AHY - Asaleo Care

[System]

Asaleo Care Limited (AHY) is a leading personal care and hygiene company. The Company manufactures, markets and distributes consumer products across the Feminine Hygiene, Incontinence Hygiene, Baby Hygiene, Consumer Tissue and Professional Hygiene product categories.

The Company has operations throughout Australia, New Zealand and Fiji.

http://www.asaleocare.com

 

[luutzu]

Asaleo Care Limited (AHY) is a leading personal care and hygiene company. The Company manufactures, markets and distributes consumer products across the Feminine Hygiene, Incontinence Hygiene, Baby Hygiene, Consumer Tissue and Professional Hygiene product categories.

The Company has operations throughout Australia, New Zealand and Fiji.

http://www.asaleocare.com

Going through the prospectus and first two years financials [2012 - 2013]... and so far PEP is pulling another Anchorage on DickSmith.

That's not to say the business is bad, haven't got the whole picture yet. But man, private equities sure know how to play the game and get $500m for nothing.

 

[luutzu]

Who's up for round 2?

My Prediction:

Unless there’s a White Knight in shining armour bringing cash and miracles, Asaleo’s will crash around September 2017 when it’s due to repay all its $191m (currently) long-term debt. Its share price should get smash around late February to late March 2017 when it release its preliminary financial results.

For those who currently hold Asaleo, please do your own research. I have no financial interest in or from Asaleo in any way. Not going to short and definitely not longing it. I might get laughed at but ey, stick and stones may break my bone but $600,000,000 is a lot of people’s money.



I will try to defend my position with what I gather from Asaleo's financials. So it's not a hit and run.

 

[luutzu]

ANALYSIS OF ASALEO’S FINANCIAL POSITION

No one financial ratio paint a complete picture of the company, and some ratios are more relevant to one company at its particular life cycle than others. So in discussing the financials, I will be selective and discuss what I think are most relevant to Asaleo’s. If this sounds like me being selective to make the case, try and catch me


SOLVENCY | NOTES PAYABLE

Solvency, or internal liquidity, measures the company’s ability to meet future short-term financial obligations. As Benjamin Graham advised, we ought to look to the company’s current assets – assets that are currently liquid (e.g. cash) or ones it expect to realise into cash with the year – to meet current liability as a company needing to sell its long-term assets, or to raise equity or borrow, to meet current liabilities will either have its operations drastically changed or its ownership be dilutive to existing shareholders.

How are Asaleo’s current assets and liabilities composition compare to that of DickSmith before it collapsed?





For each year on the Solvency charts above, the Current Assets (CA) are stacked on the left while the Current Liabilities (CL) are stacked on the right.

Note how for DSH’s final two years, its cash (blue) and trade receivables cannot pay its trade payable obligations (black). In fact, DSH’s two most liquid CA only makes up about 1/3 of payables due to its suppliers and the like. Further, DSH will need to sell about 3/4 of its inventory to be able to meet all its CL.

Asaleo isn’t where DSH was, but its cash and receivables could barely meet its payments due to suppliers in FY2014, and some $4m below in FY2015. Looking to Asaleo’s entire CL due for FY2015, it will need to sell about 1/3 of its inventory to meet them – a deteriorating condition with higher inventory and slightly rising liabilities.

These are but one indication of deteriorating business condition. One that management explained away as, take the rising inventory for example, as due to new “investment” in machineries and disruption to supplies that then increase its inventory?

If we look at the notes on inventory, we’ll find that around $17m of the $20m increase to $159m between FY2014 to FY2015 are increased in “finished goods”, not much increase in raw material – so management’s claiming that installation new machineries and plants upgrade disrupt distribution and increase inventory etc., just does not hold true.



Assume for a moment that Asaleo can turn 1/3 of its inventory in enough time to repay its payables and other obligations; and does so in proportional costs or not much costs at all so as to not increase the liabilities. Can its cash flows from inventory turnover be enough to meet the CL and at least some of the long term debt that’s coming? Both interests and principal repayment on all $294m (as at FY2015, at HY2016 it’s about $320m).

Not without further borrowings.

How would further borrowings look if its $191m long term debt becomes short-term and due on 30th Sept. 2017? Within 1 year of FY2016. With the forecast 10% decline in revenue and some 15% decline in EBITDA.





Note the similar proportion of CA to total liabilities in both Asaelo and DSH. Though one could argue that it was DSH’s inability to meet with current payables that did it in; versus Asaleo’s just-making-it CA to meet its current payables; that those $295m long-term debt can wait. I mean, people uses Asaleo’s products everyday… so it should have little trouble moving the inventory into cash.

 

[levin123]

Great write up!

 

[luutzu]

Great write up!

Thanks.
There's a bad wording where I said "all its $191m.. .debt".

Asaleo currently have $320m, of which $191m will mature in Sept 2017.

I'll just paste the rest of what I wrote and see if others find it useful.

 

[luutzu]

CASH CONVERSION CYCLE

A company’s “cash cycle”, or “net operating cycle”, measure how many days it takes to convert its assets into cash flow.

On average, it takes Asaleo 109 days to convert its assets to cash. It took DSH 27 days and it still go broke.





Note above how DickSmith’s inventory turnover was 101 days to Asaleo’s 153 days; its receivables are paid sooner at 14 days to Asaleo’s 16 days while it managed to delay payment to suppliers a whole 27 days earlier than Asaleo’s suppliers getting theirs in 60. It is also interesting seeing the increasing (deteriorating) inventory, payable and cash cycles between the two companies.

These should put to rest a possible counter-point that Asaleo still survives even though it always have low Quick Ratio, low cash and receivables in proportion to its CL and Total Liabilities (TL). But DickSmith also survives not being able to pay its CL with CA… until it couldn’t anymore and goes bankrupt.

But you’re saying… mate, Asaleo is not a retailer, it’s a manufacturer selling its products to retailers and professional markets. So it’d be unfair to compare it to a retailer’s turnover cycle.

Unfair, maybe, but cash is king and a highly leveraged company with poor cash flow will go bankrupt if it cannot pay its due in time.

But let’s be generous and compare Asaleo to an engineering/construction company – one I own fair number of shares in – and see how it compares.





Note Monadelphous’ cash cycle is about 1/5 of Asaleos. Note too MND’s FY2014’s cash and receivables alone more than pay for all its liabilities (Notes Payable chart).

That is an example of management who are able to manage their business and cash; are conservative and know how to not lose their shirts when the hard times hit. With all that cash and a badly battered share price, MND did not buy back their shares, did not borrow or further leverage their balance sheet to play the market and enhance the share price – instead, they use the cash to expand into new industry, new geographies.

Managers who run a business like a business do things very differently to those who run it for financial gains alone. As Buffett and the masters will tell us, in the end it’s the business that will win out.

 

[luutzu]

WILL ASALEO CRASH?

Yes.

When?

Can’t predict. But if I have to, the price will crash be around end of March 2017 – it should be on or a few days after 23rd February 2017 when the preliminary annual report for FY2016 is released, but from what happened with DickSmith, the smart money tend to wait until data vendors update the financials, or until the presentation is issued.

The crash may happen around September 2017 when it’s due to repay all its $191m in currently long-term debt. But I can’t predict what will happen since it is possible that Asaleo managed to convinced its lenders to extend, or new lenders to cough up the cash. But let’s give management their due ability and extend the death line to December 2017.

First, a company would only go bankrupt when it can no longer convince its shareholders, or new shareholders, or bankers and debtors to cough up more cash.

With SCA being Asaleo’s largest shareholder – at 34.67% (increased to about 36% after the share buybacks) – not wanting to potentially lose SCA-branded market share in ANZ and Fiji if anything like a DickSmith were to happen. That is, it better serves SCA’s interest if Asaleo could tick along, long enough that SCA and the Board won’t be dragged in front of the courts, wasting its management time, money and perhaps customer loyalty.

So SCA would go some way to lend a hand to keep it afloat, if that fail then they’d at least gently bring Asaleo to a soft landing… then maybe privatise it in a few years’ time to bring the business back in-house like it was before that call from PEP. This should avoid too much wrath from shareholders and the ensuing class action.

But these are just my conspiracy theories. Let’s stick to the facts and figures in front of us.

To recap, from the Solvency charts we can see that Asaleo’s FY2015 position is not as dire as that of DickSmith. That is, its cash and receivables are just $4m under its current payables – a bit of delay, tweeks and borrowing could see that through; Further, it would only need to turn a bit over 1/3rd its inventory – and with everything being equal – should pay all current liabilities. Contrast these to DickSmith’s final year where all its cash and receivables would only pay off maybe 40% the current payables, and the need to offload some 4/5th to cover all current liabilities.

Though on the flip side, Asaleo has a great deal more total liabilities to its current and liquid assets – you’d want to ignore its non-current assets as Asaleo is in no position to offload any more plants and equipment and still operates properly; that and a large chunk of the NCA are intangibles; Further Asaleo’s cash cycle is 4 times higher than DSH – at 109 days – and has been deteriorating since 2013.

So while bankruptcy or financial distress is not as sure a thing as DSH six months before its collapse, Asaleo’s financial and operating history does not suggest it’s a business whose own cash flows could help itself out of the hole PEP and SCA dug the current shareholders into.

 

[luutzu]

THE COMING SHARE PRICE CRASH

What are some of the factors that will crash a company’s stock price?

Asaleo’s revenues ranged from $615m to $629m in the five years to 2015 (FY2015 Annual Report, p.40). With management forecasting about 10% decline in “underlying EBITDA”, and about 15% decline in NPAT for FY2016 (HY2016 presentation, slide 4).

So revenue and profit is not going to lift the share price. Particularly if the FY16 were to include the impact of about $4.3m after tax non-recurring cost that were left out from that 10% forecast decline.

The repurchase of up to 10% of existing stocks will help with the reported earnings per share (EPS), Return on Equity (ROE) – and maybe management bonuses; but not sure the reduction of equity through increased borrowings would go down well with Asaleo’s lenders. As a lender, I’d probably want a bit more interest to take on more load in Asaleo’s capital structure.

So while an improved EPS would keep the share price from crashing, what would attract investors and other funds would be the “stable” and high yielding dividend payout.





ASALEO’S DIVIDEND CAPABILITY

I’m quite simple when it comes to judging how capable a business is at paying its vital costs and expenditure: I simply take put its net operating cash flow before interest (NOCBI) against the various expenses to see how they stacked up.

So from the Net Op.Cash and Vital Finance etc. chart, Asaleo’s NOCBI looks like it could easily pay for the dividends, interests and capex. Will get into the details soon, but if we were to stack the $100m share buyback (pink), it’s obvious Asaleo’s operating cash could not pay for all these expenses.

True, the buyback announced on 26 August 2015 will be conducted in stages – so management missed their forecast for the remaining financial year; or are fine with the added costs since a buyback will be conducted in stages and the company’s shares is a bargain that far outweigh any acquisition cost. Either way, by the end of FY2015 (ended 31 December 2015), Asaleo had bought back 37 million shares for an average of $1.68 a share, or a “total cost of $62,170,500 including $86,658 of after-tax transaction costs” (2015 AR, p.68-69). So that’s $62m down with up to $38m more to spend.

Cash inclusive of GST…

A closer look at FY2015’s $139m net operating cash from operation show that both receipts from customers, and payments to suppliers and employees include a 10% GST.

We can be conservative and assume that the $694m receipts include $69.4m in GST to be paid… while the $554m of payment are to supplier (claim GST back) but employees they cannot. But let’s be generous and say that the net $139m operating cash includes about $14m in GST to be paid within the year.

That mean the total net operating cash flows of $117m is actually $103m after GST is paid – and they are paid on a monthly basis for company of Asaleo’s size.




QUICK CASH FLOW CALCULATION

What should Asaleo use that $103m in cash?

The $22.8 investing activities they have to. That leaves $80.2m (103 – 22.8) in the bank.

Should Asaleo repay the $80m in debt, or pay the $56.7m in dividends? They chose to do both. So that leaves -$56.5m (80.2 – 80 – 56.7).

Looks bad to have a negative cash at the end of the year. So $105m was borrowed. That brings the cash position back to positive $48.5m

Leaving it there will look bad as you’re borrowing to make ends meet here… so you buy back shares as a cover? Too cynical?

Well, they did spent $62m buying the shares. That leaves a -$13.5m.

Remember that $14m GST cash?

Conclusion: Asaleo is a terrible business whose management is living beyond their company’s means. That is, without debt financing, it cannot do what it is doing.



But you’re saying… mate, in the real world of business, companies do borrow and it’s only smart and proactive managers who know how to take advantage of cheap money.

True, Asaleo’s debt ratios etc., looks reasonable… so no sweat… until just before 30th September 2017.




End of September next year, $191m ($157.5 + $33.5) of Asaleo’s current $320m total borrowings are matures. i.e., repaid in full.

Can Asaleo’s new and improved plants and machineries bring in enough cost savings to pay that and the operational expenses, the dividends and the interests etc. etc.?

So by mid 2017, dividends will either have to be cut or drastically reduced – or maybe reduced with dividend reinvestment plan introduced.

That or some friendly bankers are willing to lend $200m so Asaleo can keep kicking that debt further down the road.

That and with a lot of imagination, management might manage to shift and delay cash flows to make the numbers just right.

As an investor, you don’t want to be buying businesses that will do just fine if things work out as they hope. I know that, so why has Asaleo’s management gone out, spent $175K to borrow $105m to buy shares they just sold a couple of years ago? Especially when the company could do a lot more with whatever cash they managed to have – like repaying back the debt that’s coming in 11 months.

 

[craft]

Conclusion: Asaleo is a terrible business whose management is living beyond their company’s means. That is, without debt financing, it cannot do what it is doing.

Conclusion: Terrible analysis full of mistakes and not the even the relative metrics considered. What about profitability? If the companies profitability is fairly stable then its CHANGE in assets/liability values that impact (re)financing and cash flow.

Take GST as just one example of MANY errors. The monthly BAS reconciling GST flows through the 'payment to suppliers and employees' in the Cash Flow Statement. His $14M is just made up based on lack of understanding. In fact GST payable has increased in the balance sheet by 2.5M which is a change (DECREASE) in working capital requirements.

I have no interest in debating Luutze - I think he's quite irrational. But I want to clearly put it out there for beginners that at least one person (am I on my own?) who thinks this analysis is potentially dangerous for your potential learning journey. Heed or ignore as you wish.

 

[Ves]

Conclusion: Terrible analysis full of mistakes and not the even the relative metrics considered. What about profitability? If the companies profitability is fairly stable then its CHANGE in assets/liability values that impact (re)financing and cash flow.

Take GST as just one example of MANY errors. The monthly BAS reconciling GST flows through the 'payment to suppliers and employees' in the Cash Flow Statement. His $14M is just made up based on lack of understanding. In fact GST payable has increased in the balance sheet by 2.5M which is a change (DECREASE) in working capital requirements.

I have no interest in debating Luutze - I think he's quite irrational. But I want to clearly put it out there for beginners that at least one person (am I on my own?) who thinks this analysis is potentially dangerous for your potential learning journey. Heed or ignore as you wish.

Agree with all of the above.

Especially the last part.

 

[oldblue]

Thanks for providing some balance, craft. AHY isn't the best stock on the lists but it's far from the worst e.g. spending $74m on buying back stock probably indicates a lack of growth prospects but is hardly a sign of a company facing a Dick Smith-type fate!

 

[luutzu]

Conclusion: Terrible analysis full of mistakes and not the even the relative metrics considered. What about profitability? If the companies profitability is fairly stable then its CHANGE in assets/liability values that impact (re)financing and cash flow.

Take GST as just one example of MANY errors. The monthly BAS reconciling GST flows through the 'payment to suppliers and employees' in the Cash Flow Statement. His $14M is just made up based on lack of understanding. In fact GST payable has increased in the balance sheet by 2.5M which is a change (DECREASE) in working capital requirements.

I have no interest in debating Luutze - I think he's quite irrational. But I want to clearly put it out there for beginners that at least one person (am I on my own?) who thinks this analysis is potentially dangerous for your potential learning journey. Heed or ignore as you wish.

Out to save the children again are you craft?

What about profitability?

If a person is drowning, would the ropes and floaties at Bunnings be useful? If the lenders want their payment but Woolies a bit slow and your profitable stocks aren't moving, will it save you in time?


It's either you're right about GST or the ATO owes me a crap load of GST I've been paying them all these years.

The $14m GST payable is being generous. But alright, let say those GST are all zero, is Asaleo in a better position?

Anyway, you can do all the forensic accounting and whatever rocket science you guys in high finance do. For the simpleton like myself, it'll do.


btw, what do you reckon those analysts and fund managers use to think Asaleo was a great opportunity at IPO? Man, lucky they didn't listen to me else they'll... yea, share price hasn't moved up has it? Oh, the dividends - from debt financing. Maybe it's the grand strategy of buying into, then "investing" in new plants and machineries, and now... after almost three years, it'll rocket up baby.

Don't think that'll work too because Asaleo's own management are forcasting a drop of 10% revenue and 15% EBITDA for FY2016.

Maybe 2017 then? When the new efficiencies will really kick in and pay for both the $191m debt that's due, and pay for all other expenses and dividends.

Seriously man

 

[luutzu]

Agree with all of the above.

Especially the last part.

Tell me why "my" approach is dangerous again?

I swear I thought the approach I'm following is simply studying businesses. Using your basic accounting and general rule of thumb about business ownership... that's dangerous?

As dangerous as whatever rocket science that made investing in DickSmith or Asaleo a good idea?

 

[luutzu]

Thanks for providing some balance, craft. AHY isn't the best stock on the lists but it's far from the worst e.g. spending $74m on buying back stock probably indicates a lack of growth prospects but is hardly a sign of a company facing a Dick Smith-type fate!

Dude, they're borrowing cash to buy back the shares. It's not like the cash just sits there with no growth prospects so they have to buy the shares back as "capital management".

There's $320m in debt, $191m of which are due next September and the toilet paper wars, the nappy wars, the tissue wars and general wars between WOW, WES, Aldi and MTS are on going... and the forecasted 15% decline in EBITDA [what's that decline if we remove the I, the T and the DA]?

A good and honest management, facing that situation, would - if they have the cash - save it, repay the debt, get ready for shelters from the price wars etc. etc.

 

[Ves]

Tell me why "my" approach is dangerous again?

Because of the many hyperbolic and inaccurate statements that you have made and continue to make.

Company that was potentially sold for overs in an IPO process does not always equal a company that is going bust by this time next year. That's chicken little, sky is falling thinking at best and in reality it's the same kind of conspiracy theory bull**** that you hear from the likes of One Nation.

It's either you're right about GST or the ATO owes me a crap load of GST I've been paying them all these years.

The $14m GST payable is being generous.

They don't owe $14m in GST to the ATO. And they certainly don't owe more than that.

As at 30 June 2016 they owe $4.6m. Guess what? It's now paid. But replacing it will be another liability for the current month/quarter. They will always owe GST until the business stops selling goods. Name one business that pays the GST direct to the ATO the very moment they make a sale.

Because of the way the ATO works, they're always going to be one month/quarter behind. Every business is because GST is reported retrospectively. You would know that if you had your own business. At the end of a month/quarter you can calculate the GST you will likely owe and record it as GST payable/refundable in the Accounts at 30 June, but you don't pay it until the BAS is due for payment sometime in the next quarter. That's business 101. It's not bloody hard. The ATO isn't getting ripped off and there's no magic $14m ATO debt they're hiding some where off the balance sheet.

When the new efficiencies will really kick in and pay for both the $191m debt that's due, and pay for all other expenses and dividends.

Or they could just replace the $191m term loan with a new term loan. Why would they pay it back when they can just re-finance it?

Every big business does this. Whilst debt does fall due, it just gets rolled over into a new loan for the same amount. There's absolutely no current evidence that the bank (or another funding source) would say no to this arrangement (ie. no evidence they have breached the loan covenants).

 

[McLovin]

Because of the way the ATO works, they're always going to be one month/quarter behind. Every business is because GST is reported retrospectively. You would know that if you had your own business. At the end of a month/quarter you can calculate the GST you will likely owe and record it as GST payable/refundable in the Accounts at 30 June, but you don't pay it until the BAS is due for payment sometime in the next quarter. That's business 101. It's not bloody hard. The ATO isn't getting ripped off and there's no magic $14m ATO debt they're hiding some where off the balance sheet.

Waaaiiittt...Luutzu developed his own accounting program and worked with CFO's. Surely he'd know how BAS and GST works.

Have you spent 2 years working with two CFO, finance managers to develop an accounting software that tracks all financial transactions, produce financial statements and track financial performance on a multi-billion dollar project?

Then spent two years researching the application of finance to business analysis and stock valuation, then wrote a dam application to put it into practice?

https://www.aussiestockforums.com/f...t=31468&page=4&p=921591&viewfull=1#post921591

If you want a sure fire short, find out which companies these CFO's work for.

 

[luutzu]

Because of the many hyperbolic and inaccurate statements that you have made and continue to make.

Company that was potentially sold for overs in an IPO process does not always equal a company that is going bust by this time next year. That's chicken little, sky is falling thinking at best and in reality it's the same kind of conspiracy theory bull**** that you hear from the likes of One Nation.

Why do you think I start to look into Asaleo? To waste time studying a company I know I'm not going to buy?

Maybe I start to dig thinking it is undervalued and the market might be prejudiced against it.

So having look into its history, its IPO - in detail - then scan through its latest financials, I came away thinking it's crap. And not just bad in that it's a bad business, but terrible in that its management are not being honest with the market.

I've seen plenty of mediocre and poor businesses, have you seen me talking about them? Why? Because it's not worth the time, and running a mediocre business is not a crime.

Anyway, how has what I posted above conspiracy theory?

It's nice and sweat that you're giving the benefit of the doubt to private equity who somehow turned a lost-making business into a still lost-making business but walked away with $500m and some... but maybe start pulling that head out of whatever and smell the real world of business. Where, you know, clean shaven people in expensive suits do screw people out of their earnings.

They don't owe $14m in GST to the ATO. And they certainly don't owe more than that.

As at 30 June 2016 they owe $4.6m. Guess what? It's now paid. But replacing it will be another liability for the current month/quarter. They will always owe GST until the business stops selling goods. Name one business that pays the GST direct to the ATO the very moment they make a sale.

Because of the way the ATO works, they're always going to be one month/quarter behind. Every business is because GST is reported retrospectively. You would know that if you had your own business. At the end of a month/quarter you can calculate the GST you will likely owe and record it as GST payable/refundable in the Accounts at 30 June, but you don't pay it until the BAS is due for payment sometime in the next quarter. That's business 101. It's not bloody hard. The ATO isn't getting ripped off and there's no magic $14m ATO debt they're hiding some where off the balance sheet.


Or they could just replace the $191m term loan with a new term loan. Why would they pay it back when they can just re-finance it?

Every big business does this. Whilst debt does fall due, it just gets rolled over into a new loan for the same amount. There's absolutely no current evidence that the bank (or another funding source) would say no to this arrangement (ie. no evidence they have breached the loan covenants).

I actually do run my own business and do know about the GST.

Where did I say they hide that $14m GST? It's right in front of us. Not hidden.

All I said is that those GST are to be paid, so the reported earnings or the net operating cash... that's not all $117m to be spent on whatever - $14m of it will be paid in GST... Further, I said they can delay and push it back, but it's not theirs, is it?

Anyway, I have put a date on it... time will tell.

And if you think i'm wrong, go long on it and load up.

 

[Boggo]

Guys, a serious and genuine question.

I am not having a go, not criticising FA, not trying to start a who has the biggest to and fro series of comments etc.

I seriously admire the amount and depth of work that you guys put into these stocks.

This stock is now trading over 30 cents lower than it was two years ago, has paid 19.4 cents in dividends and only the last dividend was 50% franked.

The obvious (and sincere) question I have to ask is why even bother with it ?

 

[luutzu]

Waaaiiittt...Luutzu developed his own accounting program and worked with CFO's. Surely he'd know how BAS and GST works.



https://www.aussiestockforums.com/f...t=31468&page=4&p=921591&viewfull=1#post921591

If you want a sure fire short, find out which companies these CFO's work for.

Shouldn't insult those CFOs mate. They're smart and hardworking people, and whatever bs mistake I do, it has nothing to do with them.

But I do file all my business' GST and tax return.. .and you tell me if I've been overpaying all these time alright.


Revenue = $100 + GST. GST owe to the ATO is $10.

Expenses = $50 +GST. GST the ATO owes the business = $5

GST I need to pay = $5.


No?