Saturday, June 01, 2013

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.