Thursday, June 21, 2012

AEON Credit: Perhaps this other AEON is even better

I can tell you that I perhaps was looking at the wrong AEON or rather overlooked it. While I like AEON, the supermarket and mall business, what I missed out is its credit business. I have always treated it as a supporting business to its mall operations than a business that can stand alone by itself. Perhaps it is still very dependent on the mall, but its credit business is making waves.

Let me tell you why I took it for granted the business of credit for AEON:
  • I took the cue from Courts. While at first it was doing pretty well, later on it did suffer from its receivables problem as well as other competitors;
  • AEON Credit is non-deposit taking financial organization. When your costs are higher than the banks, it will take a bigger effort to compete. Already most banks are credit card issuers, what is another card issuer from AEON?;
  • the RM50 yearly tax on credit cards by the government. Need I say more, the total cards in circulation will surely drop;
  • receivables - I could not really understand how good or how bad this can go.
Well, then let's look at its 5 years performance.

Its growth is fantastic over the last 5 years, but starting from small base

At its current price of RM11.92, while may have had a run quite a bit recently, it is still trading at below 15x PE. Worth looking, if it's business is to grow at this pace and the concerns that I have mentioned are addressed. Let's look at these concerns then.


Plenty, if you take the banks into account. What differentiates AEON from the banks is that it is a very much shoppers based credit card. If you noticed, Tesco ties up with RHB Bank, Giant ties up with Citibank for the cards. AEON whereas, has its own card. I hold an AEON card but not its credit card (which may be a mistake). AEON does provide better benefits to its credit card holders. Hence, over here if you feel that AEON, the supermarket's business is growing, then the card business will continue to grow, for sure. Competition is there but AEON Credit has its own space that it is slowly building on.

Costs of doing business

Banks are able to have costs of funds as low as 2% to 3%. By issuing cards, banks are enjoying chargeable rates of 18% to 24%. Fantastic. What about AEON Credit? I would have thought its costs of credit would be much higher. If you look at the red box below, its longer term rates are below 5%. Wow! for a non-deposit taking organization. If we read further, it sources for USD financing which it hedges against fluctuations. Well, if the financing is in USD then possibly the rates can be that low.

What about receivables?

My biggest fear in the cards business is bad receivables. From below, its past due receivables are less than 10% of its total. Past due receivables does not mean it is not collectible and the below 10% threshold is very manageable, I should think.

As for the RM50 charge from the government, it is something no credit card company can do about it. If any, the measure by the government has stabilized the credit card base, which means that it is much more difficult to do new customers acquisition than before.

My take

If any measure is to be used, AEON Credit's business has yet to reach its full potential. Riding on its supermarket and mall operations business alone, the credit business itself has the potential to grow further. If you notice, AEON is concentrating on building mid-sized malls in new and some old townships than just operating a supermarket business. Its cards business is working on promotions with the tenants that AEON has. Now, with the growth of the mall business alone, it should be able to ride on the momentum. However, over the last few years, what we managed to see was that AEON Credit in fact grew faster than AEON.

If it continues to be able to manage the bad debts and costs of credit well, then this stock is one attractive company.

What does AEON Credit do?

Rather than trying to explain at length, let me just cut this out from its annual report and show from here. :)


Newbie said...

What do you think of its cash flow?
When I look at the cash flow report it is not showing any improvement.
I am a newbie so most likely I am missing something here.
Glad if you could share your view with regards to Aeon Credit's cash flow.

Unknown said...

HI (I should not call you Newbie)

For AEON Credit, it is entirely different. Its negative cashflow (in large numbers) is because of its huge increase in loans to its customers. If you are looking at cashflow from operations, -247million basically means that its new negative in loans to customers.

While I am a proponent of cashflow, I am afraid for companies such as AEON Credit, it is not the right matrix to look at.

There are a few ratios to look at Net profit, days receivables, Capital Adequacy Ratio etc.

Actually, this one is slightly more complex.

Newbie said...

Thank you for sharing.

Again we still need to understand how much cash Aeon Credit is generating from its operation. No?

I have seen companies making tonnes of net profit but have negative cash flow.

I hope to learn more.

Thanks again for generously sharing your ideas.

Unknown said...


Let me find time to write on this maybe during the weekend as this encompass quite in depth study. Financial companies need a different understanding.

Hope I find the time. Thanks for reading

Newbie said...

Thank you for sharing.

Newbie said...

What should be the right matrix to look at for finance companies like Aeon Credit?


Unknown said...

Hi Newbie
Part of it is mentioned in the article i.e. collectibles, bad debts.

Of course profit is important. Cash flow you would have to look at it this way - for a company that provides loan, they make money from loan that provide to. If repayment is too early, they will not make that much.
Hence, if the operating cashflow is good, it means that they receive money faster than they loan them out - which is bad.

Hence for a credit company, it is important to see credit growth.

Another metric is the Capital Adequacy Ratio. This means that how much capital is to support the loan. The higher the better or should I say enough capital is good. If CAR is too low it is bad as anytime there are bad loans it will hit the company's balance sheet and they may not have enough capital to support the business.

If the CAR too high, then they are not efficient in terms of capital allocation.

Newbie said...

Thank you for sharing generously.

Anonymous said...

Knowing this fact, shouldn't you be switching to AEON Credit? The price has risen from RM 11.08 at the point of your comment till today's RM 12.78 in just 1 1/2 months' time. The current PE is about 13 times.

felicity said...

You looked at my portfolio :)
Well this portfolio which was just started last year. I do not want to change so often as this blog is not about trading that often which is also not my style. Anyway, AEON still has good value and we do not just change for sake of changing.

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