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Affin Hwang Capital Research Highlights

Author: kltrader   |   Latest post: Fri, 17 Jan 2020, 8:43 AM

 

Aeon Co. (M) (BUY, Maintain) - Slight Miss, But Not Too Bad

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Slight Miss, But Not Too Bad

Aeon’s flattish 9M19 core net profit of RM60m came in slightly below market and our expectations. The variance to our forecast mainly arose from higher-than-expected start-up costs attributable to the reopening of AEON Taman Maluri from 3Q19. Nevertheless, the resulting impact on its property management margins should ease as the newly-expanded mall gestates, while we expect the encouraging retail sales momentum to sustain, with SSSG of 1.8% posted in 9M19. After trimming our 2019-21E earnings, we reaffirm our BUY rating on Aeon, albeit with a slightly reduced TP of RM1.75 (from RM1.79).

Slightly Below Estimates Due to Gestation of Mall Openings

9M19’s core net profit was flattish at RM59.6m despite revenue growth of 3.9% yoy to RM3.37bn. This came about as an absence of RM14m in associate losses following Index Living Mall’s 2H18 disposal were offset by increased mall expansion start-up costs – January 2019’s new AEON Nilai mall opening and the commencement of newly-renovated AEON Maluri, featuring a twofold increase in mall space, in progressive phases from 3Q19 which also briefly disrupted the pre-existing operations – in addition to a -9% impact to the bottom-line due to MFRS 16 and MFRS 123 adjustments. All in, 9M19 results were slightly below expectations, accounting for 51% of market and our forecasts (4Q historically makes up 38-47% of full-year earnings). On a like-for-like (pre-MFRS 16) basis, the property management segment’s earnings dropped 8.4% yoy owing to the gestation of the new malls. However, Aeon’s retailing business has performed well over 9M19, with a surge in segment earnings (+165% yoy) amid SSSG of 1.8%, in addition to contribution from new store openings.

Likely Better Quarters to Come Ahead

4Q19 earnings are expected to remain flattish yoy, as margins would continue to be affected by the ramp-up of AEON Maluri which only fully commenced in mid-November. Subsequent to that however, earnings visibility should improve sequentially in the coming quarters with the absence of new mall openings and less refurbishment disruptions, while we remain positive on the retailing segment’s prospects with resilient sales growth momentum thus far in spite of the weak local consumer sentiment.

Reaffirm BUY Call

We trim our 2019-21E earnings by 1-3% to factor in slightly higher fixed lease charges. However, we reaffirm our BUY rating on Aeon, albeit with a slightly lower 12-month TP of RM1.75 (from RM1.79) based on an unchanged 19x 2020E PER. Downside risks: i) Decline in retail traffic; (ii) contraction in mall rental income; and iii) deterioration in macro conditions.

Source: Affin Hwang Research - 29 Nov 2019

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