Aeon’s 1H18 core net profit of RM48.5m came in below our and consensus estimates. Earnings were dragged by widening losses of its share of associates’ results and the impairment loss on an investment in an associate, which amounted to RM8.01m in 2Q18. Nonetheless, Aeon’s core business remained intact, driven by better revenue and margins in the retail segment. We make the necessary adjustments to our estimates, and maintain our BUY call with a revised TP of RM2.50.

1H18 Core Net Profit Dragged by Associates’ Losses and Impairments

Aeon’s 1H18 core net profit decline of 9% yoy was dragged by a widening share of associates’ losses of RM13m, which caused core earnings to fall below estimates, representing 38% and 40% of our and consensus estimates respectively. Aeon also announced that Index Living Mall Malaysia (ILM), which is 49% owned, will be shutting down its remaining outlets in Malaysia by 3Q18. Consequently, Aeon has also recognised an impairment loss of RM8.01m on the investment in this associate.

Core Business Performing Well, Driven by Retail Segment

At the EBITDA level, Aeon saw commendable improvement primarily due to contributions from the new malls opened (AEON Bandar Dato’ Onn and AEON Kuching) as well as newly renovated stores. The main driver was the retail segment, which saw better sales and margins arising from the new stores opened and better product mix in 1H18. However, start-up costs for the AEON Kuching mall and higher promotional expenses recorded in 1H18 caused the property management segment to record slightly lower PBT despite an improvement in revenue.

FY18 to be Affected by Associates, But Prospects Remain Bright

We acknowledge that 2018 will be affected by the closing down of Index Living Mall Malaysia outlets, and impairments. Nonetheless, Aeon’s core business prospects remain solid as the recovery in retail spending will continue to support the retail segment’s revenue and margins. While the property management segment looks to be challenging due to the oversupply of retail spaces, we believe AEON malls’ strong brand name will continue to support market-beating occupancy rates (FY17: 90.9%).

Maintain BUY With Revised TP of RM2.50

We adjust our FY18-20E forecasts mainly to account for the share of associates’ losses from the closing down of ILM and impairments. We maintain our BUY with a revised TP of RM2.50 based on an unchanged 26x 2019E EPS (5-year mean PE). Key risks: i) lower-than-expected domestic consumer spending; and ii) higher-than-expected start-up costs.

Source: Affin Hwang Research - 30 Aug 2018