1H16 net profit of RM47.8m (-26.6% YoY) missed our (34%) and market (35%) expectations due to higher-than-expected effective tax rate. No dividends as expected. Outlook is uninspiring with the subdued consumer sentiment creating an unlikely scenario to raise selling prices. FY16E/FY17E earnings are trimmed by 25%/21% on higher tax expenses. Maintain UNDERPERFORM with unchanged Target Price of RM2.14.

Another disappointment. 1H16 net profit of RM47.8m (-26.6% YoY) was below expectations, meeting only 34% of our in-house forecast and 35% of the consensus’. This marked the 5th consecutive quarter where earnings failed to meet expectations. The negative deviation can be attributable to the higher-than-expected effective tax rate (1H16: 40.3%) due to higher-than-expected expenses that are not tax deductible. No dividend was declared, as expected.

YoY, 1H16 revenue rose 6.9% to RM2.1b driven by both operating division, namely retailing (+6.6%) and property management (+8.6%) on the back of new store openings. 1H16 operating profit declined by 7.0% to RM91.1m due to lower contribution from property management (- 0.6%) while contribution from retailing grew 8.8% to RM2.5m from low base. However, 1H16 net profit dipped 26.6% to RM47.8m, dragged down by higher effective tax rate of 40.3% (1H15: 30.5%).

QoQ, 2Q16 revenue fell 9.4% to RM974.8m, mainly dragged down by the 11.6% decline in revenue contribution from retail division which we think can be attributed to seasonality. 2Q16 operating profit slid 17.0% to RM41.3m as contribution from retailing fell 34.0% to RM1.0m on the back of weaker sales. As a result, 2Q16 net profit fell 33.5% to RM19.1m.

Challenging 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 its profit margin. Whereas, its property management division is expected to continue its solid run with more new store openings. However, as retail contributes the 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 have trimmed FY16E and FY17E net profits by 25% and 21%, respectively, to factor in the higher tax expenses.

Maintain UNDERPERFORM with unchanged Target Price of RM2.14 Post-result, we are switching our valuation methodology to PBV from PER as we think it is unfair to value the company based on earnings as it is currently in a transition period where consumer sentiment is stubbornly weak. The value of the company can be better reflected based on its net assets as its strong presence and expansion throughout Malaysia would provide it strong advantage once the general consumer sentiment recovers. Our TP is based on 1.54x FY17E PBV, which is close to -2 SD over its 5-year mean PBV.

Source: Kenanga Research - 26 Aug 2016