Results

• Below expectations – 1H17 PATAMI of RM48m (+0.4%) came in below expectations, accounting for only 43-47% of HLIB and consensus full-year estimates. Deviations
• Higher-than-expected effective tax rate of 45% (vs. 35% we assumed).

Highlights

• YoY: Revenue grew by 3.4% to RM1,008m while core PATAMI expanded by 32.7% to RM25.3m in 2Q17, due to improved contributions and margins from both retail and property management segments.
• QoQ: 2Q17 core PATAMI rose 11.7% to RM25.3m mainly due to better operating profit from the retail division (despite a 7.2% decline in retailing revenue) on the back of better product mix.
• YTD: 1H17 Core PATAMI increased marginally by 0.4% as higher operating profit from the Retail (+162%) and Property Management segment (+6%) was offset by higher effective which was due to capital allowance not being granted for certain capex activities.
• Retail Segment: With the implementation of marketing and pricing strategies, Aeon’s operating profit margin at the retail segment expanded to 0.4% in 1H17 (from 0.1% a year ago).
• Property Management segment: Operating profit margin at the property management services division slid to 33.6% in 1H17 (from 35.4% a year ago), due to the glut of retail space in the market, which has in turn resulting in Aeon renewing a number of tenant agreements with variable rent agreement (fixed rate + a % of sales) as opposed to a straight fixed rate in order to keep occupancy high.
• Outlook: Aeon will continue its long-term plan of opening shopping malls in Malaysia and increasing its market share in the growing urban, middle class population. However, the group plans to slow down its expansion drive from two malls a year to one given the less-than-favourable market conditions.

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 FY17-19 core PATAMI forecasts by 6%/5%/3% largely to account for higher tax rate assumptions.

Rating

HOLD (↔)

• With the glut of available retail space in the general market at the moment and the overall poor consumer sentiment level, Aeon faces a challenging year ahead.

Valuation

• Post earnings adjustment, we lower our TP to RM2.07 (from RM2.16 previously), based on 23x revised FY18 EPS of 9.0 sen. Maintain HOLD call.

Source: Hong Leong Investment Bank Research - 25 Aug 2017