News  Yesterday, AEON announced that it had entered into a Sales and Purchase Agreement with AEON REIT INVESTMENT CORPORATION ("J-REIT") in respect of the disposal of 18.18% undivided share of a piece of freehold land measuring approximately 35,070 sq m (or 436,036 sq ft) together with 18.18% undivided share of the AEON Taman University Shopping Centre in Skudai, Johor at a disposal price of RM20.0m.

 The RM20.0m disposal price is derived from the valuation of the land and building of RM110.0m, of approximately18.18% and the remaining 81.82% undivided share of the Property shall be retained by AEON.

 Currently, the property is being used for as a shopping centre with car parks and departmental stores cum supermarket.

 In consideration of mutual promises set out in the agreement, AEON will take a lease on the property for a period of 10 years at the monthly rent of RM117.5k/ month. The monthly rent shall be adjusted once every 3 years in line with the changes in the Malaysian CPI, provided that such increase shall not be more than 10% from the last monthly rent payable.

Comments  Based on our back of the envelope calculation, the lease agreement translates to a cap rate of 7.05% for J-REIT, which is higher than the average cap rate of 5-6% for the retail/ commercial complex REITs.

 Although slightly against AEON’s favour, the deal will enable AEON to unlock value in its property. The net book value for the 18.18% undivided share of the land and building is RM5.1m, thus allowing the Group to recognise a meaty gain on disposal of RM14.9m or 292% return over a 11-year period (The shopping centre was opened in July 2002).

 As the disposal is expected to be completed within 12 months, we expect the transaction to contribute c.RM0.4m p.a. in interest income starting FY14.

Outlook  The fundamental of the Group remains positive, and going forward, there will be more new outlet openings in FY13-14 (ie. a 457,000sq ft shopping mall in Kulai in Dec-13, and two more in Bukit Mertajam and Sungai Petani in FY14).

 Additionally, there would also be a refurbishment to existing malls in Wangsa Maju and Bukit Raja.

Forecast  While the additional interest income has a minimal impact on earnings, we have fine tuned our FY13E-FY14E core net profit slightly higher by +0.1% and +1.8% (from RM255.8m-RM267.9m to RM256.0m to RM272.8m) mainly due to house-keeping reasons.

Rating   Maintain MARKET PERFORM

Valuation  We increase our TP slightly to RM14.76 (from RM14.50 previously), to reflect the revision in earnings. Our valuation is based on an unchanged FY14E PER of 19.0x (+2SD from its historical 5-year mean).

Risks to Our Call Delay in expansion of new malls.

 Potential impact on its customers from implementation of GST and subsidy rationalization program.

Source: Kenanga