Results

• Below expectations – 9M17 PATAMI of RM57.6m (+8.2%) came in below expectations, accounting for just 55-57% of HLIB and consensus full-year estimates. Deviations
• Higher-than-expected effective tax rate of 46.2% (vs. 39% we assumed), and slower-than-expected turnaround at the retailing segment.

Highlights

• YoY: Core PATAMI accelerated by 71.6% to RM9.3m in 3Q17, due to higher contribution from a new Aeon mall opened in Johor in 3Q17 as well as low base effect (as Aeon was severely affected by the minimum wage hike in FY16).
• QoQ: 3Q17 core PATAMI fell 63.2% mainly due the retail division posting an operating loss of RM12.2m in 3Q17 (vs. an operating profit of RM5.2m in 2Q17 due to Hari Raya occurring in 2Q17).
• YTD: 9M17 Core PATAMI increased by 8.2% to RM57.6m, due to narrowed losses from the retail division (which has begun turning around after being hit by poor consumer sentiment and higher minimum wage in 2016) and a 5.2% growth in the property management services division from the opening of a new mall in Johor in 3Q17.
• 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. The group will open an Aeon Kuching Mall in the first half of 2018.

Risks

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

Forecasts

• We lower our FY17-19 PATAMI forecasts by 11.3%/ 7.8%/4.3% respectively to account for the higher tax rate and slower-than-expected turnaround at the retail division.

Rating

SELL (↓)

• With the glut of available retail space in the general market at the moment and the overall poor consumer sentiment level, Aeon’s prospects look challenging.

Valuation

• We downgrade our call to SELL (from Hold), with a lower TP of RM1.66 (from RM2.07 previously), to reflect: (1) Lower earnings forecasts; (2) Lower target P/E multiple of 20x (from 23x previously), given the slowing growth prospects. Our new TP of RM1.66 is based on revised 20x FY18 EPS of 8.3 sen.

Source: Hong Leong Investment Bank Research - 24 Nov 2017