Results

• Below  expectations  –  Aeon’s revenue of RM2733.8m  (+6% yoy)  translated  into  core  earnings  of  RM123.3m   (after excluding  RM14.2m  exceptional  gain  that  was recognised in the  previous  quarter)  came  in  well  below  our  expectations, accounting  for  53%  of  ours  and  52%  of  streets’  full  year estimates.

Deviations

• Higher-than-expected  operating  expenses  from  the  retailing segment.

Dividends

• None. Dividends  are usually paid in the 4 th quarter.   

Highlights

9MFY14  review …  YTD  revenue  increased  6%  to RM2733.8m  from  RM2581.8m.  Retail  and  property management  services  segments  recorded  6%   and  8% growth  yoy,  respectively.  This  is   primarily  from  the  new stores  contributions  and  better  performances  from  existing stores  as  well  as  higher  rental  and  sales commissions from tenants  revamp  in  some  of  Aeon’s  existing  shopping centres.

We  believe  that  the  property  management  services segment will  continue to  perform  exceptionally  as Aeon is  expected to open  new  shopping  centres.  At  least  6  Aeon  stores  would open between  FY14 – FY17.

Its  core  net  profit  however,  was  depressed  by  21%  yoy, largely  caused by :  (1) higher utilities costs resulting from the electricity  tariff  hike;  (2) greater initial  start-up  costs from the opening  of  new  stores ;  and  (3)  Aeon’s  30 th anniversary promotional  costs.  The  weak  consumer  sentiment  did  not help  either.  Larger A&P was needed to coax consumers into spending  more  amidst  the  already  weak macro environment, hence the higher  marketing costs.  

Update  on  furniture  venture…  Of  noteworthy,  yesterday was  the  opening  of  IOI  City  Mall  in  Putrajaya,  in  which Aeon’s  first  furniture  retailing  store  ‘Aeon  Index  Living  Mall’ is one of the anchor tenants there.  We anticipate earnings to materialise from  FY2017 onwards.

Outlook…  Despite  it  being  the strongest quarter, we  expect 4Q  earnings  would  be  slower  vis-a-vis  historical  trend  which usually  represents  circa  26%-40%  of  full  year  earnings.  As for  2015,  we  believe  the  poor  consumer  sentiment  and spending  will  persists  due  to  GST  effective  on  1  April  2015. However,  the  government  initiatives  such  as  BR1M  will  be able to cushion some of  the negative  impact of GST.

Risks

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

Forecasts

• To  reflect  the  short  term  macro  headwinds,  weak  business and consumer sentiment  as well as  the higher than expected operating  costs,  we  cut  our  FY14,  FY15 and FY16 earnings by 25%, 12% and  10%, respectively .

Rating

HOLD

• We  like  Aeon  for  its   diversified  and  unique  business  model. However,  taking  into  account  the  presence  of  short  term macro  headwinds  and  weaker  consumer  sentiment  and spending,  we reiterate  our  HOLD  call on the stock.

Valuation

• Target  Price  slashed  by  ~12%  to  RM3.42  pegged  to unchanged  21.9x P/E FY15 EPS of  15.6 sen, based on 1 SD above  3-year  historical average  P/E

Source: Hong Leong Investment Bank Research - 21 Nov 2014