Highlights 

Formerly  known  as  ‘Jaya  Jusco’,  Aeon  Co.  (M)  Bhd  was incorporated  on  15  September  2014.  It  was  then  listed  on the  main  board  of KLSE in 1996. With over 30 Aeon outlets, it  has  successfully  built  a  s trong  brand  name  and  delivering high quality shopping  experience  to its customers.

Historically,  87%  of  its  revenue  was  derived  from  retailing and  the  remaining  comes  from  property  management services.

Competitive  strengths :  (1)  Solid  brand  name  backed  by strong  customer  loyalty ;  (2)  Managed  by  experienced leadership  team; (3) Its anchor  tenant position.

The  bases of our investment  highlights for Aeon includes:

(1)   Defensive  and  growing  earnings  base  –  earnings  remained resilient despite economic slowdown;

(2)   Decent  dividend  payout  –  committed  to  pay  its  investors despite  the absence of dividend  policy;

(3)   Aggressive  expansion  capacity  and  store  refurbishment   – will contribute  significantly to its earnings;

(4)   Diversifying  its  earnings  by  entering  a  new  venture  with Thailand’s  Index Living  Mall Co. Ltd for  furniture  retailing;

(5)   Strong  balance  sheet  with  zero-borrowings  and  cash position; and

(6)   Growing  per  capita  income  and  urbanisation  rate  -  Will underpin  long term growth  of the retail industry .

Expect  FY14  core  net  profit to be rather flattish, about  0.3% to  RM231.7m. This is caused by poorer consumer sentiment in  1HFY14.  However,  earnings  should  improve  for  the remaining  2014  coming from  the year-end  festive  seasons.

Risks 

• Weak consumer sentiment and spending.
• Threat  of intensifying  competition.
• Difficulties in executing expansion.
• Higher  than expected new store expenses .

Forecasts 

• New  coverage.  We  are  expecting  revenue  to  grow  between 7.7%-7.9% annually in FY14-16  mainly due to the opening of its  new  stores ,  while  net  profit  growth  to  range  between 0.3%-6.0%.

Rating  HOLD  (NEW )

• We  like  Aeon  for  its  diversified  and  unique  business  model. However,  we  believe  its  strong  fundamentals  have  already been  largely  reflected  in  the  share  price,  thus,  we  are initiating coverage  with a HOLD  rating.

Valuation 

• We  arrive  at  our  TP  of  RM3.88,  pegged  to  21.9x  P/E  FY15 EPS  of  17.7  sen,  based  on  +1  SD  above  3-year  historical average  P/E (see figure  #8)
• Initiate coverage  with a HOLD  call.

Source: Hong Leong Investment Bank Research - 2 Oct 2014