Results

• Below expectations ? Aeon?s FY16 PATAMI of RM79.7m (- 40%) came in below expectations, accounting for 91% and 85% of ours, and consensus estimates respectively. Deviations
• Higher-than-expected effective tax rate of 49% (vs. 30% we assumed).

Highlights

• Yoy: 4Q16 PATAMI fell 31% to RM26.5m due to higher operating expenses, interest costs and costs associated with initial opening of new stores.
• Qoq: PATAMI nearly quadrupled to RM26.5m in 4Q16 (from RM5.4m in 3Q16), as 4Q is seasonally stronger (historically accounted for 28-40% of full year earnings) and margin normalisation (from the occurrence of the minimum wage hike in July 2016).
• FY16: PATAMI declined by 40% to RM79.7m in FY16, due to higher interest costs from higher borrowings, start-up costs from new store and effective tax rate (49% vs. 38% in FY15)
• Retail Segment: The group continued its execution of opening several new stores in FY16 (Aeon Kota Bharu, Aeon Ipoh Falim etc.). While operating margins deteriorated (due to minimum wage hike and new store opening costs), we were encouraged by its revenue growth, which indicates the group is continuing to grow its market share.
• Property Management segment: Operating profit margin slid from 38% in FY15 to 35% to FY16 due to the glut of retail spaces available in Malaysia, resulting in lower rental rates.
• Outlook: Aeon will continue its long-term plan of opening store in Malaysia and increasing its market share in the growing urban, middle class population.

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 FY17-18 PATAMI forecasts by 18% & 20%, largely to account for higher expected tax rate assumptions.

Rating

HOLD (↑)

• 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.

Valuation

• Despite earnings coming in under our estimates, we upgrade our call to a HOLD (previously SELL) call with a higher TP of RM2.44 (from RM2.20 previously) as valuations have turned more compelling following the roll forward in our valuation base year from FY17 to FY18. Our new TP is based on 23x FY18 revised EPS of 10.6 sen.
• The group is currently undergoing rapid expansion, hence a margin pressure should be expected. We foresee margins improving with the recovery of consumer sentiment and the slow-down of aggressive expansion.

Source: Hong Leong Investment Bank Research - 28 Feb 2017