Aeon’s 9M18 core net profit of RM64.6m tracked slightly behind estimates. 3Q18 results was rather lacklustre, in our view, as revenue was flattish on a qoq basis while retailing operating profit dipped into wider losses on a yoy basis. In view of the muted 3Q18 performance despite the occurrence of the zero-rated GST period, we turn more cautious on Aeon Co and downgrade our call to a HOLD with a revised TP of RM2.00.

9M18 Core Earnings Impacted by Associates Losses

Aeon’s 9M18 revenue showed decent improvement of 6.4% yoy mainly due to contributions from the new malls (Aeon Bandar Dato’ Onn and Aeon Kuching, opened in September 2017 and April 2018 respectively). Both the retailing and the property management segment showed improvements in revenue, growing at 7% and 4% respectively. However, the share of Index associates’ losses in 1H18 as well as the subsequent impairment losses impacted 9M18 core earnings, which declined by 5.6% yoy. Excluding this, Aeon’s 9M18 pretax profit of RM124m rose by 11% yoy.

Lacklustre 3Q18 Performance Caused Earnings Miss

Despite the occurrence of the zero-rated GST period in 3Q18 (July-Sep), revenue growth was rather muted on a qoq basis (+0.1% qoq). Retailing segment EBIT also dipped into wider losses on a yoy basis despite an increase in revenue. In addition to higher advertising and promotional expenses during the zero-rated GST period, we also suspect that Aeon’s decision on retaining prices for the month post-SST implementation caused some margin contractions for 3Q18. Due to this, we deem 9M18 earnings to track behind our full year forecasts, and cut our FY18-20E earnings accordingly.

Foreseeing Seasonally Better 4Q18

We foresee a seasonally better 4Q18 for Aeon mainly on margin improvements due to year-end trade rebates. To recap, 4Q16 and 4Q17 accounted for 41% and 45% of FY16 and FY17 earnings respectively. However, as we understand Aeon has locked in pre-SST prices for the rest of the year, any outsized margin improvements might be limited.

Downgrade to HOLD With Lower TP of RM2.00

Failing to benefit meaningfully from the zero-rated GST period and the losses from its retail segment, we turn cautious on the sustainability of Aeon’s earnings recovery. We thus downgrade Aeon to a HOLD with a revised TP of RM2.00 based on a lower 22x 2019E PER (-1SD to 5-year mean PE). Upside/downside risks: i) higher/lower-than-expected domestic consumer spending; and ii) lower/higher-than-expected start-up costs in new malls

Source: Affin Hwang Research - 29 Nov 2018