Conjecturing FY16 & F17 EPS

Warning – all conjectured models have a force-fit bias, because if the results look silly, the model is adjusted to get results that the model builder deems reasonable. As a long-term TGA shareholder who watches the stock carefully, I expect FY2016's EPS to be in the 21c–23c range, and for FY2017 to be about five cents better – 2c normal growth, plus 3c ($1760K+$2800K) ÷150m). I am fairly relaxed about the EPS numbers that my model produced – about 21.7c for FY2016, and about 27c for FY2017.

The purpose of the elaboration is to justify a Reported-NPAT-based EPS hike in FY2017 that a from-the-top-of-my-head guesstimate would have given, and to highlight how fat-tailed events alter the reality that unfolds, causing guesstimates to be far off the mark.

I decided that the best approach to conjecturing how TGA might perform was to start with Reported NPAT (Statutory NPAT), then populate a table of adjustments that would remove one-offs and the NCML Customer Relationships amortisation to derive what I have called Underlying Cash NPAT (UCNPAT). Because TEF seems to have reached reasonable profitability for FY2015, the CRA acquisition looks like it is strongly EPS accretive, and the other not-so-successful business initiatives are small, I decided to use FY2015-on-FY2014 growth to estimate FY2016 and FY2017.

I also considered reducing NPAT by a number that is a proxy for the NPAT effect of fixed costs. Because TEF, which now includes CRA, has advanced to an established-business phase, and because, as a consequence, I used one year's past growth as a guide for the next two years's growth, the fixed-costs-proxy idea did not make much difference. This absolved me from being too pedantic about the value of the proxy, which would have been difficult to derive accurately.  To preserve the concept, I let my spreadsheet stand, using a proxy of $5m ($5000K), which when considering tax, is tantamount to $5000K÷.7 ≈ $7,000K of costs. Different proxies give the following EPS metrics:

...... Proxy .. EPS FY16 .. EPS FY17
....... $0m ......... 21.6c ......... 26.9c
....... $4m ......... 21.7c ......... 27.1c
....... $5m ......... 21.7c ......... 27.2c
....... $6m ......... 21.7c ......... 27.2c
..... $10m ......... 21.8c ......... 27.5c
..... $15m ......... 22.0c ......... 28.2c

The FY2015-based growth factor seemed to produce an FY2016 guesstimate that reconciled fairly well to the recently published H1 results, so I did not tinker with it. In effect, the model expects Radio Rentals to chug along normally, TEF/CRA to make a generous contribution, and the rest (NCML and Cashfirst) to do nothing meaningful.

The reconciliation to H1 results is in the last seven rows of the table below. The highly subjective assumptions about future one-offs and adjustments seemed OK too. The visibility of fat-tail assumptions is preferable to getting the same result by adjusting the growth metric. You could invent your own growth factor and other adjustments, and derive different EPS guesstimates that are valid, or you could approach the matter via a completely different estimating methodology.

The significant level of subjectivity in the numbers I have used ensures that reality can be very different if one or more fat-tail events occur. For instance, Goodwill could be impaired, another acquisition cost incurred, a bundle of very old debt could be sold, a new skeleton may be found in the cupboard, and so on. Fat-tail events (kurtosis in probability speak) are much more normal than people think, and TGA has a significant history of fat-tailed events – the only good ones in the recent past have being unexpected sales of old debt.

	Column 1	Column 2	Column 3	Column 4
0	$ values in $000​	FY2013​	FY2014​	FY2015​
1	​	​	​	​
2	Reported NPAT​	28021​	28151​	30593​
3	​	​	​	​
4	Reconciliation of Underlying Cash NPAT​	​	​	​
5	Acquisition costs CRA​	​	​	2235​
6	NCML amortisation​	1760​	1760​	1759​
7	Debt sales​	-1404​	-810​	​
8	Rent Drive Buy trial costs​	136​	239​	-363​
9	CEO termination/recruitment costs​	​	500​	​
10	Software​	​	358​	​
11	Tax effect​	380​	-87​	-25​
12	Total adjustments​	872​	1960​	3606​
13	​	​	​	​
14	Underlying Cash NPAT (UCNPAT)​	28893​	30111​	34199​
15	UCNPAT growth FY15 on FY14​	​	​	13.58%​
16	CAGR UCNPAT for 5 years = (34199/22631)^(1/5)-1​	8.61%​	*​	​
17	CAGR of reported NPAT for 5 years =(30593/19495)^(1/5)-1​	9.43%​	*​	​
18	​	​	​	​
19	Extrapolating for FY2016 and FY2017​	​	​	​
20	Assume this after-tax cost is fixed​	5000​	5000​	**​
21	UCNPAT less fixed costs (Marginal Profit)​	25111​	29199​	​
22	​	​	​	​
23	Underlying Marginal Profit growth FY2015​	​	16.28%​	**​
24	Underlying Marginal Profit growth used​	​	16.28%​	***​
25	​	​	​	​
26	​	FY2016​	FY2017​	​
27	Estimate of Underlying Cash NPAT​	33953​	39480​	​
28	Liaise with Govt H1​	-900​	-300​	​
29	Liaise with Govt H2​	-450​	-300​	​
30	Two new executives from December 2105​	-200​	-600​	​
31	One-off over receipting $2.8m​	-2800​	​	​
32	Reverse NCML amortisation​	-1758​	​	​
33	Unknown one-offs​	​	-2000​	​
34	Costs (after tax effect) assumed as fixed​	5000​	5000​	**​
35	Estimate of reported NPAT​	32845​	41280​	​
36	​	​	​	​
37	Estimated share tally​	151500000​	152000000​	​
38	Estimated EPS in cents​	21.7​	27.2​	​
39	​	​	​	​
40	Half of FY2016 estimate​	16422​	​	​
41	Adjust Liaise with Govt​	225​	​	​
42	Adjust for two new executives​	200​	​	​
43	Adjust one-off over receipting $2.8m​	-1400​	​	​
44	​	15447​	​	​
45	​	​	​	​
46	2016 H1 Reported NPAT​	15385​	​	​

* Column FY2010 deleted to get better fit – percentages shown that were based on five years are only of historical interest – they are not use. The percentage change between FY2014 and FY2015 is preferable, because significant transitioning has made recent TGA history a more apt reflection of TGA's future trajectory for FY2016 and FY2017 – mainly because in FY2015 TEF emerged from its formative years, and changed the performance dynamics of TGA as a whole.

** If the $5,000K in “Assume this after-tax cost is fixed” row in the FY2016 column is changed, the number in FY2017 column will change too, as will the pair of numbers in the later “Costs (after tax effect) assumed as fixed”. The growth percentage used changes, but this is substantially mitigated by the “Costs (after tax effect) assumed as fixed” adjustment, so the effect on NPAT and EPS are ameliorated. The NPAT and EPS results are relatively insensitive to the value elected in “Assume this after-tax cost is fixed” row in the FY2016 column.

*** I repeated the FY2015-on-FY2014 growth factor in this cell to allow me to try alternative factors, but at the end of the day the FY2015-on-FY2014 growth factor seemed to work for me.