Saturday, June 01, 2013

Investing in Stocks: Overview


More useful writings:

Stock watch:
There are five areas in stocks investing:
  • Paradigms
  • Objectives
  • Strategies
  • Skills
  • Execution


Paradigms


"We interpret everything we experience through these mental maps. We seldom question their accuracy; we're usually even unaware that we have them. We simply assume that the way we see things is the way they really are or the way they should be. And our attitudes and behaviours grow out of those assumptions. The way we see things is the source of the way we think and the way we act." --Stephen R. Covey.

"...All of my clients had bought the same stock. Some had made money, and some had lost it...Over the years I started to notice that the people who lost money in either of these ways were always the same ones. They'd sell too soon or too late, but they always lost money..." --Suze Orman.

Her clients acted consistently based on their own paradigms. Those with winning paradigms acted consistently to win. Those with losing paradigms always acted consistently to lose.

These are the right paradigms on the natural law of market, risks and knowledge for effective stock investing.
  1. The natural law of market
  2. Selective stock prices and market movement
  3. Understanding risks
  4. Elimination of risks
  5. Consistent and accurate prediction of market timing
  6. Seeing stock investing through these perceptions turns successful stock investing into exact science. In short, we should seek knowledge and information before we invest and we should not base on market timing that is based on chance or probability.




Objectives


The objectives to invest in stocks are set to meet our financial planning objectives, i.e. to acquire and to grow income generating assets(i). From stock investing objectives we can establish our broad criteria in stocks selection.


Strategies:


Successful stock investing involves two main area, i.e. good stocks selection AND good cash management.

Stocks selection
  • Establish stocks pick criteria to fit into the objectives
  • Stock selection checklists
  • Stock selection criteria of various gurus, i.e. Warren Buffett, Philip A Fisher, Benjamin Graham, Fool.com, Peter Lynch, etc.
  • Choice between price growth and dividends growth

Cash management
  • Understand market reality and one's cash flow situation and invest accordingly
  • When to buy
  • When to sell
  • Cash inflow in bad time


Skills




Executions


  • Setup trading accounts
  • Basic online trading process
  • Finding stockbrokers, i.e. a list of stockbrokers
  • Choose and get a bank account
  • Share margin financing
  • Executions of trade
  • Basic trading techniques: order, settlement and contra
  • IPO
  • Rules and regulations
  • Counting gain & loss
  • Tax issues
  • Credit control

AEON Co valuation based on Quarter 1's results

The reasons why I started my writing with AEON are that

  1. its current price at RM17.64 is ridiculously high due to a few reasons, and
  2. for another reason, such price may not be really crazy

But in either cases above, one thing for sure, it is definitely not the right price for me to buy more into this stock.

The price is too expensive:

  • Unless there is new announcement that gives a different financial picture, I think the fair price for AEON is still at between RM9.00 - RM12.00. At such price the P/E ratio of forecast earning is in the range of 12.5 - 16.7 times.
  • This stock has very low trading volume. Prices can be easily affected by just a few traders. I can only guess that some punters are playing up the share price.




But what are the reasons that may justify current high price:

  • If the management decided to dispose its property at market value, the increase of price beyond reasonable of P/E ratio can be justified. But based on research report, we know the management is not keen.
  • If the management decided to dispose its property and decided not to retain control over the property management, then such disposal will hurt its Retailing business. On the other hand, if the management decided to dispose the property to a REIT and retain control over the property management, then the new REIT will be loaded with debts and interest expenses that eventually will hurt the Retailing business too.
  • On a more far fetched speculation, as AEON's book carries high value property, are there corporate raiders quietly accumulating this stock until they get sufficient votes to force current management to sell its property and realize a huge short term disposal gain? This is quite unlikely though make a good story. :-)
  • Big blocks of shares are traded among/ by Employees Provident Fund, Aberdeen Asset Management Asia Limited and Mitsubishi UFJ Financial Group, Inc for several months. Maybe these are just normal trading activities or maybe there are something more than apparent that I don't really understand.

In all cases above, they are not good for the long term prospects of the business.

Cut the long story short, if I were to buy this stock more for investing (and not trading or speculating), the price should not be more than RM11.00, unless and until the next announcement that reflects a different scenario. (Its Q2 results will be announced in August 2013)


AEON Co valuation based on performance of FYE 31 December 2012

The share price doubled in 2012. While PE ratios for the years between 2008 - 2011 were hovering between 12.22 and 13.00, PE for the year ended 2012 was increased to an astonishing 23.3 times!!

Such drastic increase may mean changes of something more fundamental, otherwise just a fluctuation of market forces that we should take advantage of (means it is time to sell la).

1. The historical growth of EPS was normal (on the face of it, the growth number is lackluster. but we know there were RM12.7m disposal gain in 2011.)  Growth of net dividend payout had been increased at 20% range year on year.

2. There is only one new store at Kulai expected to start in 2013. Two stores, Ipoh Station 18 and Seri Manjung that started in 2012, will have full 12 months earnings in 2013.



3. Taking into forecast profit growth consideration of 10% for Retailing, 25% for Property Management Services and 30% for interest income, my forecast EPS for year 2013 is RM0.72 per share (or 72 sen per share). Valuing at PE 13 times, the fair value of the share should be at RM9.36. One research house gave a more positive outlook and higher valuation at RM11.82.

Currently, the share price is RM17.64 at forecast PE of 24.5, which is ridiculously high.

Unless there is something that we don't know, i.e. disposal of old land at revalued price, new interested investors, corporate finance activities to securitise the property and put them into REIT, etc. otherwise, I am avoiding to buy more into this stock.




Company: AEON Co. (M) Bhd (6599)


Latest updates:
To invest in this Company, we must know it has two businesses that contribute almost equally to its bottom line. The businesses are related and they are complementing to each other growth, yet they are distinctively different in terms of financial performance and assets employed. They are:
  1. Retailing ("RET"): Operations of Department Stores and Supermarkets 
  2. Property Management Services ("PMS"), which include to be as landlord renting out shops and/or store space to other retailers. 
In 2012, both business contributed 50% of the profit of AEON. Property Management Services had grown significantly in recent years.

The reasons why I follow this company:
  • Well managed Retailing business with strong branding that are able to ride on the growth of our nation populations
  • Lucrative and stable Property Management Services Business that can ride on its Retailing business
  • Strong balance sheets (no debts) and rational management that focus on long term business growth instead of cashing out one-time short term profit that may jeopardize simplicity of management (in which the many unhappy investment bankers' would termed as "Conservative")
  • Its clouts, due to sheer size, over its suppliers to provide long payment period 
  • In my opinion, this is a well managed company that can sustain and grow for many years to come. Our concern should be only buying at the right price.

Problem of this stock as investment:
  • Low trading volume. Price can be staled for a long period of time and suddenly moved beyond reasonableness. Just a few interested parties, or lack of them, can move the price significantly.
  • Valuation of properties. Will one day the management finally yield to investment bankers' pressure on their "grand idea" of putting the properties into REIT and make a huge one-time short term profit? This decision will distort valuation of the share. 

    More Notes:
  • If the REIT thing does happen, the Net Assets and share price of AEON may increase many folds. Investors may make a one time big gain. However, such move may kill its Retailing business if the management does not retain control over the new REIT, as the Retailing business needs constant renovations to provide freshness of the malls to retain and attract shoppers. On the other hand, if the management does retain control over the REIT, it will then have to manage a highly geared (loaded with borrowings) properties that may cause many distractions, e.g. tussle between malls' needs and REIT's financing needs.
  • At this point, it is wise for the management to "shun" (as the words used by a financial analyst) the idea of REIT completely. Just hope they can continue to resist the temptation. In long term, it only benefits the one-time investors who made gain and run away and the bankers who make lucrative fees and interest income from the deal. The new REIT arrangement would leave a messy borrowings structure to be managed by the same management that would take many years to pay down, if at all.




Financial Performance (until FYE 31 Dec 2012)
  • Growing revenue, with average 7% revenue growth for the past 4 years.
  • Growing profit, with average 14% profit before tax growth for the past 4 years.
  • Improving profit margin, mainly come from PMS
  • Expected better prospects


Financial Positions

The unique part of AEON's balance sheet is that the Company has no bank borrowing, and that the entire Assets are funded by Equity and Accounts Payable that include suppliers, accruals, rental deposit collected, etc.

This kind of balance sheet can only be considered as a positive sign (healthy with liquidity) for the kind of business, i.e. Retailing Departmental Stores & Supermarkets and Malls' Property Management Service that include rental income, and the kind of clout they have over their suppliers due to their size.

The key risk for investor, is therefore the true valuations of the Non Current Assets. Part of Non Current Assets are invested in Quoted Shares listed in Malaysia and intangible items like software. These amounts has relatively little impacts on income statements. Property they acquired through out the years are mostly valued at cost or at valuations done 18 years ago in 1995.

Some salient points about AEON's financial positions:
  • Positive cash flow from operations
  • Positive net cash flow after capital expenditure
  • Account Payable is funding Current Assets and part of Non-Current Assets (But this is not a problem for AEON)
  • No borrowings
  • Simple balance sheets that devoid of chances of manipulation
  • Property value reflected in balance sheet are significantly below current market value

Investor issues
  • Growing dividend though with low yield

The conclusion is that AEON is a good company that we should keep an eye on. The next step is to find out stock valuation, i.e. what is consider as good price to buy its shares.




You can download AEON's annual reports here.
You can find some historical data, information and even research reports on AEON in this page.
Check out our latest valuation updates on AEON.