Aeon reported a decent set of results which were within both market and our expectations. 6M19’s 14% growth yoy in core net profit was mainly due to the absence of associate losses alongside a 3% yoy growth in operating profit before MFRS 16 adjustments. We make no changes to our earnings estimates, and subsequently maintain HOLD with an unchanged target price (TP) of RM1.61.

Within Expectations

6M19’s core earnings grew 13.9% yoy to RM52.2m, led by: (i) absence of RM14m in losses arising from Index Living Mall associate which was subsequently disposed in 2H18; (ii) revenue growth of 5.9% yoy, driven by opening of new AEON Kuching (Apr18) and AEON Nilai (Jan19) malls and specialty stores alongside renovated outlets; while offset by (iii) slight margin contraction of 0.2ppt yoy (pre-MFRS 16) due to its Property Management segment’s weaker performance; alongside (iv) -3.5% bottom-line impact arising from MFRS 16 and MFRS 123 adjustments. All in, we deem 6M19’s results to be within both market and our expectations, accounting for 41% and 43% of consensus and our full-year estimates respectively. We expect a stronger 2H19 performance due to year-end rebate collections.

Sequentially Weaker

On a sequential basis, core earnings declined 40% over a seasonally weak quarter, with revenue declining 8.9% qoq. Pre-MFRS 16, segmental profit from the Retailing business fell 47% qoq, although this was offset by higher EBIT from Property Management segment (+9.3% qoq) due to margin improvement (+2.5ppt qoq). Heading into 2H19, we expect earnings growth to taper down as losses from Aeon’s Index Living Mall associate have ceased in 2H18.

Maintain HOLD

As 6M19 results were deemed in line, we make no changes to our earnings estimates. We remain cautious on the stock, due to the lingering weakness in operating margins seen despite the decent top-line performance. Maintain HOLD on Aeon with an unchanged TP of RM1.61 based on an unchanged 19x 2020E 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 mall operating expenses.

Source: Affin Hwang Research - 27 Aug 2019