Period

3Q15

Actual vs. Expectations

Despite registered a stronger QoQ growth of >90% (from RM15.3m in 2Q15), AEON recorded a 3Q15 net profit (NP) of RM29.6m in comparison to 3Q14 PAT of RM43.6m (-32.2% YoY).

9M15 results have fallen below our in-house/consensus full-year NP estimates at 49.8%/47.4% of full-year forecast.

Dividends

No dividends were declared, as expected.

Key Results Highlights

QoQ

The Hari Raya festive season proved to beneficial to retail revenue with an increase 19.1% from 2Q15 to RM806.2m

Property management service revenue was flattish at RM134.6m (+0.6% QoQ) as the increase in tenant rentals from new stores opened was already captured earlier this year.

Higher operating expenses at RM893.4m (+13.6% QoQ) are likely due to aggressive promotional and marketing activities to support festive celebrations.

All in all, the Group managed to reap a substantially better profit before tax (PBT) and NP of RM45.2m (+102.6% QoQ) and RM29.6m, (+93.8% QoQ), respectively. YoY

Compared to 3Q14, revenue only tipped by 1.1% to RM940.8m. Retail sales was mostly unmoved at RM806.2m (+0.4% YoY) in 3Q15 with revenue growth was mainly attributed by property management services, which grew by RM6.6m to RM134.6m (+5.2% YoY), due to the nett increase of two stores after 3Q14.

With more stores operating but with discouraging sales generated, estimated average sales per store fell from 3Q14’s RM25.4m per store to 3Q15’s RM23.7m per store or -8.4% Same-Store-Sales Growth (SSSG).

Depreciation expenses rose to RM161.0m (+21.0% YoY) as more stores operational. This appears in line with 9M15 property, plant and equipment (PPE) recorded at RM2.9b compared to 9M14 PPE RM2.4b.

Overall, higher operating expenses coupled with flattish revenue from the primary retail business, despite the rise in store numbers led to lower 9M15 PBT and NP of RM137.7m (-31.5% YoY) and RM93.9m (-31.7% YoY) from 9M15, respectively.

Outlook

Consumer sentiment could have discouraged by the GST implemented in April this year. Besides, we also do not rule out that discretionary spending is further dampened by the imported inflation (in-line with the prevailing weakness in the Ringgit) as well as lower disposal income arising from higher living cost.

On the bright side, the 4th quarter is likely display an upside in retail revenue as consumer spending is usually higher with year-end holidays and the Christmas festivities.

We are hopeful that the overall market environment will rebound but remain cautious of poor consumer sentiment prolonging into FY16.

As for the Group’s property management division, it should continue growing steadily as store tenancy rates are in-line with more stores being opened. Thus far, the property management division contributes 14% of total revenue and while fairly stable. We reckon that it could only grow inorganically and is reliant to the Group’s efforts to further expand its store-base.

Change to Forecasts

Due to the weaker-than-expected results, we are downgrading our FY15E and FY16E net profits by 11.4% and 5.8%, respectively.

We have also adjusted our forecast average store sales growth from 0.0% growth in FY14 to -2.6% in FY15 to further reflect the weak market environment for the rest of FY15. FY15E top-line is also expected to experience a downwards growth at -3.4% from FY14 despite the larger store base. Gross profit margins are likely to maintain at c. 37.0% but net profit margins have been lowered to 4.4% from 5.7% in FY14.

We expect a recovery for FY16 with a RM4.1b top-line, a conservatively reduced from our initial RM4.4b forecast. Either way, we expect margins to be relatively similar to our revised FY15 as operating expenses will continue to increasing pressure profitability.

Rating

Maintain UNDERPERFORM.

Valuation

Correspondingly, we cut our TP from RM2.56 to RM2.42 based on an unchanged target PER of 20x and our revised FY16 EPS of 12.1 sen.

Risks to Our Call

Faster-than-expected recovery in consumer sentiment.

Lower-than-expected operating expense.

Source: Kenanga Research - 27 Nov 2015