News  AEON has entered into a Sale and Purchase Agreement with Genting Property Sdn Bhd for the acquisition of a freehold land for RM34.8m.

 The freehold land measures 20.0 ac and is situated in Mukim Simpang Kanan, Batu Pahat, Johor.

 The purpose of the land is for the construction and operations of a shopping centre with car parks and departmental stores.

 The acquisition will be fully satisfied by cash and funded by internally generated funds.

Comments  This is AEON’s 7th potential outlet in Johor. We understand the key rationale of the acquisition is to accelerate the expansion of its retail business through opening of new shopping centres and outlets. The acquisition would also provide AEON with the opportunity to expand its presence in Batu Pahat, Johor

 The payment terms are considered favourable and will be paid in stages, with the final payment to be satisfied 6 weeks after the Unconditional Date as defined in the SPA. AEON is more than capable of paying for the acquisition upfront as it has a net cash position of RM182.5m vs. the land price of RM34.8m. There are no further details on construction cost, but we believe management will be able to finance it given their strong net cash position and cashflow.

 Land pricing appears fair at RM40psf which is close to market price for commercial properties within that locale which range between RM43psf-RM80psf.

 While we believe the upcoming new mall on the newly acquired land will enhance AEON’s retail business going forward, we have not imputed the potential earnings impact into our financial model at this early stage.

 There is no guidance on the completion timeline of the new outlet, although it will take 2-3 years to complete once construction commenced.

Outlook  We view the acquisition as positive in the long-term and remain positive on the company’s future prospects 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. The group also plans to strengthen its presence in East Malaysia.

 However, the group’s earnings may be affected marginally by increased operating cost associated with initial cost from new stores, which could eat into margins while utilities expense has been on the rise possibility due to the electricity tariff hike.

Forecast  No changes to earnings.

Rating Maintain UNDERPERFORM

Valuation  Maintain UNDERPERFORM on AEON and TP of RM3.44 based on FY15E EPS and a PER of 19.0x. We maintain UP as the consumer sector’s prospects remain challenging with progressive weakening observed in consumer spending, while there are no major catalyst in the near-term.

Risks to Our Call   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