News  In an announcement to Bursa Malaysia, AEON has entered into a Sale and Purchase Agreement with construction outfit Ireka Corp Bhd to purchase a freehold land for RM53.7m

 The land measures 8.45ha and is situated in Senawang, Seremban.

 The land acquisition is for the purpose of constructing and operating a shopping centre with car parks and departmental stores cum supermarket for a maximum cost of RM203.1m.

 The acquisition will be fully satisfied by cash and finances through the Group’s internal generated funds.

Comments  NEUTRAL on the acquisition. Prospect of Senawang may be appealing considering the rising residency due to the congestion and rising property prices in Klang Valley. However, with major competitors Tesco and Giant already established their presence in the area; we foresee tough competition for AEON moving forward.

 Land cost of RM53.7m translates into average of c.RM59/sf which we deem fair as compared to average of c.RM70-75/sf of lands in close vicinity according to our channel check.

 Funding should not be an issue considering the low net gearing of 0.02x as of 3Q14 while the development cost of RM203.1m is also within our yearly CAPEX estimates of RM400m.

Outlook  We reiterate our negative stance on the company in view of the challenging retail division on the back of persistent soft consumer sentiment as well as subdued consumer spending. Higher operating costs in relation to marketing and advertising expenses are expected to be incurred in order to boost market sentiment and the actual sales moving forward while imminent GST implementation is expected to put further dent on the consumer sentiment.

Forecast  No changes to our earnings forecast as we expect earnings contribution to kick in soonest by FY17.

Rating Maintain UNDERPERFORM

Valuation  Maintain our TP of RM3.10 based on 20.3x PER FY15E, implying +0.5SD over 5-year forward mean.

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

 Lower-than-expected operating costs.

Source: Kenanga