AEONCR- profit margin began to narrow

Result Update

For QE20/8/2013, AEONCR's net profit increased by 4% q-o-q or 34% y-o-y to RM43 million while revenue increased by 13% q-o-q or 45% y-o-y to RM163 million. The smaller increase in the bottom-line q-o-q basis vis-a-vis the higher increase in revenue is likely due to increase funding cost. The increased funding cost must be quite severe that a 13%-increase in revenue only translated into a 4%-increase in net profit. If this trend continues, AEONCR's net profit may soon flatten out.


Table: Aeoncr's last 8 quarterly results

The dip in the profit margin is shown on Chart 1. If you look at Chart 2, we can see that the average quarterly change in top-line and bottom-line seems to diverge in the past 6-7 quarters, with top-line quarterly growth inching higher while bottom-line quarterly growth drifting lower.


Chart 1: Aeoncr's last 25 quarterly results


Chart 2: Aeoncr's average quarterly change in top-line & bottom-line for last 21 quarterly results 

Valuation

AEONCR (closed at RM15.80 last Friday) is now trading at a PE of 14.2 times (based on last 4 quarters' EPS of 111 sen). While the PE multiple indicates fair valuation, AEONCR's PEG ratio is still attractive at 0.4 time (arrived at by dividing PE with average CAGR of 40%).

As noted above, my concern is the flattening out of bottom-line due to a compressed profit margin, brought on by increased funding cost. If this happens, the above valuation will not apply. 

Technical Outlook

AEONCR is still in an uptrend but it is in a corrective phase which is likely to see the share price testing its 40-week SMA line at RM15.17 (or, RM15.00). As long as this level is not violated, the uptrend is still intact. A break of the RM15.00 mark could change the bullish technical outlook to a cautious outlook that would warrant a reduction in position in this stock.


Chart 3: Aeoncr's weekly chart as at Oct 18, 2013 (Source: Quickcharts)
 
Conclusion

Based on satisfactory financial performance, current attractive valuation & positive technical outlook, AEONCR is rated a HOLD. However, if the share price were to break below the RM15.00  mark or the net profit were to drop next quarter, the rating would be adjusted to REDUCE.

Note:
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, AEONCR.