. But in note 21 there appears the following table:
|
2020 |
2020 Leases Under IFRS16 |
Interest on Lease Liabilities |
$1.412m |
Expense Related to Short Term/Low Value Leases |
$0.219m |
Depreciation of Right-to-use Asset |
$5.619m |
2019 Leases Under NZ IAS 17 |
Lease Expense |
$6.136m |
Now what I think this table is saying is that under IFRS16, the total lease expenses are:
$1.412m+$0.219m+$5.619m=
$7.250m
WHEREAS under NZ IAS 17, the lease expenses would have been $6.136m.
OK, there is an error here of mine I have identified, brought on by the layout of a table in AR2020 p31 (reproduced in the quoted text box above). That figure of $6.136m I quote above relates to FY2019, not FY2020, - even though it appears under a column header '2020'. How do I know this? Because when I go to the equivalent page in AR2021 (p29), there is no equivalent column header '2020' (it should be there reading '2021' if the two reports were consistent).
In the AR2021 report equivalent table on p29, this time looking at row headers, the two row headers read '2021' and '2020'. Now going back to AR2020, the information along the row header '2020' p29 AR2021 is exactly the same as the information alongside the row header '2020' on p31 AR2020. IOW each report is comparing lease information of the current year with the previous year, which is kind of what you expect annual reports to do.
Then on p18 of AR2020 we learn:
"The Group applied NZ IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 July 2019. Accordingly comparative information is not restated ‐ i.e. it is presented as previously reported."
The fact that 'comparative information is not restated', means that the full process of transitioning from NZ IAS17 to IFRS16 remains opaque. To someone like me trying to understand this, is extremely annoying ):-(
Quote:
Originally Posted by
Snoopy
This means upon adopting the IFRS16 standard, lease expenses have increased by: $7.250m - $6.136m = $1.114m
As a result NPAT would reduce by 0.72x$1,114m = $0.802m.
That is rather more than the $0.44m reduction suggested on AR2020 p4. So I remain confused :-(
Because I misunderstood where the $6.136m figure in the above quoted calculation came from, the above quoted calculation is nonsense. Yet another factor causing confusion is that the rent due in any current year remains as an expense, and is not been capitalised as a 'right of use asset' alongside the longer term rental liabilities. When things get as confusing as this, I believe it is better to go back to what we do know for sure, rather than try guessing figures that we don't know.
One source of real world information that can by pass all this IFRS16 stuff (IFRS16 is simply an accounting construct that has little meaning in the day to day running of a business) is to look at the cashflow statement. Real money paid out as rent should be recorded there. Unfortunately in AR2020 for Vital, this information is not there in its entirety. $5.619m cash paid out is listed as "Principle Element of Lease Payments" (are these other payments that have been renamed for reporting purposes as lease payments?)
Right, 'back to the facts' that we know.....
AR2020 p4 tells us the overall 'answer' we seek - the NPAT impact.
"The IFRS16 impact to Net Profit after Tax ($0.44m)."
I believe that to mean that the Vital profit reduced over FY2020 because of IFRS16 by $0.44m. It should be possible to derive the missing annual rent information - that I will term 'R'- using this number, because the after tax difference effect in the two rent calculations (IFRS16 and NZ IAS17) we are told is $0.44m.
We also need to keep in mind that this unknown 'R' only captures the rent from the 'non current term' lease agreements. The current term lease agreement rent is still listed separately as an expense (I hope readers can now see how annoying all of these little details are becoming). Bringing all of this information together, produces an exercise in algebra to solve for the missing rent - if I haven't made another mistake which is not guaranteed! (to see where I pulled these numbers from look at the first quoted text above):
$0.44m = 0.72[($7.250m -(R + $0.219m)]
=> $0.611m = $7.031m - R
=> R = $6.420m
Add onto that the 'current period rent' and I get a 'total rent contracted' rent bill over FY2020 to be: $6.420m + $0.219m = $6.639m
The comparative figure for FY2019 under NZ IAS 17 was $6.136m (AR2020 p31). So my figure for rent payable over FY2020 of $6.639m passes the 'in the ballpark' test, even if it is 8% higher.
As a double check, I took the $6.136m of 'rent' from FY2019 that was back referenced from AR2020 and tried to find it in AR2019. But I couldn't find it :-(. And that leaves me feeling both stupid and annoyed at the same time. ):-(
SNOOPY
P.S. Just in case any readers are wondering why any of this matters, unless I solve this, it means that I can't adjust the profit figures from FY2021 and FY2022 back to pre-IFRS16 figures either. And why do I need to do that? Because the banks do not accept IFRS16 compliant profit reporting, even though it is the current accounting standard!
From AR2021 p28
"The secured bank loans are subject to various covenants such as debt coverage and interest coverage. Throughout the year the Company has complied with all debt covenant requirements. With the implementation of NZ IFRS 16 all covenants are calculated exclusive of NZ IFRS 16."
IFRS16: A confusion untangling lifeline? (Part 1)
Quote:
Originally Posted by
Snoopy
Just in case any readers are wondering why any of this matters, unless I solve this, it means that I can't adjust the profit figures from FY2021 and FY2022 back to pre-IFRS16 figures either. And why do I need to do that? Because the banks do not accept IFRS16 compliant profit reporting, even though it is the current accounting standard!
From AR2021 p28
"The secured bank loans are subject to various covenants such as debt coverage and interest coverage. Throughout the year the Company has complied with all debt covenant requirements. With the implementation of NZ IFRS 16 all covenants are calculated exclusive of NZ IFRS 16."
It looks like I have been thrown a lifeline by Vital itself, in my quest to get around IFRS16 distortions
From AR2022 p6:
"The Company’s results are complicated by IFRS 16 Accounting for Leases, which means that rent expense on the sites leased is predominantly shown under Depreciation (and partly in Net Interest) in the Financial Statements. The following Summary Financial Performance restates the composition of the Income Statement to reflect what the directors believe better represents the economic performance of the Company in the sense of EBITDA in relation to free cash flow (noting that EBITDA is a non-GAAP accounting measure)."
This is effectively a two fingered salute to the current accounting standards, as my translation from the above paragraph written in 'accounting speak' into plain English will reveal.
"The published accounts are bollocks and give an inaccurate picture of the business. So we have gone back to the old accounting standards and redrafted the accounts 'as they should be' ourselves."
So how does the 'new' income statement presentation compare with the accounting body sanctioned one?
Income Statement FY2022 |
Vital Presentation {A} |
IFRS Sanctioned Presentation {B} |
Difference {A}-{B} |
Revenue |
$31.456m |
$30.719m |
add Other Income |
|
$0.737m |
less Staff Costs |
$9.878m |
|
less Other Selling General/Admin Costs |
$8.264m |
|
less Administrative Expenses |
|
$12.494m |
less Operating Costs (excluding D&A) |
|
$8.283m |
less Lease/Rent Costs |
$7.691m |
|
equals EBITDA |
$5.623m |
$10.679m |
-$5.056m |
less Depreciation |
$6.745m |
$6.258m |
$0.487m |
less Amortisation on Right of Use Asset |
|
$5.072m |
equals EBIT (operating) |
-$1.123m |
-$0.651m |
less Impairment Charge |
$17.038m |
$17.038m |
equals EBIT (reported) |
-$18.161m |
-$17.689m |
less Net Finance Cost |
$0.673m |
$2.194m |
-$1.521m |
equals Net Profit Before Tax |
-$18.834m |
-$19.883m |
add back Income Tax refund |
-$0.503m |
-$0.790m |
equals Net Profit After Tax |
-$18.331m |
|
less Lease Adjustment Accounting Loss after tax |
-$0.762m |
|
equals Net Profit After Tax (reported) |
-$19.093m |
-$19.093m |
Discussion
Both sides add up to the same ultimate number, which is always a good start.
EBITDA is considerably greater on the IFRS side. This is to be expected, because IFRS16 introduces an artificial construct called a 'Right of Use' asset that is amortised. This 'right of use asset' may be thought of as a reflection of a capitalised rent contract (IFRS16 requires companies to captalise any long term rental contracts in this way) . Through the years, this long term 'Right of Use' asset is amortised annually. However, in the 'Vital' way of looking at things, this 'Right of Use' asset does not exist. And because it does not exist, there is no long term asset relating to 'rent' to amortise each year. This explains why the EBITDA (where 'A' stands for the amortisation that we have been discussing) is so much higher on the IFRS approved side of the table.
Depreciation is $0.487m different from each perspective. I do not understand why this should be so.
Moving on to 'net finance cost', the operating cost of 'rent' in the Vital view is seen as a 'lease expense' (a financial 'interest cost' under IFRS16). This 'Interest expense on lease liabilities' of $1.588m may be found under Note 11 of AR2022. Nevertheless $1.588m is not quite the same difference in 'net financial cost' as found in the table above of $1.521m. I am unsure why there is a discrepancy.
The FY2022 'Amortisation of the Right to Use' of $5.072m when added to the 'lease expense' of $1.588m comes to $6.660m. This adds up to less than the $7.681m rent charge on the Vital side of the table. This surprises me, because although both methods of treating rents over the length of any rent contract are equal, the IFRS16 method tends to see these costs front loaded. That in turn reduces company profits in the early years of a rent contract. I can think of two possibilities to explain this unexpected result.
1/ On average we are in the latter years of these rent contracts, not the early years.
2/ It is a fact that for some reason this IFRS16 treatment of 'right of use assets' excludes 'current year rent contracts' that are separately expensed (AR2022 note 23a ii. - Why this is allowed to happen, I do not know). So it may be that such contracts need to be added back separately to get a like with like comparison between methods.
Finally there is the 'Lease Adjusted Accounting Loss' that squares up both the totals on the second to last line. But is it the lease that is being adjusted? (IOW changes in leasing arrangements were renegotiated during the year). Or is it the way that information is being fed into the accounts that is being adjusted? I find this adjustment ambiguous.
Regardless of how or why all this tabled information fits together, Vital have given shareholders a clear message that the representative after tax profit (excluding the goodwill adjustment) for FY2022 was:
-$18.331m + $17.038m = -$1.293m
There are still a few unanswered questions in this analysis. Fortuitously Vital have done a comparative redraft for FY2021 as well. So I am going to look at that too, in the interests of trying to learn more.
SNOOPY
IFRS16: A confusion untangling lifeline? (Part 2)
There are still a few unanswered questions in this analysis. Fortuitously Vital have done a comparative redraft for FY2021 as well. So I am going to look at that too, in the interests of trying to learn more.
Income Statement FY2021 |
Vital Presentation {A} |
IFRS Sanctioned Presentation {B} |
Difference {A}-{B} |
Revenue |
$35.239m |
$34.559m |
add Other Income |
|
$0.681m |
less Staff Costs |
$9.117m |
|
less Other Selling General/Admin Costs |
$8.208m |
|
less Administrative Expenses |
|
$11.386m |
less Operating Costs (excluding D&A) |
|
$7.920m |
less Lease/Rent Costs |
$8.057m |
|
equals EBITDA |
$9.858m |
$15.934m |
-$6.076m |
less Depreciation |
$7.824m |
$7.306m |
$0.518m |
less Amortisation on Right of Use Asset |
|
$5.642m |
equals EBIT (operating) |
$2.034m |
$2.985m |
less Impairment Charge |
$0m |
$0m |
equals EBIT (reported) |
$2.034m |
$2.986m |
less Net Finance Cost |
$0.618m |
$1.822m |
-$1.204m |
equals Net Profit Before Tax |
$1.416m |
$1.164m |
less Income Tax |
$0.397m |
$0.323m |
equals Net Profit After Tax |
$1.019m |
|
less Lease Adjustment Accounting Loss .after tax |
-$0.178m |
|
equals Net Profit After Tax (reported) |
+$0.841m |
+$0.841m |
Discussion
Both sides add up to the same ultimate number, which is always a good start.
EBITDA is considerably greater on the IFRS side. This is to be expected, because IFRS16 introduces an artificial construct called a 'Right of Use' asset that is amortised. This 'right of use asset' may be thought of as a reflection of a capitalised rent contract (IFRS16 requires companies to captalise any long term rental contracts in this way) . Through the years, this long term 'Right of Use' asset is amortised annually. However, in the 'Vital' way of looking at things, this 'Right of Use' asset does not exist. And because it does not exist, there is no long term asset relating to 'rent' to amortise each year. This explains why the EBITDA (where 'A' stands for the amortisation that we have been discussing) is so much higher on the IFRS approved side of the table.
Depreciation is $0.518m different from each perspective. I do not understand why this should be so.
Moving on to 'net finance cost', the operating cost of 'rent' in the Vital view is seen as a 'lease expense' (a financial 'interest cost' under IFRS16). This 'Interest expense on lease liabilities' of $1.203m may be found under Note 11 of AR2022. $1.203m is the same difference in 'net financial cost' between the two reporting scenarios as found in the table above of $1.204m (within the bounds of rounding error).
The FY2021 'Amortisation of the Right to Use' of $5.642m when added to the 'lease expense' of $1.203m comes to $6.845m. This adds up to less than the $8.057m rent charge on the Vital side of the table. This surprises me, because although both methods of treating rents over the length of any rent contract are equal, the IFRS16 method tends to see these costs front loaded. That in turn reduces company profits in the early years of a rent contract. I can think of two possibilities to explain this unexpected result.
1/ On average we are in the latter years of these rent contracts, not the early years.
2/ It is a fact that for some reason this IFRS16 treatment of 'right of use assets' excludes 'current year rent contracts' that are separately expensed (AR2022 note 23a ii. - Why this is allowed to happen, I do not know). So it may be that such contracts need to be added back separately to get a like with like comparison between methods.
Finally there is the 'Lease Adjusted Accounting Loss' that squares up both the totals on the second to last line. But is it the lease that is being adjusted? (IOW changes in leasing arrangements were renegotiated during the year). Or is it the way that information is being fed into the accounts that is being adjusted? I find this adjustment ambiguous.
Regardless of how or why all this tabled information fits together, Vital have given shareholders a clear message that the representative after tax profit for FY2021 was $1.019m.
SNOOPY