Weak Start

Aeon’s 1Q17 core net profit of RM24.6m (-15.2% yoy) came in below our and street expectations (19% and 20% of estimates), affected by higher interest expense and tax rate, while revenue remained flat. Nevertheless, we maintain our HOLD call with a lower TP of RM2.31 as we believe earnings will recover from a low base and remain hopeful that consumer spending recovers with fewer stores remaining loss-making for the retail segment.

1Q16 Core Earnings Below Expectations

AEON’s 1Q17 revenue decreased by a minimal 0.3% yoy to RM1.1bn as the 14.0% yoy growth in the property management segment to RM163.1m mitigated the drop in retail revenue by 2.5% yoy to RM908.8m. Growth in the property management segment was mainly attributed to contributions from new shopping malls such as AEON Shah Alam in March 2016 and AEON Kota Bahru in April 2016, whereas the lower retail revenue was due to weak consumer sentiment and spending. Core net earnings declined by 15.2% yoy to RM24.6m, coming in below our and street expectations at 19% and 20% of full-year estimates. This was due to higher-than-expected interest expense and a higher tax rate of 44% (vs 1Q16 tax rate of 38%).

Margin Contraction for Property Management, Same for Retail

The 1Q17 EBIT margin for the retail segment (85% of revenue, 3% of EBIT), remained 0.2%, the same as in 1Q16. However, the property management division, which contributed 15% of revenue and 98% of EBIT, saw a margin compression by 5ppts yoy to 33.2%.

Maintain HOLD With Lower TP of RM2.31

We tweak our results post the release of the annual 2016 report and adjust our depreciation rate to 4.3% (from 4%), reducing FY17-19 forecasts by 6- 7%. We maintain our HOLD rating with a lower 12-month TP of RM2.31 (from RM2.47) based on an unchanged 27x CY17E EPS (5-year average PE ratio). We acknowledge this year continues to be challenging but remain hopeful that earnings should see an improvement from its low 2016 base as consumer sentiment gradually improves and fewer stores remain loss-making, which should improve the retail margin. We continue to like AEON’s renowned brand name and its property segment (15 self-owned malls), which has acted as a more stable earnings base in times of weak consumer demand. Key risks: i) higher- or lower-than-expected domestic consumer spending; and ii) lower- or higher-than-expected operating expenses.

Source: Affin Hwang Research - 26 May 2017