Period  1Q14/3M14

Actual vs. Expectations 1Q14 net profit of RM46.9m came in slightly below expectations, making up 18% of both consensus’ full-year estimates and ours.

 Topline growth was well within our expectations at 25%, but the earnings were slightly below expectations as the 1Q and 2Q are traditionally weaker quarters compared to a stronger 2H as promotional expenses tends to be front loaded. However, the quarter was also hit by (i) higher utilities (ii) initial cost associated with new store openings.

Dividends  None, as expected.

Key Results Highlights YoY, revenue increased by 8.8% to RM945.5m driven mainly by the retail segment (+8.9%) to

RM817.9m due to: (i) better performance of existing stores, and, (ii) contributions from new stores openings. The property management segment also recorded revenue growth of 8.1% to RM127.6m from the opening of the new shopping centre in Johor (Nov-13) and better rental rates in existing centres. However, higher operating cost from: (i) utilities and promotions expenses and (ii) initial cost from new store openings lowered EBIT margins by (-1.35ppt) to 6.5%, which dragged down net profits. The lower effective tax rate of 29.8% (-1.92ppt) was not sufficient to offset the drop in net profit, which declined 8.3% to RM46.9m

 QoQ, revenue increased slightly by 1.4% from growth in both retailing (+1%) and property management (+4%). The retailing segment EBIT declined by (-67.7%), causing PBT to decline by a staggering 37.9% to RM66.7m due to: (i) higher trading rebates received in 4Q13 and (ii) higher operating cost. This reduced net profit to RM46.9m (-37.9%).

Outlook  The longer-term growth prospects appear positive as it plans to open another 3 new AEON outlets and 2 MaxValu stores in smaller towns, including Bukit Mertajam, Taiping and Klebang within the next 3 years, and it also has intentions to expand its retail outlets into Sabah and Sarawak to further strengthen its retail presence in East Malaysia.

 But in the near term, the group’s earnings may be affected by higher operating cost in 1Q14 from: (i) utilities and promotion expenses, (ii) initial cost from new stores, which could nibble into margins.

Change to Forecasts    We reduce our FY14E and FY15E core earnings estimates to RM243.4m (-4.7%) and RM254.5m (-5.4%) (refer overleaf).

Rating Maintain UNDERPERFORM

Valuation  Downgrade TP marginally to RM13.78 (from RM13.83) (Ex-Bonus and split TP of RM3.44) after rolling forward to FY15E EPS based on an unchanged PER of 19.0x.

Risks  Delay in expansion of new malls.

 Potential impact from implementation of GST and subsidy rationalization program.

 Higher-than-expected operating expenses resulting from new store openings.

Source: Kenanga