THE VERITAS SNAPSHOT Sell

Transcription

1 Aimia Q Clouded with Doubt; Downgrade to SELL due to Price Appreciation and Near-Term Risks Aimia Inc. ( Aimia ) reported strong Q results. The burn ratio came in at 80% in Q4-2012, compared to 85% last year. For the full year, the burn ratio was flat at about 85%, better than our estimate of 89%, while FCF increased by 52% to $300 million, or $1.67 per share, much better than management s top-end guidance of $240 million. At the current price of $15.75, Aimia has an 11% FCF yield. The dividends paid in 2012 represented about 40% of free cash flow, which is lower than the historical payout ratio of 45% to 55%. Therefore, we believe the dividend is sustainable and there is room for further increases. However, with Aimia shares trading at our intrinsic value estimate, we believe the company is fairly valued while facing several near term uncertainties, and therefore, we prefer to sit on the sidelines. We are downgrading Aimia to a SELL for the following reasons (Please note Veritas only has Buy and Sell ratings for companies under coverage): Given the flat gross billings in Canada during 2012 and the soft economic outlook, we are reducing our gross billings growth rate in Canada by roughly 1%. Therefore, we expect gross billings to grow at a rate of 1.7% in 2013 and 1.3% from 2014 onwards. Our 2013 assumption is in line with management s 2013 guidance of 1% to 3% gross billings growth rate in Canada; Reading between the lines of both Aimia and Canadian Imperial Bank of Commerce s ( CIBC ) comments on their latest earnings conference calls, we suspect CIBC is trying to play hardball with Aimia in the upcoming negotiation for its credit card agreement with Aeroplan Canada (expiring at the end of 2013). Our estimates show that the current contract is lucrative for both CIBC and Aeroplan Canada. However, much has changed since the contract was originally renewed in 2003, as competition in travel rewards programs has intensified while Aeroplan introduced a seven-year mileage redemption policy (effective as of January 2007) and increased its fixed mileage levels for redemptions in July CIBC has seen its credit card loans shrink for the last two consecutive quarters. If CIBC is successful in reducing the price it pays per mile by 5%, we estimate it would reduce Aimia s intrinsic value by $1.20 (see detailed analysis below). This may also have implications for the credit card agreement between Aeroplan and American Express, which is expiring at the end of 2014; As we indicated in our Friday the 13 th Settlement research report dated September 11, 2012, we believe credit card surcharging in Canada is more likely to happen rather than a reduction of interchange fees. The Competition Tribunal is expected to make a decision in the near term. However, if there is a 25 bp reduction in interchange fees, it could reduce Aimia s intrinsic value by $2.00; and Aimia s share price has rallied 30% since we reiterated our Buy rating on April 11, 2012 with our comprehensive research report called Searching for Redemption. We have incorporated the better-than-expected Q results in our model, reduced our gross billings growth rate in Canada and reduced the redemption cost per Aeroplan Mile going forward. These changes resulted in the same $15.70 intrinsic value for Aimia. Therefore, we believe Aimia is fully valued at the current price. Although the stock is attractive with an 11% FCF yield and 4.3% dividend yield, we advise investors to stay on the sidelines, as the current uncertainties facing Aimia could have dire consequences for the company and leave little room for upside. Uncertainty Surrounding the Upcoming Renewal of the Credit Card Agreement with CIBC The growth rate of Aimia s miles issuance mainly depends on travel and credit card accumulations. Appendix A shows Aimia s gross billings in Canada by major partners, with CIBC and American Express accounting for 51% and 10%, respectively, in The credit card agreement between Aeroplan Page 1

2 Canada and CIBC has a 10-year term, which is expiring at the end of Aimia s management mentioned on the conference call that it is now considering partnering with financial institutions other than CIBC in Canada. Similarly, CIBC mentioned on its latest earnings conference call that it has engaged in periodic discussions with Aimia but is also exploring alternatives as there is no assurance the Aeroplan agreement will be extended. CIBC s management also noted that CIBC has significant contractual rights in the event the current agreement is not extended, implying CIBC has some flexibility to ensure its customers are not disadvantaged if the Aeroplan agreement is not renewed by the end of this year. In other words, CIBC is not scared to let the agreement expire. Based on the credit card agreement, CIBC administers various Visa credit cards and other products through which Aeroplan members can accumulate Aeroplan Miles. In exchange, Aeroplan receives revenue for the Aeroplan Miles credited to participating CIBC cardholders' accounts based on the value of the purchases charged to such cards. According to industry sources, CIBC is paying 1.21 cents per Aeroplan Mile based on the existing contract, and therefore, Aeroplan earns a spread between its selling price and redemption cost per Aeroplan Mile. On the other hand, CIBC earns interchange fee revenue to finance rewards for its card members. The current interchange rate for the CIBC Visa Infinite credit card is 1.74% per $1 of spending. Thus, CIBC makes a spread between the interchange fee and the price paid per mile to Aeroplan. Figure 1 shows the economics for Aeroplan and CIBC under the terms of the current agreement as well as a what-if scenario in the event CIBC negotiates a 5% reduction in the price per mile it is currently paying Aeroplan Canada. Figure 1 Partnership Economics for Aeroplan and CIBC (Under Current and Modified Contract Terms) Based on Terms in the Current Contract Expiring Dec Aeroplan CIBC Aerogold Visa Infinite Cents per Mile % of Spending Selling Price per Aeroplan Mile (Under Current Contract) Interchange Fee as % of Spending Redemption Cost per Aeroplan Mile Cost per Aeroplan Mile - as % of Spending * Spread Spread Margin Spread 30% 20% Annual Fee $120/ $14,000 average spending** per CIBC Aergold Visa Infinite card Spread Margin Spread 30% Margin Spread 69% Assumption: 5% reduction in Selling Price per Aeroplan Mile Aeroplan CIBC Selling Price per Aeroplan Mile (Under New Contract) Interchange Fee as % of Spending Redemption Cost per Aeroplan Mile Cost per Aeroplan Mile - as % of Spending Spread Spread Margin Spread 25% 24% Annual Fee $120/ $14,000 average spending per CIBC Aergold Visa Infinite card Enhanced Spread Reduction in Profit per Mile -21% * Based on the reward rate of CIBC Aerogold Visa Infinite cards: 1.5 Aeroplan miles per $1 of spending for 30% of total spending on groceries/gas/drugs (our estimate), and 1 Aeroplan mile per $1 of spending for the remaining 70% of total spending. According to Statistics Canada, the average household spends about 30% of its expenditure on food, transportation, healthcare and personal care. We have excluded the following from our calculation: 15,000 welcome bonus miles for new card members, 1.5 Aeroplan miles for every dollar spent at any Fairmont Hotels & Resorts worldwide, and triple Aeroplan Miles at select CIBC Bonus Rewards establishments. The calculation: (1.5*30% + 1.0*70%) miles * 1.21 cents/aeroplan Mile =1.39%. ** Aeroplan Canada s gross billings were 1,080 million in 2012, with gross billings from CIBC and American Express credit card accumulations of $662 million, representing 62% of the mix. A gross billings-to- spending rate of 1.39% would imply annual spending on Aeroplan branded CIBC and American Express credit cards of $47.6 billion. Aeroplan has 4.7 million active members and we estimate 3.5 million members have CIBC Aerogold or American Express Aeroplan Plus Gold credit cards. This implies the average annual spending on the Aeroplan branded CIBC or American Express credit cards is approximately $14,000. Source: Veritas estimates Under the terms of the current agreement, we believe CIBC is earning a lucrative 20% margin spread between the interchange fees and the price paid per Aeroplan mile. Including the annual fee CIBC Page 2

3 receives on the card, it boosts the current margin to about 69%. This is much higher than the 30% margin spread that we estimate for Aeroplan. However, if CIBC decides to play hard ball with Aeroplan, we believe it may be successful in negotiating a 5% reduction in the price per mile. This would imply a cost of cents per Aeroplan Mile for CIBC. Under this scenario, it will boost CIBC s margin spread to 24% before taking the annual fee income into account and would reduce Aeroplan s margin spread to 25%. We estimate this could reduce Aeroplan s profit per mile by about 21%. Figure 2 shows that Aimia s intrinsic value will be reduced by about $1.20 if CIBC successfully negotiates a 5% reduction in the price of Aeroplan miles. This may have implications for the credit card agreement between Aeroplan and American Express, which expires at the end of However, American Express represents only 10% of gross billings in Canada. If the selling price per Aeroplan mile is also reduced by 5% at American Express, we estimate it will reduce Aimia s intrinsic value by another $0.30. Figure 2 Impact on Aimia s Intrinsic Value: 5% - 10% Reduction in Selling Price per Aeroplan Mile Paid by CIBC Cents per Aeroplan Mile Gross Billings Mix Current 5% Decline 10% Decline CIBC 51% Amex 10% Others 39% Average Selling Price per Mile 100% Aimia's Intrinsic Value $ $ $ Source: Veritas estimates During the conference call, Aimia s President and CEO, Robert Duchesne, quoted the following regarding the agreement extension process with CIBC: We have a very specific agenda of growth and quality growth. And I ve said before that we do not expect to make any incremental margin per mile sold, and I will stick with that very clearly. If anything, to get investment, we might have a little less margin or some upfront investment. We are very comfortable with any of that. But what is important to us is growth of quality card holders and backing that up with a significant refresh of the reward products. (emphasis added) It appears as though Aeroplan is willing to take a haircut by lowering its selling price per mile, but perhaps it is expecting too much from CIBC in return. Mr. Duchesne s comments for increasing quality card holders and rolling out a significant refresh of reward products would likely require resources and investment from CIBC, neither of which may be on the table. Thus, we believe Aeroplan is not in a favourable position, and the fact that the company has openly stated it is in discussions with other Canadian financial institutions, despite a successful 20 year track record with CIBC, is worrisome. We believe the agreement between CIBC and Aeroplan is extremely important for both parties. CIBC has built its credit card business on the success of the Aerogold Visa over the past two decades. However, if the agreement were to be terminated, the impact on Aeroplan would be far more severe, given CIBC contributes more than 50% of total Canadian gross billings. Over the last few years, the competing Canadian financial institutions have strengthened their travel rewards programs, by focusing on flexibility and availability, two of Aeroplan s major shortcomings. We have analyzed the current travel rewards landscape to determine which Canadian financial institutions, if any, would be suited for the Page 3

4 Aeroplan program. Figure 3 summarizes the current travel rewards credit cards currently offered by the big six Canadian banks, as well as credit card loans 1 outstanding, as of the latest quarter for each bank. Figure 3 Travel Rewards Credit Cards in Canada (Amounts in Millions of Canadian Dollars) Financial Institution Credit Card Loans Market Share Travel Credit Card Strategic Partner Bank of Montreal $7,104 12% Canadian Imperial Bank of Commerce $14,549 24% World MasterCard Air Miles MasterCard* Aerogold Visa Aventura Visa Proprietary Air Miles Aeroplan Proprietary National Bank $1,874 3% World MasterCard Proprietary Royal Bank $13,311 22% Bank of Nova Scotia $9,764 16% Toronto-Dominion Bank $14,260 23% WestJet MasterCard Avion Visa British Airways Visa Cathay Pacific Visa Passport Visa Scotiabank American Express** Travel Visa WestJet Travelocity British Airways Cathay Pacific Proprietary American Express Expedia * Bank of Montreal renewed a multi-year agreement with Air Miles in Jan The agreement provides BMO with category exclusivity in retail banking and co-exclusivity (shared with American Express) in the credit card category for the Air Miles program. ** Bank of Nova Scotia introduced the first American Express-branded credit card offered by a major Canadian bank in Sept The launch included three new Scotiabank American Express cards, with each card emphasizing travel redemptions as the primary reward benefit. Source: Veritas estimates, Company reports. Although Aeroplan could potentially partner with any of the big six Canadian banks, we believe the opportunities are very limited for the following reasons: Bank of Montreal is unlikely to partner with Aeroplan given their recent renewal and exclusivity with Air Miles, a direct competitor to Aeroplan; Royal Bank of Canada already offers four travel rewards credit cards, including British Airways and Cathay Pacific branded cards, two major airlines that are not a part of the Star Alliance which Aeroplan is partnered with; Bank of Nova Scotia recently launched three American Express travel rewards cards, as well as a cash back credit card, making it unlikely for the bank to introduce another credit card in 2013 given it is still in the early stages of promoting and ramping up its new offerings; Although National Bank has the weakest travel rewards offering, making it an ideal partner for Aeroplan, given its paltry 3% credit card market share amongst the big six, even if Aeroplan were 1 We use credit card loans data disclosed by the banks to approximate credit card market share in Canada. Page 4

5 to strike a deal with them, it would be insignificant compared to its current arrangement with CIBC. Thus, we are left with TD Bank. However, TD has marketed the flexibility and ease of its travel rewards program (no blackout periods, no travel restrictions) as one of its strongest selling points. The adoption of Aeroplan would be contradictory to this strategy, given the limitations of the Aeroplan program. Also, TD is partnered with Expedia which does not limit travel options to Star Alliance members, unlike Aeroplan. Nonetheless, we believe TD would be an ideal partner from Aeroplan s perspective, but we do not believe TD is desperate to seek a new partner and would likely pressure Aeroplan for more favourable terms than what had been offered to CIBC. The competition tribunal is yet to announce its stance on interchange fees and credit card surcharging, either of which would have a negative impact on credit card issuers. Aeroplan indicated on its conference call that a potential agreement extension with CIBC will likely only be reached after the competition tribunal s decision is announced so it can be factored into the contract calculations. We believe Aeroplan and CIBC will renew their agreement before the end of 2013, as both parties have too much to lose. However, unlike 2003, CIBC is in a better position to negotiate and we believe they will successfully negotiate more favourable terms. Aeroplan wants to grow volume at the expense of profitability, but we suspect they expect a significant commitment from their partners, both strategically and financially, and CIBC is hesitant to make further commitments. Although our analysis is speculative, the tone and comments from both sides suggests that the process thus far has been anything but smooth sailing. We prefer to sit on the sidelines while the competition tribunal makes its decision and before Aeroplan and CIBC renew their contract terms, as both events carry significant downside risk for Aimia. Our Assumptions and Valuation Figure 4 shows our new assumptions for Aeroplan Canada, incorporating the results from 2012 and a lower gross billings growth rate (about 1% lower than our estimate in Canada). Our 2013 gross billings growth rate in Canada is in line with management s guidance of 1% to 3% in Moreover, our forecast in 2014 and onwards also includes the potential impact of credit card surcharging in Canada. We also reduced our redemption cost assumption from 0.88 cents per mile to 0.86 cents per mile given management s effective cost management. Figure 4 Our New Assumptions for Aeroplan Canada E 2013E 2014E 2015E 2016E 2017E Intrinsic Value Change in Travel Accumulation (30% mix) 2.1% -0.5% 1.0% 1.0% 1.0% 1.0% 1.0% Change in Credit Card and Retail Accumulations (70% mix) 4.9% 1.5% 2.0% 1.5% 1.5% 1.5% 1.5% Gross Billings Growth in Aeroplan Canada 4.1% 0.3% 1.7% 1.3% 1.3% 1.3% 1.3% Burn Ratio 85% 85% 90% 83% 83% 84% 84% Selling Price per Aeroplan Mile (cents) % Redemption Cost per Aeroplan Mile (cents) % Margin Spread 28.4% 31.9% 30.6% 30.6% 30.6% 30.6% 30.6% -1.21% 3.4% -1.2% 0.0% 0.0% 0.0% 0.0% $15.65 Source: Veritas estimates We maintain our intrinsic value estimate of Aimia at $15.70, which is a combination of the following: 1) $12.80 per share for Aeroplan Canada Given the disclosure of Aeroplan Canada (i.e. miles issued, miles redeemed, breakage estimate, selling price per mile and cost per mile), we can estimate the value of Aeroplan Canada s operations Page 5

6 using a free cash flow model. Our model yields an estimate of $12.80 per share for Aeroplan, including $7.00 per share in Future Redemption Cost Liabilities at Aeroplan. 2) $1.20 per share for EMEA Since the details (mile issuance, miles redemption, breakage estimate, selling price per mile, redemption cost per mile) of the Nectar U.K., Nectar Italia and Air Miles Middle East loyalty programs are not disclosed, we estimate the value of these loyalty at roughly about 0.3x trailing gross billings, which represents a significant discount to the Aeroplan program, which is valued at about 2.0x trailing gross billings. Our valuation for the EMEA segment is conservative at $210 million, which is below the net book value of $395 million (purchase price of $715 million in $320 million write-down in 2008). 3) $1.70 per share for Other Investments We value the rest of Aimia s investments at book value. Figure 5 shows the breakdown of our $15.70 intrinsic value estimate for Aimia. Figure 5 Aimia's Intrinsic Value Value Per Share Value of Aeroplan Canada's Operations 3, Present Value of Aeroplan Canada's Future Redemption Cost Liability (1,261) (7.0) Aimia's Cash and Short-Term & Long-Term Investments (exclude Cardlytics) Aimia's Total Debt (Short-Term and Long-Term) (793) (4.4) Net Value of Aeroplan Canada's Operations $2, Value of EMEA Operations- Nectar UK, Nectar Italia, Air Miles Middle East $ Aimia's 100% Interest in Carlson Marketing Value of Aimia's 49% interest in Club Premier Value of Aimia's Minority Interest in Cardlytics Value of Aimia's Minority Interest in Excellence in Motivation Value of Aimia's Minority Interest in China Rewards Vaue of Other Investments at Book Value $ Aimia's Intrinsic Value $2, Source: Veritas estimates Q Highlights The burn ratio was about flat at 85% in 2012 compared to 2011, despite the impact of the seven-year mileage redemption policy. For the full year, Aeroplan miles issuance increased by 0.3% and Aeroplan miles redemptions increased by 0.4%. See Figure 6. Page 6

7 Figure 6 Burn Ratio Q to Q Q Q Q Q Dec-11 Q Q Q Q Dec-12 Aeroplan Miles Issued (mlns.) 21,000 21,800 21,300 22,800 86,900 20,900 22,700 21,200 22,400 87,200 Aeroplan Miles Redeemed (mlns.) 19,900 17,600 17,000 19,400 73,900 21,400 17,500 17,400 17,900 74,200 Surplus 1,100 4,200 4,300 3,400 13, ,200 3,800 4,500 13,000 Y-o-Y Miles Issuance 5.5% 6.3% 2.9% 1.8% 4.1% -0.5% 4.1% -0.5% -1.8% 0.3% Y-o-Y Miles Redemption 13.1% 17.3% 9.7% 18.3% 14.6% 7.5% -0.6% 2.4% -7.7% 0.4% Burn Ratio 94.8% 80.7% 79.8% 85.1% 85.0% 102.4% 77.1% 82.1% 79.9% 85.1% Source: Company reports, Veritas estimates Figure 7 shows that gross billings exceeded redemption costs by $455 million in 2012, compared to $421 million in This was mainly due to a reduction in the redemption cost per Aeroplan mile. The relatively lower redemption cost compared to the past continued to be driven by the Star Alliance booking tool (higher-margin Star Alliance Rewards), the increase in ClassicPlus flight bookings (which require at least 33% more miles to redeem), the change in the redemption grid implemented in July 2011 (which require more miles to redeem certain flights, particularly business class) and the increase in the non-air rewards mix from 20% to 30% of total redemptions (given the seven-year mileage expiration policy and 12-month inactivity policy). Figure 7 Aeroplan Canada - Gross Billings and Redemption Costs, Q to Q Q Q Q Q Dec-11 Q Q Q Q Dec-12 Selling Price per Mile (cents) Cost per Mile (cents) Gross Profit Margin 26% 28% 31% 29% 28% 34% 33% 29% 31% 32% Year-over-Year Change in Selling Price 1% 1% 1% -1% 0% 1% -2% -1% 2% 0% Year-over-Year Change in Redemption Cost -3% -1% -3% -1% -2% -11% -9% 2% -2% -5% Gross Billings ($mlns) $263 $273 $266 $278 $1,079 $263 $277 $263 $278 $1,081 Redemption Costs ($mlns.) $185 $158 $146 $169 $658 $178 $144 $153 $152 $626 Surplus $ 77 $ 114 $ 120 $ 109 $ 421 $ 86 $ 133 $ 110 $ 126 $ 455 Surplus Margin 29.5% 41.9% 45.1% 39.3% 39.0% 32.6% 48.2% 41.8% 45.2% 42.1% Source: Company reports, Veritas estimates Figure 8 shows the gross billings by region in Q compared to the same quarter last year. The strong gross billings increase in the EMEA more than offset weak performance in Canada and U.S. & APAC. The gross billings decline in Canada and U.S. & APAC was mainly due to weakness in the propriety loyalty segment. Aimia derives proprietary loyalty service fees related to directed marketing, sales promotion, development and administration of loyalty programs on behalf of its clients. The proprietary and loyalty analytics customers were negatively affected by the general economic conditions present in the countries (i.e. Canada and U.S.) in which the loyalty programs are operated and services are rendered. Page 7

8 Figure 8 Gross Billings by Region and Free Cash Flow in Q (Amounts in millions of Canadian dollars) NORMALIZED Q Q $ Change % Change $ Change % Change Aeroplan Canada % 1, , % Proprietary Loyalty (12.5) -15.4% (20.0) -7.8% Intercompany Eliminations (23.7) (37.0) 13.3 (79.1) (84.4) 5.3 Gross Billings- Canada % 1, ,300.5 (8.1) -0.6% Gross Billings- EMEA % % Gross Billings- US & APAC (4.3) -4.8% (18.3) -5.8% Eliminations (1.0) (2.9) 1.8 (4.6) (5.4) 0.8 Gross Billings - Consolidated % 2, , % Canada as % of Consolidated Gross Billings 56% 56% 58% 60% Free Cash Flow Before Dividends % Shares Outstanding Free Cash Flow per Share $0.43 $0.06 $1.67 $ % Dividends % % Dividends per Share $0.17 $ % $0.67 $ % Free Cash Flow After Dividends 46.7 (16.5) % Dividend Payout Ratio 40% 57% * The gross billings in U.S. & APAC excludes the impact of the exit of the Qantas business and the newly acquired business of EMI. Source: Company reports, Veritas estimates Canada Segment: Gross billings for Aeroplan Canada were flat in Q4 and increased 0.6% for the full year. The softness in gross billings was partially due to the absence of the Aeroplan miles conversion promotion in Q4-2012, following a successful campaign in Q Gross billings were also impacted by weakness in billings from financial partners, which was offset by an increase in the travel sector due to promotional activity. This is in line with the better load factor reported by Air Canada in Q compared to Q (Figure 9). The Aeroplan Program added 0.7 million members in 2012, with 0.3 million coming from new financial cards issued during the year. The increase in the number of active cards helped mitigate the decline in average consumer spend per active credit card in the financial sector. Aeroplan had approximately 4.7 million active members at the end of Of the 2.3 million rewards issued in 2012, more than 1.6 million were for flights on Air Canada and Star Alliance carriers, with roughly 0.7 million in non-air rewards. Proprietary loyalty had new client wins, including a large financial institution at the end of 2012, however, this was not enough to offset reduced business volumes. As a result, gross billings from proprietary loyalty declined by $13 million. Page 8

9 Figure 9 Load Factor, System Traffic Comparison at Air Canada and Peers in Canada Air Canada WestJet Porter Air Canada WestJet Porter Air Canada WestJet Porter Load Factor Load Factor Load Factor System Traffic or RPMs in mlns Capacity ASMs in mlns Jan % -1.0% 7.6% 9.1% 9.7% 37.0% 8.4% 11.2% 16.6% Feb % 1.1% 4.1% 3.7% 12.2% 28.7% 7.1% 10.7% 18.5% Mar % 1.0% -0.6% 4.2% 13.3% 21.0% 7.6% 12.1% 22.5% Apr % -0.4% 6.5% 11.6% 11.8% 26.0% 12.2% 12.3% 10.8% May % -2.9% 10.5% 5.0% 3.1% 43.8% 4.7% 7.0% 18.5% Jun % -2.5% 12.4% 2.5% 5.8% 47.9% 3.0% 9.2% 19.5% Jul % 0.9% 4.8% 4.3% 8.4% 26.1% 2.5% 7.2% 16.9% Aug % 1.1% 4.8% 3.5% 7.7% 28.1% 2.2% 6.2% 19.2% Sep % -0.8% 12.2% 3.8% 6.9% 46.8% 3.0% 8.0% 20.4% Oct % 0.0% 11.4% 2.0% 6.7% 44.0% 3.2% 6.7% 19.9% Nov % -0.1% 11.9% 3.0% 4.4% 47.3% 1.4% 4.5% 20.7% Dec % 0.6% 1.5% 3.0% 8.0% 29.9% 2.8% 7.1% 26.7% Jan % 2.1% 4.0% 3.3% 11.5% 41.0% 1.9% 8.6% 31.0% Feb % -0.9% 5.5% 6.5% 9.9% 51.7% 5.3% 10.9% 36.8% Mar % 1.4% 10.2% 4.8% 9.0% 44.8% 2.2% 7.0% 20.1% Apr % 2.6% 8.0% 1.0% 8.2% 40.5% -0.3% 5.0% 22.4% May % 4.4% 1.0% 1.8% 7.2% 14.4% 2.5% 1.3% 12.5% Jun % 3.3% -2.6% 1.5% 6.7% 4.1% -0.1% 2.3% 8.5% Jul % 3.7% 3.3% -1.1% 6.6% 18.3% -0.5% 2.0% 12.9% Aug % 5.6% 5.8% 0.7% 9.2% 21.4% 0.6% 2.3% 12.0% Sep % 4.4% -5.7% 3.1% 7.7% -2.3% 0.5% 1.7% 6.7% Oct % 3.8% -8.3% 4.9% 5.9% -7.5% 0.4% 0.9% 5.5% Nov % 5.0% -11.4% 4.6% 8.3% -11.9% 1.7% 1.7% 6.7% Dec % 1.0% 0.4% 3.2% 7.2% 3.5% 1.8% 6.0% 2.9% Jan % 1.0% -2.1% 0.3% 7.7% 0.8% -0.1% 6.4% 4.7% Source: Company reports EMEA Segment: Gross billings increased 3% in Q and 12% in The strong growth in gross billings was mainly due to a 10% increase in Nectar UK points issuance in Q and 16% in 2012, which was supported by higher miles issuance at Sainsbury and British gas, as well as the benefits from new contract terms with Sainsbury s and HSBC, which commenced on April 1, Nectar Italia points issuance declined by 20% in Q due to a decrease in promotional bonus point activity and difficult economic conditions. For the full year, Nectar Italia points issuance declined by 0.6%. U.S. & APAC Segment: The U.S. & APAC segment provides loyalty programs for employees, business franchisees and sales channels, and works with companies to provide incentive reward programs. Excluding the impact of the loss of the lower-margin Qantas business 2 ($25.7 million worth of gross billings) and the newly acquired EMI business ($16.5 million worth of gross billings), gross billings declined by $4 million, or 5% in Q4-F2012. The five-year agreement with Standard Chartered Bank in Asia commenced in Q and this will help partially offset the loss from the Qantas business in the U.S. & APAC segment going forward. 2 This was due to Qantas in-sourcing of its rewards fulfillment process. Page 9

10 Appendix A Gross Billings Mix in Canada (Amounts in Thousands of Dollars) 2012 Mix Airlines Travel 310,169 29% CIBC - Partner A 553,666 51% Amex - Partner B 107,979 10% Credit Card 661,645 61% Retail and Other Travel (Hotels, Cars) 107,979 10% Gross Billings - Canada 1,079, % Gross Billings- EMEA 548,636 Gross Billings 1,628,429 Source: Company reports, Veritas estimates. Veritas Investment Research Corporation ("Veritas") its directors, officers, employees and their immediate families are prohibited from trading any position in the securities profiled in a report thirty (30) days before and five (5) days after the publication date where the report involves coverage initiation or a change of opinion. Veritas has not offered any consulting, financial advisory, investment banking or underwriting services to the companies mentioned. Veritas does not accept research fees from the companies profiled herein. The information contained in this report has been obtained from sources believed reliable however the accuracy and/or completeness of the information is not guaranteed by Veritas, nor does Veritas assume any responsibility or liability whatsoever. All opinions expressed are subject to change without notification. This report is for information purposes only and does not constitute and should in no way be construed as a solicitation to buy or sell any of the securities mentioned herein. The contents of this research report do not, in any way, purport to include any manner of legal advice or opinion. The intention of this report is to provide a forthright discussion of business, accounting and financial reporting issues, as well as generally accepted accounting principles and the limits of their usefulness to investors. As such, please do not infer from this report that the accounting policies of any company mentioned herein are not allowed within the broad range of generally accepted accounting principles, or that the policies employed by that company were not approved by its auditor(s). This report may not be reproduced in whole or in part without the express prior written consent of Veritas. Veritas is a 100% employee owned firm Veritas Investment Research Corporation. Page 10