AIMIA INC. $15.93 (Toronto symbol AIM; TSINetwork Rating: Extra Risk) (514-205-7315; www.aimia.com; Shares outstanding: 172.3 million; Market cap: $2.7 billion; Dividend yield: 4.0%) owns and operates Aeroplan, Canada’s largest loyalty program, and Nectar, the U.K.’s biggest loyalty program. In addition, Aimia has interests in Air Miles Middle East and Nectar Italia, as well as Club Premier, the leading loyalty program in Mexico.
In the nine months ended September 30, 2012, Aimia’s revenue rose 1.0%, to $1.63 billion from $1.61 billion a year earlier. Excluding one-time items, earnings per share rose 33.8%, to $1.03 from $0.77. The company’s cost per mile awarded dropped significantly, partly because it is making better use of its computer systems. Redemptions also fell.
… but it faces three risks in 2013
Aimia faces three significant events this year. We think all of them will be resolved in a way that will let the company continue to thrive. But until then, uncertainty remains too high for us to choose Aimia as our #1 pick.
1) The Canadian Competition Tribunal will soon rule on whether Visa Canada and MasterCard impose anti-competitive rules on merchants. If the decision strengthens merchants’ bargaining power, financial institutions may earn lower fees from credit cards. These fees finance their investment in loyalty rewards programs.
If this occurs, CIBC and American Express, Aeroplan’s credit card partners, may choose to either reduce their loyalty offerings or cut the fees they pay Aimia.
However, the Canadian credit card market is extremely competitive, and loyalty programs are a significant and entrenched part of credit cards in Canada,
so the programs will likely continue. As well, any changes will probably be phased in. Meanwhile, Aimia continues to expand overseas.
2) Aimia’s contract with CIBC expires in December 2013, but all indications are that it will be renewed, and likely well before the expiry date. The Competition Tribunal decision will clarify the negotiations on the terms of the renewal. That’s the main reason why the deal hasn’t yet been signed.
3) All Aeroplan miles earned before January 1, 2007, will expire by December 31, 2013, under Aimia’s seven-year expiry policy. That could lead to a sudden rise in redemptions (although members have been aware of this policy change since 2011). Any sharp increase could hurt Aimia’s cash flow and stock price.
However, the company has been able to generate strong cash flow when redemptions have been high in the past. As well, cash flow should hit a record in 2014, after the redemption date has passed. The anticipation of that cash flow rise will likely offset a lot of the pressure on the stock price in 2013.
The company will probably earn $1.65 a share in 2013. The stock trades at just 9.7 times that forecast. Its 4.0% yield adds further appeal.
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