Thursday, 17 April 2014

Aeon Credit Q4 earnings up 22.6% to RM47.82m

Wednesday April 16, 2014

KUALA LUMPUR: Aeon Credit Service (M) Bhd’s earnings rose 22.6% to RM47.82mil in the fourth quarter ended Feb 20, 2014 compared with RM39mil a year ago due to higher fee income, including from sales of insurance products, point management fee and higher recovery of bad debts.

It said on Wednesday its revenue rose 42.7% to RM187.99mil from RM131.68mil. Its earnings per share were 33.21 sen. It recommended a dividend of 24 sen per share.

In the financial year ended Feb 20, 2014, its earnings rose 30.7% to RM175.35mil from RM134.12mil in the previous corresponding period. Its revenue saw a 44% increase to RM672.76mil from RM467.13mil.

A quality strategy - appreciating the future earning potentials of wonderful companies.

Though Warren Buffett popularized the idea of the moat, he credits partner Charlie Munger for bringing him around to the idea that "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

A quality strategy is a bet that the market doesn't appreciate wonderful companies enough, particularly their earnings potential many years out. 

As Charlie Munger said, "If a business earns 18% on capital over 20 or 30 years, even if you pay an expensive looking price, you'll end up with one hell of a result." 

(Of course, it's not easy to identify in advance firms that can sustain such high rates of return for so long.)

Thursday, 3 April 2014

Retailers Accounting 101 (A Conceptual Overview)

Investing in Retail:  Understanding the Cash Conversion Cycle (CCC)

One of the best ways to distinguish excellent retailers from average or below average ones is to look at their cash conversion cycles.

The CCC tells us how quickly a firm sells its goods (inventory), how fast it collects payments for the goods (receivables), and how long it can hold on to the goods itself before it has to pay suppliers (payables).

Naturally, a retailer wants to sell its products as fast as possible (high inventory turns), collect payments from customers as fast as possible (high receivables turns), but pay suppliers as slowly as possible (low payables turns).

The best case scenario for a retailer is to sell its goods and collect from customers before it even has to pay the supplier.

Wal-mart is one of the best in the business at this:  70% of its sales are rung up and paid for before the firm even pays its suppliers.


Looking at the components of a retailer's cash cycle tells us a great deal.

A retailer with increasing days in inventory (and decreasing inventory turns) is likely stocking its shelves with merchandise that is out of favour.

This leads to excess inventory, clearance sales, and usually declining sales and stock prices.

Days in receivables is the least important part of the CCC for retailers because most stores either collect cash directly from customers at the time of the sale or sell off their credit card receivables to banks and other finance companies for a price.

Retailers don't really control this part of the cycle too much.

However, some stores, have brought attention to the receivables line because they've opted to offer customers credit and manage the receivables themselves.  

The credit card business is a profitable way to make a buck, but it is also very complicated, and it is a completely different business from retail.

Be wary of retailers that try to boost profits by taking on risk in their credit card business because it is generally not something they  are good at.

If days in inventory and days in receivables illustrate how well a retailer interacts with customers, days payable outstanding shows how well a retailer negotiates with suppliers.

It is also a great gauge for the strength of a retailer.

Wide-moat retailers such as Wal-Mart, Home Depot, and Walgreen optimize credit terms with suppliers because they are one of the few (if not the only) games in town.

The fortunes of many consumer product firms depend on sales to Wal-Mart, so the king of retail has a huge advantage when ordering inventory:  It can push for low prices and extended payment terms.

Extending payment terms to their suppliers allow the retailers to hold on to its cash longer and to reduce short-term borrowing needs; effectively increasing the retailers' operating cash flows .

Additional Notes:
In retail and consumer services, most economic moats for the sector are extremely narrow, if they exist at all.

Therefore, not surprisingly, you don't find a ton of great long-term stock ideas in retail and consumer services.

The only way a retailer can earn a wide economic moat is by doing something that keeps consumers shopping at its stores rather than at competitors'.

It can do this by offering unique products or low prices.

Although you can do well buying high quality specialty and clothing retailers when the industry sees one of its periodic sell-offs, very few of these kinds of firms make great long-term holdings.

Asset Management Accounting 101 (A Conceptual Overview)

The single biggest metric to watch for any company in this industry is assets under management (AUM), the sum of all the money that customers have entrusted to the firm.

An asset manager derives its revenue as a percentage of assets under management, AUM is a good indication of how well -or how badly - a firm is doing.

Unlike a bank or insurer, where big losses can cause the firm to become insolvent, big losses in asset management portfolios are borne by customers.

Big losses will affect fee income by reducing AUM, but an asset manager could lose well over half the value of its assets under management and still remain in business.

In a worst-case scenario, customers could withdraw their remaining dollars and the firm could fold if its fee income became inadequate to support its operations.

But because asset management requires almost no capital investment, these companies can pare back to the bone to remain in business.

Additional notes:
Asset management firms run money for their customers and demand a small chunk of the assets as a fee in return.

This is lucrative work and requires very little capital investment.

The real assets of the firm are its investment managers, so typically compensation is the firm's main expense.

Even better, it doesn't take twice as many people to run twice as much money so economies of scale are excellent.

This means that increases in assets under management - and therefore, in advisory fees - will drop almost completely to the bottom line.

All this adds up to stellar operating margins, which are usually in the 30% to 40% range - something you won't see in many industries.

Property/Casualty Insurance Accounting (A Conceptual Overview)

Property/Casualty Insurance Accounting 101


Premium revenue is used to fund claim payments, sales commissions for insurance agents and operating expenses.

Insurers typically express each of these expenses as ratios to earned premiums.

Claim expenses, for example, typically consume 75% of an insurer's net revenues.

Adding together these three ratios produces the combined ratio.

Combined ratio is an insurance company's key underwriting profit measure.

A combined ratio under 100 indicates an underwriting profit.

For example, a combined ratio of 95 means that the insurer paid out 95% of its premium revenue for losses.  The 5% remaining is the underwriting profit.

A combined ratio exceeding 100 indicates an underwriting loss.

For example, an insurer with a combined ratio of 105 paid out 105% of its premium revenue to cover losses, meaning that it had an underwriting loss equal to 5% of revenues.

Companies with combined ratios exceeding 105 for more than a short time have a difficult time recouping their losses via investment earnings, and this type of poor underwriting track record suggests that an insurer's competitive position is unusually weak.

Insurers unable to earn even the occasional underwriting profit will produce the industry's poorest returns and may be tempted to accept large investment risks to boost profitability.

Insurers also make money from investment income, which they often report as a ratio of premiums.

Adding the investment ratio to the combined ratio yields the operating profit ratio.

In many instances, investment income is a key profit determinant because it offsets underwriting losses.



The key asset for most insurers is investments.

In addition to float, most insurers invest a large portion of their own retained earnings as well.

The investments account reveals the size of an insurer's investments relative to its asset base and details the asset allocation employed.

As a starting point, look for insurers with no more than 30 percent invested in equities (unless the company is run by Warren Buffett).

Unearned premiums represent premiums received but not yet considered revenue.

When an insurer receives a premium, it is deemed to earn it gradually across the year.

After all, if a customer cancels a policy, the insurer must refund that portion of the coverage not consumed.

After six months, an annual auto policy would be 50% earned, and half the premium would be considered revenue.

Before this occurs, the premiums are held in the unearned premium account, and the insurer is free to invest them.


Look for an insurer who is able to consistently earn underwriting profits on a large, growing customer base.

In effect, this insurer would be getting paid to profit from investing other people's money and could retain this float indefinitely (as long as it grows).

Unfortunately, for investors, these situations rarely occur.


Insurers enjoy a peculiar business advantage.

Premiums are received well in advance of the firm's requirement to pay claims.

This money is often referred to as float.

An insurer enjoys the use of this money between the time it receives a premium and the time it has to pay a claim.

Insurers exploit this by investing these premiums and keeping the money they make from the investments.

How much money they can make this way depends on market performance, the insurer's asset allocation, and how long the insurer holds premiums before making claim payments.

Insurers writing long-tail insurance hold premiums longer and, hence, can invest more in equities.

(The length of an insurance policy's tail refers to the time it takes for damages to become apparent.
Short-tail policies are those where damages incurred during the insured period become known quickly, such as a car accident.
Long-tail policies cover damages that may not become apparent for many years, such as an asbestos injury_

The Magic Words - A Healthy Attitude

Today, Earl Nightingale is remembered as the greatest philosopher of his time, and his best selling programs and books continue to sell daily, inspiring people around the world to reach their highest potential.

Success is not a matter of luck or circumstance. It's not a matter of fate or the breaks you get or who you know. Success is a matter of sticking to a set of commonsense principles anyone can master. In Lead the Field Earl Nightingale explains these guidelines: the magic word in life is ATTITUDE. It determines your actions, as well as the actions of others. It tells the world what you expect from it. When you accept responsibility for your attitude, you accept responsibility for your entire life. Earl Nightingale -- the "Dean of Development" -- offers you a treasure trove of uplifting and insightful information like: * The importance of forgiveness * How "intelligent objectivity" can improve your professional life * The usefulness of constructive discontent Now it's your turn to bring positive changes to your own life, changes that will allow you to lead the field yourself!

Wednesday, 2 April 2014

Financial statements of Life Insurance Companies (A Conceptual Overview)

Life insurance companies offer products that allow people:
(1) to protect themselves or their loved ones from catastrophic events such as death or disability or
(2) to provide greater financial protection and flexibility for situations such as retirement.

A life insurer pools the individual risks of many policy holders.

The life insurers then strives to earn a profit by taking in and/or earning more money than it is required to eventually pay out to its policyholders.

A bizarre fact of the industry is that when an insurer sells a policy, it doesn't really know how to effectively price that policy because it doesn't really know how much it will eventually cost.

Despite the best efforts of a life insurer's actuaries to estimate variables such as future investment returns, policy persistency rates (the length of time that customers keep their policies), and life expectancy, it can take years before the insurance company knows whether it made money on the policy.

Financial statements for life insurers (A conceptual overview).


On the asset side of the balance sheet are two major items:
(1) investments (the accumulated premiums and fees that an insurer builds up before having to pay out benefits to its policyholders) and
(2) deferred acquisition costs, which is the capitalized value of selling insurance or annuities policies.

For firms that sell variable annuities, separate account assets, which represent the funds that variable annuity owners have invested, constitute a third important asset type.

Because variable annuity owners manage their own investments, these assets are segregated and the separate account assets are offset by an equivalent amount of separate account liabilities on the opposite side of the balance sheet.

A life insurer's other liabilities basically consist of the actuarially estimated future benefits that need to be paid to the insurer[s policyholders.


The two main sources of revenue are:
(1)  recurring premiums and fees and
(2) any earned investment income.

The two main expenses are:
(1)  benefits and dividends paid to policyholders and
(2) amortization of the deferred acquisition costs.

Given how few revenue and expense lines there are, it is vital to keep track of their growth trends.