Highlights

• Aeon entered into a Sale and Purchase Agreement to dispose off a piece of land measuring 28,328 m2 (304,920 sqft) together with a two-story retail shopping centre (known as Aeon Mahkota Cheras Shopping Centre) for RM87.8m.
• Based on the abovementioned property?s NBV of RM67.4m, Aeon is estimated to record a gain of ~RM17m gain from the disposal after adjusting for necessary expenses and taxes.
• The cash proceeds are expected to be used as working capital and to reduce the group?s borrowings. Based on our estimates, the disposal will reduce Aeon?s net debt and net gearing to RM781.2m and 41.6x from RM869.4m and 0.46x as at 31 Mar 2017.
• The proposed disposal is in line with AEON?s corporate strategy of focusing and developing its future retail business. Aeon deems the property non-essential to future operations.
• The disposal is expected to complete by 4Q2017, i.e. 4 months from the date of the agreement.
• Outlook: Latest development aside, Aeon will continue its long-term plan of opening store in Malaysia (albeit at a slower pace of one shopping mall a year instead of two) to capitalise on the growing urban, middle class population in Malaysia. The group is scheduled to open AEON Mall Kempas, Johor Bahru by the third quarter of this year and its first mall in Kuching, East Malaysia by the first quarter of 2018.

Risks

• Persistent weak consumer sentiment and spending; threat of intensifying competition; Difficulties in executing expansion; higher-than-expected new store expenses.

Forecasts

• Unchanged, as we consider the disposal gain as non-core earnings. In any case, loss of earnings arising from the disposal is minimal given Aeon?s large earnings base.

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.
• The group is currently undergoing expansion in addition to a glut of retail space in the market in general, hence a margin pressure should be expected. We foresee margins to improve gradually in line with the recovery of consumer sentiment and the slowdown of aggressive expansion.

Valuation

• We maintain our TP at RM2.16 based on 23x FY18 EPS of 9.4 sen.

Source: Hong Leong Investment Bank Research - 30 Jun 2017