Aeon’s 9M17 core net profit of RM60m (+10% yoy) came in below our and street expectations, accounting for 54% and 58% of respective full-year forecasts. While retailing revenue remained muted in 9M17, the opening of new malls supported revenue growth. We believe that improving consumer sentiment and a favourable 2018 budget, in addition to management’s continual cost optimisation efforts, should lead to a recovery in the retailing segment. Rolling forward our valuation to FY18, we upgrade Aeon to Buy with a slightly higher TP of RM2.30.

9M17 Core Earnings Slightly Below Our Expectation

9M17 revenue increased marginally by 1% yoy to RM3bn as a 10% yoy growth in property management mitigated the 0.7% yoy decline in retail revenue (due to weak consumer discretionary spending). The former was driven by contribution from new shopping malls such as AEON Shah Alam (opened in March 2016) and AEON Kota Bahru (April 2016). 9M17 core earnings increased by 10.1% yoy to RM60m, coming in below our and street expectations (54% and 58% of full-year estimates), mainly because of lower-than-expected EBIT due to the depreciation cost of new malls.

Retailing Segment’s EBIT Margin Is Improving

The retailing segment’s 9M17 operating loss of RM5.6m was lower compared to the RM11.6m operating loss for 9M16. This was due to the management’s marketing and pricing strategies to introduce higher-margin products. For the property management segment, the operating profit increased by 5% yoy to RM163.3m in 9M17 due to contribution from new shopping malls, but the margin compressed by 1.6ppts to 33.5% due to the higher depreciation cost from new malls.

Upgrade to BUY on Valuations. TP Raised to RM2.30

We revised down our FY17-19E EPS by 5-10% to reflect the slightly weaker EBIT margin arising from the higher depreciation cost, but we believe that a likely stronger growth in private consumption and a favorable 2018 budget should benefit Aeon’s retailing revenue in 2018. Aeon’s strategy to open 1 mall a year should also provide stable recurring income. We roll forward our valuation to FY18 and lift our TP to RM2.30 based on a 2018E PE of 25x (5-year mean PE; previously a 2017E PE of 27x). Upgrade to BUY. Key risks: i) lower-than-expected domestic consumer spending; and ii) higher-than-expected operating expenses.

Source: Affin Hwang Research - 24 Nov 2017