Period  3Q14/9M14

Actual vs. Expectations 9M14 core net profit of RM123.3m (-20.7%) was below expectations, accounting 60% of our initial forecast and merely 46.9% of the consensus’. The negative deviation can be attributed to the worsethan-expected performance of its retail segment on the back of higher-than-expected operating costs.

Dividends  No dividend was declared, as expected.

Key Results Highlights YoY, 9M14 revenue of RM2.73b was 5.9% higher, assisted by the growth in both retail and property management division. However, core net profit dipped 20.7% no thanks to the lacklustre performance of the retail division, which recorded a 42% slump in EBIT contribution as extra marketing expenses were incurred in conjunction with its 30th anniversary promotional campaign as well as to boost sales in light of subdued consumer sentiment. Operating costs was also higher by 6.9% no thanks to the 17% hike in electricity tariff.

 QoQ, revenue inched up by 8.5%, driven by the 9.3% growth of its retail division thanks to the new store opening in Bukit Mertajam in June 2014. Core net profit was lifted 33.3% to RM43.7m as a lesser proportion of start-up or renovation costs in relation with the new store opening were recognized as compared to the previous quarter.

Outlook  Retail division remains challenging in view of the soft consumer sentiment which induced AEON to incur higher marketing expenses in order to stimulate the market. The weakness was partially offset by the property management division, which we expect to continue its steady run judging by the new shopping centres openings as well as higher rental as a result of tenant revamp.

 We remain negative on AEON’s outlook as we do not expect the consumer spending to recover significantly judging by the soft sentiments amid higher cost of living environment.

Change to Forecasts We lower our earnings forecast by factoring in higher marketing costs in view of the continuous weak consumer sentiment. As a result, FY14EFY15E core net profits were revised down by 6.6%-7.7%.

Rating Maintain UNDERPERFORM

Valuation  Our Target Price was revised to RM3.10 (from RM3.14) correspondingly with the earnings cut. We peg our TP with higher PER of 20.3x to FY15E EPS of 15.3 sen, after we impute the latest forward earnings assumption to the PER bands. The valuation is slightly below the +0.5 SD of its 5- year historical forward-PER mean.

Risks to Our Call  Better-than-expected recovery in consumer spending.

Source: Kenanga