Aeon’s 1H18 core PATAMI of RM45.7m was below ours and consensus expectations. Poorer earnings were mainly due to larger losses from associate company Index Living Mall and poorer contributions from the property management services division. FY18/19/20 forecasts are reduced by 9.3%/4.4%/4.2% to account for weaker contribution from the property management services division. Despite lower expected contribution from the property management services division, we maintain our BUY call, albeit with a lower TP of RM2.52.

Below expectations. Aeon’s 1H18 core PATAMI of RM45.7m was below ours and consensus expectations, at 36.7% and 37.8% respectively. This was mainly due to lower than expected contribution from property management services and larger losses from associate company.

Dividend. None Declared (2Q17: None)

QoQ: Core PATAMI declined by 36.3% from RM27.9m to RM17.8 mainly due to larger losses from Aeon’s furniture selling associate company (Index Living Mall). (2Q18: RM10.4m losses vs 1Q18: RM2.3m).

YoY: Increased top line (+5.4%) was due to the opening of new shopping malls (Aeon Bandar Dato’ Onn (Johor) in September 2017 and Aeon Kuching Mall in April 2018). After removing impairment losses of RM11.4m from Aeon’s stake in Index Living Mall, core PATAMI was lower by 37.6% due to start-up costs associated with Aeon Kuching Mall as well as larger losses from Index Living Mall.

YTD. Stronger top line was driven by better performance from both the retail (+4.5%) and property management services (3.8%), attributed to new store openings. Lower core PATAMI of RM45.7m (-16.4%) was due to higher marketing spend as well as start-up costs for Aeon Kuching Mall.

Expansion plans. Aeon is targeting to open a new mall in Nilai, Negeri Sembilan in 1QFY19 with an approximate net lettable area of 586,000 square feet.

Outlook: Rebounding consumer sentiment (which hit record highs in 2Q18) and sales tax holiday should fuel top line growth. Additionally, Aeon announced they plan to close the remaining Index Living Mall (49% associate company) outlets going forward. Aeon reported their 49% share of Index Living Mall recorded RM13.7m losses YTD.

Forecast. We reduce our FY18/19/20 PATAMI forecasts by 9.3%/4.4%/4.2% to account for lower contribution from the property management services division.

Maintain BUY. Despite lower expected contribution from the property management services division, we maintain our BUY call, albeit with a lower TP of RM2.52 after incorporating our forecasts adjustments as we expect better consumer spending going forward. Additionally, the absence of losses from Aeon Index Living should aide profitability. Our TP of is based on 25x FY19 EPS of 10.1 sen.
 

Source: Hong Leong Investment Bank Research - 29 Aug 2018