Results

• Below expectations – Aeon’s 1HFY16 PATAMI of RM47.8m came in below expectations, accounting for 34% of our and 36% consensus estimates.

Highlights

• 1HFY16 review… Revenue grew by 7 % yoy (1HFY16: RM2.05bn vs. 1HFY15:RM1.92bn) on the back of higher contributions from new and existing stores along with the previous quarter after having seen a vacuum in sales post GST implementation.

• PBT declined by 17% yoy (1HFY16: RM77.1m vs. 1HFY15: RM92.6m). 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 low consumer sentiments domestically and higher initial costs associated with new stores opening.

• Retail Segment: Registered an improvement in revenue to the quantum of 7% in 1HFY16 (1HFY16:RM1.757bn vs. 1HFY15:RM1.648bn) on the back of contribution from its new stores. Subsequently operating profit improved by 9% yoy to RM2.5m vs RM2.3m vs SPLY. Nonetheless, margins are almost non-existent in the retail segment on the back of strong pricing competition.

• Property Management segment: The group’s property management services segment registered an increase of 8.6% yoy in revenue (1HFY16: RM293.5m vs. 1HFY:RM270.3m), on the back of greater contributions from its existing and new shopping centres. Operating profit dipped marginally by 1% on the back of higher fixed costs associated with store opening.

• Consumer sentiment: Despite consumer sentiments gaining traction yoy by 6.8pts (2Q16: 78.5pts vs 2Q15: 71.7pts), it is still below the threshold level. We can expect FY16 to remain challenging especially in the retail arena on the back of cutthroat competition amongst the hypermarkets and a higher overall cost environment. We expect Aeon to experience a longer gestation period before its recent expansion drive will start bearing fruit.

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 FY16/17 forecast by 11%/7% on the back of higher operating expenses and interest expense.

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 maintain our SELL call on the stock.

Valuation

• Reduce target price to RM2.20 from RM2.39 pegged to unchanged 20x P/E based on FY17 EPS of 11 sen or 1SD below 4-year historical average P/E (see figure 4).

Source: Hong Leong Investment Bank Research - 26 Aug 2016