Period  2Q14/1H14

Actual vs. Expectations  1H14 core net profit of RM79.6m (-19.1%) was derived after stripping off exceptional gain amounting to RM14.2m. To recap, AEON disposed 18.2% stake in AEON Taman Universiti Shopping Centre together with the corresponding land for RM20m in October 2013.

 The results were below expectations with net profit accounting for 32.7% of our full-year forecast and only 31.8% that of the consensus. Negative deviation can be attributed to the higherthan-expected operating and A&P expenses incurred in its retail segment.

Dividends  No dividend was declared for the quarter, as expected.

Key Results Highlights YTD, core net profit dipped 19.1% despite a healthy growth in revenue by 6.8%. The downfall was due to the higher-thanexpected utility costs incurred as a result of the electricity tariff hike. Furthermore, the Group has also committed to extra A&P expenses for promotional activities on the back of lacklustre consumer sentiments and weak consumer spending. That together lifted its operating expenses by 8.5%, resulting in 10.8% decline in core operating profit as core operating margin fell 1.4ppt to 6.8% against the 9% we forecasted. Segment-wise, retail EBIT fell 38.7% while property management recorded commendable growth of 9.5%.

 YoY, 2Q14 core net profit slumped 30.8% to RM32.7m. Similarly, the main culprit was the utility and A&P expenses incurred in the retail division which saw the segmental EBIT tumbling 59.7% to RM10.9m. The core net profit was further dragged down by a higher effective tax rate of 34.9% (vs 29.9%) as the Group recognized deferred tax expenses amounting to RM2.2m (vs tax allowance of RM1.4m ),

 QoQ, core PBT recorded a decline of 13% thanks to the weaker revenue, at RM857.7m, down 9.3%. Meanwhile, PBT margin continued to narrow (from 7.1% to 6.8%) on the back of higher operating costs as well as initial costs from new store opening. Core net profit fell in a more significant manner by 30.1% due to the higher effective tax rate. (34.9% vs 29.8%). Core property management PBT growth remained stable at 14.3% but retail division saw a huge decline of 52.9% in its EBIT to RM10.9m.

Outlook  The result was disappointing to us for the second consecutive quarter with the hike in electricity tariff at the beginning of the year taking a big toll on earnings. Price increases in its retail stores would be unlikely in view of the soft consumer sentiments.

 The performance of the retail division is due to improve with the presence of festivities in coming quarters (Hari Raya in 3Q14 and the Christmas and New Year in 4Q14). We also expect more A&P activities to be rolled out in order to boost the sales in its retail segment.

 We reiterate our negative stance on the outlook of Aeon as net profit is projected to record a negative growth of 11% while the Group would also have to deal with the challenging business environment going forward in view of the high operating costs as well as the lacklustre consumer sentiments.

Change to Forecasts We factor in higher operating costs into our earnings forecasts to take the higher-than-expected utility costs and A&P expenses into account. As a result, FY14E-FY15E net profits are toned down by 15.6% and 8.7%, respectively.

Rating Maintain UNDERPERFORM

Valuation  Correspondingly, our Target Price is revised down to RM3.14 (from RM3.44) following the earnings cut. We peg our TP to 19x PER to FY15E EPS of 16.5 sen, which is below its +1SD of 5-year mean PER. We deem the valuation lofty at c.24x FY2015E PER (close to +2SD mean) based on the latest closing price in view of the negative growth of 11% projected in its FY14 net earnings growth while the overall consumer sentiments remain soft of the back of higher living costs. The imminent implementation of GST could put a further dent to the discretionary spending and also to the outlook of consumer sector.

Risks to Our Call  Lower-than-expected operating costs.

 Recovery in consumer sentiments and consumer spending.

Source: Kenanga