Another Valuation: Discounted Cash Flow - AEON

In the previous posting, I have covered on intrinsic value calculation using earning projection and discount it for future projection. As mentioned before, there are many types of valuation. Today, I will write on Discounted Cash Flow. This calculation will be based on Cash Flow. What is cash flow? It tells investors that how strong a company in term of generating cash from their daily operation.

For this exercise, I will choose AEON due to its strong cash flow generation. AEON is one of the oldest retail chain store in Malaysia (formerly known as Jusco). Remember, some metric or KPI may not be fit for certain sector. AEON do not need to spend its cash except for expanding new branches as well refurbish existing branch. As for daily operation, as long as customers are coming to the store and buy things, it will still continue to generate cash on daily basis.

Also worth to highlight the ability of AEON to sustain free cash flow. Meaning, on top of generating cash flow from operation, after deducting capital expenditure, AEON still manage to spare some cash.

What are other business characteristics that AEON possess besides Strong Cash Flow? This is what you should be looking for:

1. Sustainable and consistent ROE
2. Strong, consistent and sustainable Cash 
3. Strong brand and customer loyalty
4. Good and recognize management

If you missed out AEON, you might want to look another similar strong cash companies like AEON. May be I will discuss later for Pos Malaysia.

AEON Free Cash Flow

AEON Dividend History

Based on the historical dividend payout, AEON has the sustainability of cash to pay dividend to shareholders at least 10 consecutive years.

AEON 10 Years Operating Cash Flow

AEON Cash Flow Statement 31 Dec 2012

AEON Intrinsic Value Using Discounted Cash Flow

Based on the above valuation, it is still undervalued by 21%. Based on margin of safety principle, this may not be a good entry. You may want to enter at 50% MOS. It depends on your appetite for safety net. But it is just a guidelines, not the exact science. If you decided to make a position, be prepared to average down your position. 

AEON annual report can be found the following link: http://www.jusco.com.my/annual.html

Disclaimer: The above simulation is intended for discussion. Not intended for buy or sell call. Please consult certified financial adviser for your investment decision.