Aeon’s 9M18 core PATAMI of RM59.6m was below ours and consensus expectations, at 52.8% and 52.5% respectively. The poorer-than-expected results were due to the retailing division posting unexpected loss despite the sales tax holiday period. We reduce our FY18/19/20 PATAMI forecasts by 11.9%/11.8%/11.6% to account for slimmer margins in the property management services division amid the oversupply of retail space and poor retail performance. Our TP is lowered from RM2.52 to RM2.00 based on 23x of FY19 EPS of 8.7 sen. We downgrade our call from a Buy to HOLD.

Below expectations. Aeon’s 9M18 core PATAMI of RM59.6m was below ours and consensus expectations at 52.8% and 52.5% of full year forecasts, respectively. The poorer-than-expected results were due to the retailing division posting unexpected losses despite the sales tax holiday period.

Dividend. None Declared (3Q17: None). YTD: None.

QoQ. Core PATAMI dropped 22.2% to RM13.9m mainly from the poorer performance in the retailing division. Aeon’s retailing division posted RM7.1m losses at the EBIT level (vs RM17.0m profit in 2Q18) due to excessive marketing spend during the sales tax holiday period. We note that top line was flat despite the sales tax holiday.

YoY. Top line growth of 10.8% was driven by stronger retailing (+11.9%) and property management services (+5.0%) revenues. The positive top line growth was reflected at the bottom line level, which grew 11.2%. Better retail sales were due to the opening of new malls - Aeon Bandar Dato’ Onn and Aeon Kuching.

YTD. Core PATAMI decreased by 9.4% to RM59.6m despite revenue growth of 6.4%. This was predominantly explained by weaker property management services margins and the loss from associate company Aeon Index Living.

Outlook. In the property management services division, we expect occupancy and rental rates to be challenging for the foreseeable future due to the continued available glut of retail space in the market, which should push down rental rates. Note that property management services EBIT margin have been in decline in recent years (Figure #2). Aeon hopes to open a new mall in Nilai, Negeri Sembilan in FY19 with an approximate net lettable area of 586k square feet. For the retail division, Aeon will continue to refurbish selected stores in order to drive retail sales. We expect the retail division to return to profitability as we expect the group to lower their marketing cost, since the ending of sales tax holiday.

Forecast. We reduce our FY18/19/20 PATAMI forecasts by 11.9%/11.8%/11.6% to account for slimmer margins in the property management services division amid the oversupply of retail space and poor retail performance.

Downgrade to HOLD. Amid the challenging outlook, we reduce our earnings multiple from 25x to 23x. Post earnings adjustment, our TP is lowered from RM2.52 to RM2.00 based on FY19 EPS of 8.7 sen. We downgrade our call from Buy to HOLD.

Source: Hong Leong Investment Bank Research - 29 Nov 2018