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Ann: Preliminary Profit Advice - Half Year Ended 31 December 2016, page-10

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MarsC

2,589 Posts.

127

06/01/17

15:21

Post #: 21725990
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Originally posted by madamswer ↑

Erratum: There was a typgraphical error in part of my post.
The corrected version is as follows:

Not sure where you got your staff cost figures of $1.41m for FY16, and $1.39m for FY15, because from Note 3 of the Annual Report, I added the figures for Salaries & Wages to Superannuation and got $1.298m for FY16 and $1.217m for FY2015, so a reasonably meaningful 8% increase, year-on-year.

But, looking at annual staff cost numbers is not very helpful, because while the full-year numbers for FY2016 vs FY2015 might show a certain degree of change, this doesn't tell us anything about what is happening with the employee cost dynamic on a half-yearly basis (i.e., JH16 vs pcp and HD15 vs pcp).

And because the company only provides an annual breakdown of staff costs, and not half-yearly figures, we are unable to know for sure what the shape of the curve looks like over the half-yearly time frames.

The best we can do is extrapolate.

Here's my attempt at it:

Given what we know on head count at the end of each financial year (i.e, JH14/Jh15/JH16 = 19/15/23), an educated guess suggests that DH15 employee costs were lower than DH14, and therefore JH16 employee costs were therefore substantially more than 8% higher than JH15.

And that, in turn, DH16 employee costs ended up being substantially higher than for the DH15 period (given average employee numbers at the end of DH16 will have been around 23 (assuming they didn't add any more staff since the end of FY16), compared to probably 18 (the weighted average of 23 and 15, being headcount at 30 June 2016 and 30 June 2015, respectively) for the DH15 period.

So, for what its worth, here is my best guess at the average employee numbers and, resulting staff costs, on a half-yearly basis for the past few half-years:

DH14: Average Employee Numbers (AEN) = 18 ; Total Staff Costs = $640k
JH15: AEN = 16 ; Staff Costs = $580k
DH15: AEN = 18; Staff Costs = $610k
JH16: AEN = 20; Staff Costs = $690k
DH16: AEN = 23; Staff Costs = $800k

Where I am going with this half-yearly drill-down, is to try to get a feel for what employee costs have done in the previous half versus pcp. Because, if I know that, then given I know what operating profit has done (they told me that, it's up 4%), then I can solve for what the Revenue line has done in the half. And this is a very important figure for me, because it informs the top line organic growth rate of the business.

Now I readily concede that this sort of exercise, because of some of the assumptions required, can never be prescriptive. Rather, it is intended to be indicative.

To that end, from the table of figures above, it can be seen that - based on my figures - that employee costs are expected to have been some 30% higher in DH16 than in the pcp.

Working this figure through the financial model, to reproduce management's 4% Pre-Tax Profit growth guidance, generates a solution for implied DH16 Revenue growth of around 15%.

So I think that when the company reports its interim results in a few weeks' time, I think we have sufficent clues to conclude that the momentum seen in JH16 will have continued into the December half, and I strongly suspect we will see reported top-line growth for DH16 come in well above historical average rates, as well as above system growth rate.

I'm therefore looking for an interim Revenue number close to $3.4m (which will be 10% higher than the JH16 figure and 14% higher than the figure for DH15).

That deals with DH16; JH17 is another matter altogether.

For JH17 is cycling the very strong JH16 number, being 33% growth on JH15, as you point out. I don't expect the company to beat that lofty starting base.

So I think that market will be pleased with the quality and composition of the upcoming result, but it might be disappointed with the full-year result which I suspect will not show any positive JH growth on pcp.

The market might be mature enough to acknowledge the effect of the very strong JH16 number, but knowing the market's laziness like I do, I suspect it won't. Instead, it is more likely to shoot first, then question later.

So, to summarise, I don't think the upcoming result will result in a share price response that could present you with a buying opportunity. But the full-year result might do.

But, like you, I'm not sure what the full-year result will look like, let alone how the market will respond.

Expand

@madamswer

Madam

Ok, you've twisted my arm and I've done a deep dive into half year costs versus revenues. Frankly, I think I'm more confused now than I was before I started. To be honest, I'm not a big fan of reading too much into half year fluctuations (in truth, not even into annual fluctuations).

For instance, if it was now August 2015, and we had seen employee numbers drop from 19 (@ June 2014) to 15 (@June 2015), we could have made all sorts of determinations about where staff costs might be headed, and we probably would have been wrong.

Here is what actually happened in the relevant half year periods (using "admin costs" as a proxy for staff costs):

AC = admin costs
SN = staff numbers

HY Jun 2013; AC=$0.768m ; SN=19
HY Dec 2013: AC=$0.832m ; SN=?
HY Jun 2014: AC=$0.723m ; SN=15
HY Dec 2014: AC=$0.768m ; SN=?
HY Jun 2015; AC=$0.754m ; SN=23

The problem is, as you know, with such small staff numbers, things can be very lumpy. In particular the actual timing of firing/hiring has a big influence, not to mention changes in staff make-up (eg shifts to part-time or casual etc).

Further, if you look at admin costs going back to FY2011, the changes in the last FY look like little more than noise:

HY Dec 2010: $0.820m
HY Jun 2011: $0.758m
HY Dec 2011: $0.773m
HY Jun 2012: $0.831m
HY Dec 2012: $0.788m
HY Jun 2013: $0.768m
HY Dec 2013: $0.832m
HY Jun 2014: $0.723m
HY Dec 2014: $0.768m
HY Jun 2015: $0.754m
HY Dec 2015: $0.805m
HY Jun 2016: $0.818m

I think you said it best when you said "there are so many moving parts".

In fact, the biggest contributor to cost increases in H1 and H2 of FY16 were not admin costs (which I am using as a proxy for "staff costs") but rather "other costs" (the bulk of which will have been "postage, printing & handling").

Here are some cost increases on pcp's (AC=admin costs; PPH=postage, printing & handling[#])

HY Dec 2013: AC increase: $0.045m ; PPH increase: -$0.001m
HY Jun 2014: AC increase: $-.044m ; PPH increase: $0.011m
HY Dec 2014: AC increase: -$0.065m ; PPH increase: -$0.138m
HY Jun 2015: AC increase: $0.031m ; PPH increase: $0.081m
HY Dec 2015: AC increase: $0.037m ; PPH increase: $0.096m
HY Jun 2016: AC increase: $0.063m ; PPH increase: $0.222m

[#]: here I am making an estimate of PPH half year costs , based on annual reported numbers, and HY reported numbers for aggregate "other costs".

So what am I saying? I'm not 100% sure, to be honest. What I am sure about is that what may be driving the H1 FY17 result will be heavily contingent on the following, probably in the order indicated:

changes in registry fee revenue, vs pcp

changes in "client disbursements recovered", vs pcp

changes in "postage, printing & handling" costs, vs pcp

changes in admin costs (aka staff costs), vs pcp

And that's just too much for my little brain to handle.

What I am more certain about (though not 100% certain), is that the feat of H2 FY16 will not be repeated (which you too have commented on). And this was pretty much the main thrust of my last post.

On this last point, H2 FY16 looks very uncharacteristic for the following two key reasons:
1. Registry fees almost matched those of H1. In the prior 7 financial years, H2 fees averaged about 84% those of H1.
2. "client disbursements recovered" climbed to over 23% of total sales revenue, whereas in the prior 11 HY periods it had always been no greater than 20%, and had averaged about 18% (even less in H2 periods).

So, if there is actually a revenue recovery occurring (which I readily concede is quite possible), I suspect there are too many variables at play too have sufficient certainty. So for me, it's best to see what the full H1 FY17 accounts tell us. This may mean I miss the opportunity to buy before any upswing is in full view. However, as I suspect H2 FY17 results may disappoint, I am prepared to wait for any consequent opportunities at that point.

PS: On the subject of differences between our "staff cost" numbers, I think the issue is that I was including directors fees as well as equity based compensation. Though I think there was an error in your FY16 value (though the real value only reinforces your argument). In any case, this is, in my opinion, not material to the issues discussed.
Last edited by MarsC: 06/01/17

ASW Price at posting: 78.0¢ Sentiment: Hold Disclosure: Not Held
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