We met with Aeon’s management and came away feeling positive about the group’s prospects going forward. Aeon expects to open 1 mall per annum going forward (Aeon Kuching in 2018 and Aeon Nilai in 2019). Aeon’s retail arm reported negative SSSG in FY16-17 (-2% & -4% respectively). Of its 26 malls, Aeon currently has occupancy rate of 89% (lower than its high of 94% in fY12). We raise our FY18/19 forecasts by 1.5%/10.2% to account for narrower losses from Aeon’s associate company and better domestic consumption going forward. Our TP is raised from RM1.82 to RM2.30 post earnings adjustment and revised earnings multiple to 23x (previously 20x) on back of favourable macro factors that support domestic consumption plays.

Expansion Plans. Aeon guided that they expect to open Aeon Kuching in April with occupancy of over 80% which will include anchor tenants such as Uniqlo, Padini, H&M and more. We expect there to be a gestation period for the mall to turn profitable. In totality, the group expects to recognise RM500m in capex charges in FY18 mainly from the construction of an Aeon mall in Nilai (RM300m) which is expected to be open in 1Q19 as well as refurbishments for Aeon Taman Maluri.

Aeon Index Living. Aeon guided that they expect their loss making associate Aeon Index Living (49% stake) to narrow the losses in FY18. The group guided that Index Living Mall plan to reduce their lettable area in their Shah Alam and Kota Bharu stores. Aeon recorded RM7m in losses from Aeon Index Living in 4Q17.

Same-store-sales-growth (SSSG). FY17 SSSG was reported at -4% YoY (vs FY16 SSSG of -2%). This was mainly due to non-food categories (apparel, cosmetics etc.). The group is working to rejig its product offerings to better suit consumer taste.

Occupancy Rate. Of the 26 malls operated by Aeon, the group guided they currently have an overall occupancy rate of approximately 89% (which is lower than the high of 94% in FY12). Management guided that chain stores (optical, jewellery etc.) have become more selective of picking retail locations over the past few years.

Macro Factors Intact. Rebounding domestic consumption figures should boost Aeon’s top line in FY18. (i) Retail sales index grew 9.5% YoY in 2017 (vs 7.1% in 2016 and 5.5% in 2015); (ii) Consumer Sentiment Index (CSI) ended 2017 at 82.6 (an improvement from 69.8 at end-2016 and 63.8 at end-2015); (iii) Private consumption accelerated 7% in 2017 (vs 6.1% in 2016 and 6% in 2015). We expect to see a seasonally strong 1Q18 thanks to Chinese New Year spending.

Forecast. We raise our FY18/19 PATAMI forecasts by 1.5%/10.2% to RM119.4m/RM140.1m to account for narrower losses from Aeon’s associate company Aeon Index Living and increased domestic consumption.

Maintain BUY, TP: RM2.30. We expect rebounding consumer spending in 2018 to resuscitate Aeon’s sluggish retail business. However, the overall glut in retail rental area in Malaysia is expected to depress rental and occupancy rates in Aeon’s property management service division. We raise our TP from RM1.82 to RM2.30 based on revised FY19 EPS of 10 sen and a higher earnings multiple of 23x (previously 20x) on back of strong macro factors that favour domestic consumption plays.

Source: Hong Leong Investment Bank Research - 13 Apr 2018