Thursday, July 5, 2012

AEON: Using other people's money

Someone was saying, perhaps I should not be overly critical on some issues. Perhaps he / she is right. Investments, we should be looking for winners. However, we should also be able to identify "question mark" ones. If we are not sure, we can opt not to invest.

As I was highlighting in my earlier article, there are companies with bad assets as well as there are companies which has good liabilities. There are quite a few of these companies. Strong deposit banks for one. Insurance companies who has strong premium based. Retailers. Not all of them though.

Let's see what AEON has.

Basically, what do we see?
  1. Strong customer base with consistent growth in revenue and profit. AEON - quite decent and strong brand.
  2. Strong management of cash and receivables - AEON - very. Their business basically is cash business, so why not. Now as we look at the above balance sheet, what do we see? Cash assets which will last 2 months of purchase. Inventories which will last for 2 months. Not overly stocked.
  3. Liabilities - When we go to financial or accounting school, usually when this number is high, it is a trigger point. AEON's payables and accruals is RM1.1 billion - basically 40% of its revenue. Liquidity ratio - 0.68 : 1. Some system may trigger the company as possibly insolvent. For AEON, it is far from it. Their business is using supplier to finance them. From the ability to use supplier's financing, they are acquiring land assets and build buildings so that more and more suppliers can finance them, in future. Are they bad paymasters? Well, you can ask around.
  4. Why is supplier financing good if you manage it well? Zero financing costs. Way better terms than banks. In getting financing from banks, even a company the size of AEON will have to sign pages of contracts. Supplier financing - several less pages and usually these terms are much looser.
  5. At this point of writing, AEON has 11 properties throughout Malaysia. For AEON, having strong properties in good locations is an asset. Developers with large landbanks would want to attract AEON to participate or build properties in their area (very much like Wal-Mart being attracted by smaller townships in US to open their superstores). It will increase the value of their development and townships. With the improvement in the property value, what is the impact to the balance sheet? Just to show you the property in Setapak, Kuala Lumpur below. Do you think the build up area of 667,000 sq ft is worth RM79 million for this semi-prime location? RM118 per sq ft. Parkson (another not bad retailer) just bought another similar sized property around the area at over RM200 million 3 years ago and it is a yet to complete piece.
  6. I can also tell you with the properties, AEON can have opportunities for REITs depending on whether they want to or not.

Now, do you see the difference between AEON and the company which I was to "trigger" warning signs on its balance sheet?

Note: Thanks to a reader for highlighting the land size for AEON in Setapak may not be the same as Parkson's land as I was using the built-up area metrics. The land area is actually almost the same size as the one owned by AEON. Parkson's land: 34,103 sq mtr= 367,082 sq ft. AEON's land size is 368,516 sq ft.


Sunny said...

Do you like DKSH? I do not know what they are distributing other than Lay's Stax. The profit margin is sooooooo tiny and looks like they are struggling to pinch money out of the goods they are distributing.

felicity said...

Ya margin is quite low, but they are one of the bigger (if not the biggest) distributor in Malaysia. Has some advantage against the rest. their business model dependent on size. When got it the price was quite low though.

Sunny said...
This comment has been removed by the author.
Sunny said...

Is the capital of "supplier financing business" provided interest-free?

felicity said...

Ya, it is interest free as supplier's credit is usually interest free.

Daichi Bo said...

(1) When I refer to Annual Report 2011, found that it was stated amount due to holding company and amount due to related companies are interest free. These are small amount compare to the total current liabilities. The biggest chunk being the trade payable. But it was not stated that the trade payable are not interest free. May I know from which statement you know it is interest free?

(2) Also, the counter part of this big sum of trade payable (over 600 millions) in the current asset column cannot be found. I presume it has been spent to purchase other commercial land and building. Is that possible to verify?

felicity said...

Hi Daichi

This is the nature of the business. Trade payables are normally interest free. In most companies, trade payables are interest-free.

For company, their trade payables are to companies such as Nestle, Coke, Padini etc. It depends whether what they buy are on consignment or not as well.

Daichi Bo said...

I am comparing 2010 report to 2009 report.

In 2010's report, the comprehensive income statement shows revenue in year 2009 was 2.75 billion. But in 2009's report, the revenue in year 2009 is 3.74 billion. Why these two figures are not tally and show such a big difference? Anything fishy?

felicity said...

Hi Daichi.

See this. It reflects the change in recognition of revenue

"Amendments to FRS 118, Revenue
The amendments clarify the distinction between when an entity is acting as a principal and an agent. The adoption of
this guidance resulted in a change in accounting policy which has been applied retrospectively in accordance with the
transitional provisions of the amendment. This change in accounting policy affects the presentation of such revenue from
a gross presentation to a net presentation as detailed in Note 29. Accordingly, there is no impact to the profit or loss and
does not affect the basic earnings per ordinary share for the current and prior periods."

Daichi Bo said...

Perhaps I am too serious. I would like to ask more questions. I checked around and found out (if my calculation is correct) AEON takes on average 4 months to pay its suppliers. It is fast to collect money (around 7 days) but takes 120 days to pay supplier (trade payable). Why? When we check the report in Nestle, Dutch Lady, etc. did they receive money in less than 90 days?

felicity said...

Hi Daichi

It is a cash business for AEON. Trade receivables is probably the credit card payment.
Market has it that AEON is not a bad paymaster, hence the 4 months is probably quite normal