Results

• Below expectations – Aeon’s 1Q16 PATAMI of RM28.7m (- 41% yoy) came in below expectations, accounting for 19% of ours and 18% of consensus estimates.

Highlights

• 1Q16 review… Revenues declined by 2.8 % yoy (1Q16: RM1.08bn vs. 1Q15:RM1.11bn) whilst PBT declined by 36% (1Q16: RM44.9m vs. 1Q15: RM70.2m). This is attributed to higher Interest expense due to the increase in borrowings, higher cost structure and depressed margins due to heavy promotions and discounting in light of intensive competition amongst retailers amid the persistently melancholic consumer sentiments domestically and higher initial costs associated with new store opening.

• Retail Segment: Registered a decline in revenues to the quantum of 4.0% in 1Q16 (1Q16: RM932.5m vs. 1Q15: RM970.9m). Operating profits plummeted by 93% yoy due to a combination of higher marketing and promotional expenses, lower trade rebates and pricing promotions on the back of low consumer sentiment in a highly competitive market.

• Property Management segment: The group’s property management services segment registered an increase of 5.0% revenue growth yoy (1Q16: RM143.2m vs. 1Q15:RM136.2m), on the back of greater contributions from its existing and new shopping centres.

• Challenging outlook… We expect FY16 to remain challenging especially in the retail arena on the back of cutthroat competition and higher cost environment. Whilst we do expect consumer sentiment to recovery gradually throughout 2016, we are mum on the prospects of Aeon making an immediate recovery as we believe that Aeon will require a longer gestation period before its recent expansion drive will start bearing fruit. In the near term, the pressures on its cost structure, heightened competition and relatively low consumer sentiment present immediate challenges.

• Aeon intends to spend RM650m in capex this year to open two new stores, as well as refurbish some of its existing stores. We expect the property segment to remain resilient throughout.

Risks

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

Forecasts

• We trim our earnings forecast for FY16-17 by circa 9%-7% to take into account the near term challenges, pricing competition and higher overall cost structure.

Rating

• SELL
• We like Aeon for its diversified and unique business model. However, taking into account the presence of short term challenges it faces as well as persistently low consumer sentiment and heightened competition, we downgrade our call from HOLD to a SELL on the stock.

Valuation

• Reduce target price to RM2.39 from RM2.58 pegged to unchanged 20x P/E based on FY17 EPS of 12 sen or 3-year historical average P/E (see figure 4).

Source: Hong Leong Investment Bank Research - 20 May 2016