Aeon’s 1H17 core net profit of RM50m (+2.8% yoy) came in below our expectations but in line with street’s. Retailing revenue remained weak in 1H17, but the opening of new malls supported the growth in property management service. Although the retailing segment has yet to show a meaningful recovery, we believe that earnings will recover from a low base as we expect improving consumer sentiment backed by positive economic data. Maintain HOLD with a lower TP of RM2.13.

1H17 Core Earnings Below Our Expectation

AEON’s 1H17 revenue increased by a minimal 1.4% yoy to RM2.08bn as a 11.6% yoy growth in the property management mitigated flattish retail revenue growth. The latter was mainly attributed to contributions from new shopping malls such as AEON Shah Alam in March 2016 and AEON Kota Bahru in April 2016. Retail revenue dropped marginally by 0.2% yoy despite the contribution of new shopping malls due to weak consumer sentiment and spending. 1H17 core earnings increased by 2.8% yoy to RM50m, coming in below our expectations but in line with street’s (42% and 48% of full-year estimates). This was mainly because of higher-thanexpected tax rate of 45% vs our forecast of 35%. We suspect this is due to certain losses arising from new malls are not tax deductible.

Margin Down for Property Management, But Up for Retail

1H17 EBIT from the retail segment jumped RM6.6m yoy (from RM2.5m in 1H16) as margins improved from 0.1% to 0.4% on management’s cost efficiency efforts. However, the property management segment saw a margin compression by 1.8ppts yoy to 33.6% due to higher depreciation cost arising from new mall openings.

Maintain HOLD With Lower TP of RM2.13

We raise our tax rate assumption to 40% from 35% resulting in a 5-8% cut in FY17-19E EPS. We maintain a HOLD with a lower 12-month TP of RM2.13 based on 27x CY17E EPS (5-year mean PE). Share price has been on declining trend since 2014 along with net profit decline, but we believe that earnings could have bottomed out as consumer sentiment gradually improves and fewer stores remain loss-making. Aeon’s strategy to open 1 mall a year should also provide stable recurring income. Key risks: i) higher or lower-than-expected domestic consumer spending; and ii) lower or higher-than-expected operating expenses.

Source: Affin Hwang Research - 25 Aug 2017