News  Media reported that AEON is venturing into the furniture retail market with the opening of its first home and interior furnishing store in IOI City Mall, Putrajaya in November.

 The new home and interior furnishing outlet measuring 6800 sq meter will be run by AEON Index Living Sdn Bhd, which is a 70:30 joint venture with Index Living Mall Co Ltd, a Thai furniture company.

 Aeon Index Living has a paid-up capital of RM45m, of which AEON will contribute RM31.5m from internal funds.

Comments  We are not surprised as the JV proposal was announced back in Sept 2013 followed by the incorporation of the JV Company in Feb 2014. AEON is looking to leverage on the expertise of its Thai partner Index Living Mall Co Ltd (ILM) which is the biggest player in Thailand’s furniture industry with 19 stores and 20 branches of furniture centres. ILM has been expanding abroad and currently has 8 overseas branches covering Asian and Middle Eastern markets.

 The JV paves the way for the Group to diversify its business into new areas, on top of the current retail and property management activities. With the retail business performance being underwhelmed by the soft consumer sentiment and heightening competition, innovation or diversification could be the key growth factor going forward. Meanwhile, funding would be of no issue to the Group judging from its net cash position.

 We are generally NEUTRAL and cautious on the venture in view of the tight competition in the local home and interior furnishing market, flanked by international players such as IKEA, Courts Mammoth and Harvey Norman. On the flipside, we reckon that the success of the new business would be much needed to provide spark to its earnings growth.

Outlook  With 1H14 results disappointed due to the mentioned reasons, we expect earnings to recover in 2H14, supported by better performance of the retail division with the presence of festivities in coming reporting quarters (Hari Raya in 3Q14 and the Christmas and New Year in 4Q14).

 In a nutshell, we remained negative on the outlook of AEON in view of its negative FY14 EPS growth of 11%. Meanwhile, 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 soft consumer sentiment.

Forecast  We leave our earnings forecast unchanged as we do not expect significant material impact to earnings in the near-term until a further concrete plan is drafted for the development of its furniture business venture.

Rating Maintain UNDERPERFORM

Valuation  Maintain our Target Price of RM3.14, pegged with 19x PER FY15E EPS of 16.5 sen, which is a mere growth of 0.6% from FY13 EPS, thus justifying our call. The valuation implied +1 SD of 5-year mean PER. Last closing price of RM3.86 indicated PER of 23.4x, which we deem lofty.

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

 Better-than-expected consumer sentiment.

Source: Kenanga