Aeon’s 2018 core net profit of RM113.4m (+6.8% yoy) beat our and consensus expectations by 11% and 9% respectively. The surprise to us was due to lower-than-expected associate losses, while operationally the results were broadly in-line. Revenue growth was driven by higher contributions from mall expansions, while margins dipped slightly amid a contraction from the property segment. We foresee some challenges for Aeon heading into 2019, particularly from its property segment which is the key earnings contributor. Maintain HOLD with a revised TP of RM1.60.

Above Expectations, But Operationally In-line

Aeon recorded a decent 2018 core earnings growth of 6.8% yoy, mainly due to: (i) 5.6% revenue growth yoy, underpinned by higher contributions from new malls – AEON Bandar Dato’ Onn in Sep17 and AEON Kuching in Apr18 – and renovated outlets, and (ii) lower associate losses following the closure of its Index Living Mall (ILM) over the year. The earnings’ variation to our forecast arose from lower-than-expected ILM associate losses, which appeared to have ceased from 4Q18. A DPS of 4sen was announced for the year (2017: 4sen).

Weak Property Environment Dampens Earnings Outlook

Although prospects remain encouraging for Aeon’s retail segment, which is further supported by its new AEON Nilai mall commenced in Jan19 alongside other outlet extensions/renovations, we foresee some pressure on margins due to an uptick in product costs amid the stiff competitive retail environment (4Q18 retail EBIT margin reversed into contraction). On the property segment, rental revenue growth and margins markedly declined over 2018, leading to a fall in EBIT of -5.2% yoy. As a result, the share of rental/retail EBIT contribution has shifted to 80/20 (vs. 85/15 in 2017) while EBIT growth was flat yoy at the segment level.

Maintain HOLD

While we tweak our 2019-20E EPS by 5.2%/5.4% respectively to reflect improved associate contributions and slightly lower taxation, we remain cautious on Aeon’s prospects in view of challenges seen at its property segment, which has been the key earnings contributor. Maintain HOLD on the stock, with a slightly higher TP of RM1.60 based on an unchanged 19x 2019E EPS. Upside/downside risks: i) higher/lower-than-expected retail traffic; (ii) recovery/contraction in the property rental business; and iii) lower/higher-than-expected start-up costs for new malls.

Source: Affin Hwang Research - 28 Feb 2019