3M16 net profit of RM28.7m (-41.9% YoY) missed our (18.5%) and market (18.1%) expectations due to the weaker-thanexpected performance from its retail division. No dividends as expected. Outlook is uninspiring with the subdued consumer sentiment an unlikely scenario to raise selling prices. FY16E/FY17E earnings are trimmed by 4%/8% on higher operating costs. Maintain UNDERPERFORM with lower Target Price of RM2.14 (from RM2.22).

Results disappointed. 3M16 net profit of RM28.7m (-41.9% YoY) was below expectations, meeting only 18.5% of our in-house forecast and 18.1% of the consensus estimate. This marked the 4th consecutive quarters where earnings failed to meet expectations. The negative deviation can be attributable to the weaker-than-expected performance from its retail division due to higher-than-expected operating costs. No dividend was declared, as expected.

YoY, 3M16 revenue fell marginally by 2.8% to RM1.1b thanks to steady performance in property management division which contributed revenue of RM143.2m (+5.1%) but contribution from retail division was lower by 4.0% to RM932.5m as 3M15 was aided by pre-GST buying. While the operating profit from property management grew in line with the revenue growth (+5.4% to RM54.6m), the retail division was just above the profitable level with operating profit of RM1.5m, a dip of 92.6% from RM20.6m in 3M15. The shrinking profitability was caused by higher operating expenses and initial start-up costs arising from new store opening, coupled with higher interest expense (+180%). As a result, net profit slumped 41.9% to RM28.7m.

QoQ, 1Q16 revenue grew 10.3% to RM1.1b, mainly driven by 11.7% revenue growth in retail division which we think can be attributed to seasonality as well as additional sales from new outlets. However, retail operating profit dipped 95.7% to RM1.5m due to higher operating expenses while 4Q15 was also aided by year-end trading rebates. Net profit declined by a milder quantum of 25.1% to RM28.7m as the effective tax rate was lower at 37.6% from 48.3% in 4Q15.

Difficult times ahead? Looking forward, we foresee the near-term outlook for its retail division to be challenging considering the persistent weak consumer sentiment and subdued consumer spending, rendering AEON unable to hike selling prices to protect profit margin. Whereas, property management division is expected to continue its solid run with more new store openings. However, as retail contributes a lion’s share of revenue (>85%), the sluggish performance in the division is expected to constraint its earnings growth. Thus, we are maintaining our cautious stance on AEON.

Trimming earnings forecasts. Post-result, we are trimming FY16E and FY17E net profits by 8.2% and 3.8%, respectively, to factor in the higher operating costs.

Maintain UNDERPERFORM with lower Target Price of RM2.14 (from RM2.22). We roll over our valuation base year to FY17E, and derive new TP of RM2.14 based on unchanged 20x PER and revised FY17E EPS of 10.7sen. The valuation is slightly above -0.5SD over its 5-year mean. 

Source: Kenanga Research - 20 May 2016