disastrous performance in Q4, super high tax rates, high lease liabilities payments, non-responsive management, lousy finance and tax department, high maintenance costs, and costly promotional activities that yielded no result.
The business and brandname itself is good, but the local management team is lousy. Can't help it.
"Operating cashflows are still strong but a lot were spent on high maintenance costs, high lease liabilities and useless promotional activities" ------------------------------------------------------------
This is the standard modus operandi to siphon money from any listed company
Your point on AEON having reduced issue of shoplifting compared to the old Carrefour may be right, but we should not overlook the other shortcomings of the current AEON management.
The utmost responsibility of the management of a listed company is to safeguard shareholders' interests and manage the company well to create more value for the shareholders. Otherwise why bother with listing?
The current management seems to have focused on the wrong things without clear strategy on how to expand and improve earnings.
They have spent millions of dollars on digital transformation which has obviously yielded little result (note online revenue was only RM24m for 2022, not even 1% of the annual revenue). Though it may have incorporated and digitised data from hundreds of suppliers but this has not transformed into any apparent saving in bulk purchase. Total revenue may have increased by 6% in Q4 but earnings fell over 60% from last year.
The management has not got the maintenance and expenses in check, allowing it to eat into the profit (net profit fell 65% from Q4 2021) as well as cashflows (capex has doubled to over RM110 million in 2022 compared to RM65m in 2021).
They have replaced a local good capable MD in Samsuddin with 3 Japanese (1 MD and 2 deputy MDs), obviously the salary and remuneration package is different for these 3 expats, and they seem to be irreplaceable (one of them is the son of AEON founder) and are here to stay for years.
They may not be well verse with the local retails market and hence the strategy being implemented has resulted in much higher expenses and lower profits.
The current management is particularly weak in corporate finance and taxation.
This is visible from the super high taxation rate of 45.4% in Q4 2022, and unbelievably high cash tax rate of 62.7% in 2022. Just imagine, for RM211.4 million of pretax profit registered for 2022, AEON paid cash tax of RM132.5 million. I checked with AEON public relation officer and the reply was that the high taxation rate was due to cukai makmur and some disallowed items for tax deduction. That simply did not explain a thing.
The company accounting team has allowed the lease liabilities to balloon to a whopping RM1.612 billion, almost reaching 90% of total equity of RM1.80 billion. The reply from the company was that these lease liabilities are capitalised long term leases from third party shopping malls. They charged out total RM258.7 million of lease liability interests and payments into cashflows statements in 2022. This implies an averaged 6 year of leases being capitalised. One would question why they need to capitalise so much of such lease liabilities and whether such practice has unintentionally increased the cash tax payments to the taxman while increasing the accounting profits.
I think this stock is showing sign of declining with latest bad QR announced. A 4c dividend proposed also can't move up the share price. I guess I should wait for the opportunity at better price to exit.
Rambutan9, the share price movement of Aeon is a reflection of what the company has achieved in terms of financial performance. As I said above, the Q4 qtrly result was a disaster with no visible improvement on any of the areas I suggested before, i.e. - the high taxation rate - the increasing lease laibilities - the accounting policy that capitalises a lot of these lease liabilities - the weak corporate finance team that fails to adopt sound finance practices - an uncontrolled capital expenditure program on digitisation which has so far yielded no visible result - an incompetent management that is not willing and possibly incapable of carrying out material corporate restructuring to a leaner REIT structure that minimises tax and improve cash holdings - a weak economy and a competitive retail landscape which limits growth - uncertain external factors and weakening ringgit - foreign funds pulling out of Bursa
AEON has a good business model and the underlying business generates good operating cashflows. However, without a determined and capable management, the company is going nowhere.
I will only revisit it when there is a change in the management or a change in the attitude of the management, or share price drops below RM1.00.
We should invest in a company with good management that always tries to improve shareholders' value. No matter how much earnings the company makes or how much cash the company has, if the management does not do what is best for company shareholders, eg. spending big on unnecessary capex program that yields no visible result, paying high rentals to third party shopping mall owners, contented with high amounts of debts and serve increasing interest expenses, etc, then there is no point putting your money into such a company stock. You won't see growing earnings nor dividends.
I would rather put my money into other retail companies with net cash position and capable management like Padini who knows how to contain costs and expand at the right time to improve earnings. Even Bonia and SEM do much better than AEON in terms of growing shareholders' value. AEON management is getting too complacent, if it continues going on like that, its market share will sooner or later be eaten up by other retailers.
I had earlier projected a net profit of RM202 million and operating cashflows of RM660 million for FY2022. AEON ended up with a net profit of RM111.2 million and operating cashflows of RM434 million only. The shortfall was due to:
- higher than expected taxation rate of 47.4% for FY2022 vs expected 35% - substantially higher unallocated expenses of RM120 million vs expected RM87 million - lower EBIT of RM224m from the retailing segment vs expected RM241m (as a result of thinner margin and higher expenses on digitisation) - lower EBIT of RM219m for Property Management segment vs expected RM232m (as a result of lower savings in electricity and higher leases) - substantial increase in capex to RM118.4m in FY2022 from RM67m in FY2021
Though FY2022 revenue actually went up by 4.4% vs expected and by 14% vs FY2021, the management has so far failed to translate the higher revenue into higher earnings mainly due to its ineffective capital/corporate structure and ineffective capex program/IT initiatives.
There is nothing we as minority shareholders can do if the management is happy to pay out almost 50% of earnings to the tax man and pay about RM260 million of lease liabilities payments to other parties. Net Profit will remain low and dividends remain low and no growth ensues.
We maintain our OVERWEIGHT call with our focus still on the retailers. Despite sustained high inflation, we expect consumer spending to stay resilient in the absence of any immediate plan by the government to rationalise subsidies or reintroduce the GST, while the B40 group continues to benefit from various financial assistance programmes especially direct cash handouts. Also helping, are a relatively stable economy and a healthy job market, coupled with a strong household balance sheet of the M40 group. Our sector top picks are AEON (OP; TP: RM1.80), PADINI (OP; TP: RM6.00) and QL (OP: TP: RM6.66)
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....