Aeon’s 3Q19 core PAT of RM10.7m (QoQ: -47.2%, YoY: -22.6%) brought 9M19 to RM64.8m (+8.8%). This was below our expectations, accounting for just 52.5% and 55.6% of ours and consensus expectations, respectively. We lower our FY19/20/21 earnings forecasts by 8.6%/8.1%/5.6% to account for higher effective tax rate and operating expenses going forward. After our earnings adjustment, our TP falls from RM2.20 to RM2.00 based on an unchanged 23x FY20 EPS. Maintain BUY.

Below expectations. Aeon’s 3Q19 core PAT of RM10.7m (QoQ: -47.2%, YoY: - 22.6%) brought 9M19 to RM64.8m (+8.8%). This was below our expectations, accounting for just 52.5% and 55.6% of ours and consensus expectations, respectively. While we expect significantly stronger earnings in 4Q19 from Christmas and year-end sales, we deem this below expectations, as 4Q typically accounts for ~35% of full year earnings. The shortfall in earnings was due to higher-than-expected effective tax rate of 45.8% vs our assumed 42.0% and higher-than-expected operating expenses.

Dividend. None declared (9M19: nil, 9M18: nil). Aeon typically only declares dividend once a year, usually in April of the following FY.

QoQ. Weaker sales (-3.4%) was due to festive period spending in 2Q19 associated with Hari Raya. Core PAT fell 47.2% in tandem with lower sales figure. Note that a large part of Aeon’s costs are fixed staff cost.

YoY. Weaker retailing revenue (-0.8%) offset better property management services (PMS) top line (+2.8%) resulting in overall flat sales (-0.2%). Poorer retail sales were due to the temporary closure of stores for renovation during the quarter and downsizing of stores at the end of FY18. Despite flat top line, core PAT declined 22.6% due to higher utility expenses.

YTD. Despite the temporary closure and downsizing of stores mentioned above, opening of Aeon Kuching (April 2018) and Aeon Nilai (January 2019) resulted in better retailing (+4.1%) and PMS (+2.7%) sales. Note that 9M18 included RM21.7m losses from Aeon Index Living Mall, an associate company that has since been disposed of. Removing the RM21.7m losses, last year’s (i.e. 9M18) core PAT would have totalled RM62.5m. On a like for like basis, Aeon’s core PAT for the period would have increased 3.7% to RM64.8m in 9M19 in tandem with better sales.

Outlook. After opening two shopping malls in FY16 and one in each of the following three years (FY17: Aeon Bandar Dato’ Onn, FY18: Aeon Kuching, FY19: Aeon Nilai), Aeon does not plan on opening any more in FY20. We are positive on the group’s slow-down in shopping mall openings amid the overhang in available commercial retail space. According to National Property Information Centre (NAPIC), the average occupancy rate of shopping malls in FY18 was just 79.3% (vs. 81.3% in FY17).

Forecast. We lower our FY19/20/21 earnings forecasts by 8.6%/8.1%/5.6% to account for higher effective tax rate and operating expenses going forward.

Maintain BUY. After our earnings adjustment, our TP falls from RM2.20 to RM2.00 based on an unchanged 23x earnings multiple of FY20 EPS of 8.8 sen. Despite the miss in earnings this time, we expect Aeon’s shopping mall refurbishments and pivot to ready-to-eat offerings (which commands higher margins) to revive their retailing division. Maintain BUY.

Source: Hong Leong Investment Bank Research - 5 Dec 2019