Results

• Slightly below expectations – Aeon’s revenue of RM1107.1m (+17% yoy) translated into core PATAMI of RM48.8m (+4% yoy) came in below our expectations, accounting for 22% of streets’ year estimates and ours.

Deviations

• None.

Highlights

• 1Q15 review… Yoy revenue increased 17% to RM1.107.1m from RM945.5m. Retail and property management services segments recorded 19% and 7% growth yoy, respectively. This is attributed to the opening of new general merchandise stores and shopping centres throughout 2014.

• Retail Segment: Registered revenues of RM970.9m, an increase 19% yoy due to the pre-GST stocking up. Despite this, the retail segment continues to drag down bottomline performance; operating profits from the group’s retail business segment was down 11% (1Q14: RM23.1m vs 1Q15: RM20.6m). We believe the retail segment will be affected by weak consumer sentiment in the coming quarters.

• Property Management segment: The group’s property management services segment continues to gain traction, registering an increase of 7% revenue growth yoy. Operating profits from the property segment was up 11% yoy (1Q14: RM46.8m vs 1Q15:RM51.9m), this is on the back of greater contributions from its existing and new shopping centres.

• Moving forward, we expect the property segment to contribute more to the overall topline. During the AGM held yesterday, management guided that capex of RM700m has been set aside for FY15. Aeon malls in Shah Alam and Klebang are expected to come online in the fourth quarter, whilst the Kota Bharu mall is expected to open in the first or second quarter FY16.

• Outlook… Moving forward, the group expects 2015 to be a challenging year due to subdued consumer sentiment resulting from higher cost of living and the recent implementation of the Goods and Services Tax. Despite this, the group remains optimistic that it has the capacity to pursue its growth strategy. Nonetheless, we believe that there remains no re-rating catalyst in the short-term as consumers take time to adjust to the new pricing environment.

Risks

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

Forecasts

• We updated our numbers based on the latest FY14 annual report figures and trimmed our earnings forecast for FY15 by 2% to take into account the macro headwinds for the year. We increased our earnings forecast for FY16-17 by ~10% as we expect higher contributions from new malls.

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 increased 4% to RM3.24 pegged to unchanged 20x P/E as we roll forward to FY16 EPS of 16.2 or 1SD above 3-year historical average P/E (see figure 4)

Source: Hong Leong Investment Bank Research - 22 May 2015