Results

• Below expectations – Aeon’s 9M16 PATAMI of RM53.2m came in below expectations, accounting for 45% and 46% of our and consensus estimates.

Deviations

• Minimum wage hike beginning July 2016 increased labour costs significantly.

Highlights

• Qoq: 3Q16 Revenue dropped only marginally to RM965.3 (-1% qoq) while PATAMI shrunk -71.6% qoq to RM5.4m. This was due to higher labour costs as a result of the hike in minimum wage that begun on 1 July 2016 as well as higher finance costs from higher short term borrowings.

• Yoy: Revenue grew 2.6% yoy to RM965.3 while PATAMI fell 82% yoy to RM5.4m due to similar reasons.

• Retail Segment: The group recorded a RM14.1m operating loss despite steady revenue in 3Q16 vs RM6.4m in the SPLY due to the higher labour costs from the hike in minimum wage and new store start-up costs.

• Property Management segment: Recorded a 10.6% yoy growth in revenue but just a 0.7% yoy rise in operating profit in 3Q16 due to new store start-up costs.

• Consumer sentiment: Despite consumer sentiment rising from 3Q15: 70.2pts to 3Q16: 73.6pts, consumer spending remained depressed. We can expect FY16 to remain challenging in the retail arena due to subdued consumer sentiment and the group is adjusting the higher labour costs. We expect Aeon to experience a longer gestation period before its recent expansion drive starts 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 FY16/17/18 forecast by 21.3%11/% on the back of higher operating expenses and interest expense.

Rating

SELL ( ↔ )

• We like Aeon for its potential to capitalise on the growing urban, middle class population in Malaysia that we believe will slowly begin switching its retail preferences from more traditional wet markets to all-in-one retailers like Aeon. 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

• We maintain our SELL call with an unchanged target price of RM2.20 as we incorporate forecast downgrade but with a higher P/E of 23 from FY17 EPS pegged to its 5-year historical average P/E.
• The group is currently undergoing rapid expansion, hence a long gestation period is expected.

Source: Hong Leong Investment Bank Research - 25 Nov 2016