9M16 net profit of RM53.2m (-44.1% YoY) missed our (50%) and market (46%) expectations due to weaker-thanexpected retailing division. No dividends as expected. Outlook is challenging with the subdued consumer sentiment creating an unconducive scenario to raise selling prices. FY16E/FY17E earnings are slashed by 30%/23% on higher operating expenses. Maintain UNDERPERFORM with lower Target Price of RM2.06 (from RM2.14).

Sunk to a low. 9M16 net profit of RM53.2m (-44.1% YoY) was below expectations, meeting only 50% of our in-house forecast and 46% of the consensus’. This marked the 6th consecutive quarter where earnings disappointed and recorded the lowest quarterly profit (RM5.4m) since May 2001 (RM4.4m). The negative deviation can be attributable to the weaker-than-expected performance in retail division. No dividend was declared, as expected.

YoY, 9M16 revenue grew 5.5% to RM3.0b thanks to growth across operating divisions, retailing (+4.9%) and property management (+9.3%) on the back of new shopping malls and stores openings. However, 9M16 operating profit dipped by 23.3% mainly dragged down by lacklustre performance in retailing with operating losses of RM11.6m on high operating costs while operating profit contribution from property management division was flattish (-0.1%). Coupled with higher interest expense (+120%), 9M16 net profit dipped 44.1% to RM53.2m.

QoQ, 3Q16 revenue declined marginally by 1.0% to RM965.3m with both division recording marginal drop in sales (both at -1.0%), which may indicate that consumer sentiment was still struggling. 3Q16 operating profit dipped 45.9% to RM22.4m with retailing slumped into operating losses of RM14.1m as compared to RM1.0m in 2Q16 as we believe higher operating costs were incurred in marketing and promotional activities to spur the weak sentiment, as well as higher staff costs following the implementation of higher minimum wage. As a result, 2Q16 net profit shrank 71.6% to RM5.4m, the lowest in more than 15 years.

More challenges ahead. Looking forward, we foresee the near-term outlook for its retail division to be challenging considering the persistently weak consumer sentiment and subdued consumer spending, rendering AEON unable to hike selling prices to protect profit margins. 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 earnings growth. Thus, we are maintaining our cautious stance on AEON.

Slashing earnings forecasts. Post-result, we have trimmed FY16E and FY17E net profits by 30% and 23%, respectively, to factor in the higher operating expenses.

Maintain UNDERPERFORM with lower Target Price of RM2.06 (from RM2.14) Correspondingly with the earnings cut, we trimmed our TP to RM2.06, based on unchanged 1.54x FY17E PBV, which is close to -2 SD over its 5-year mean PBV to reflect the negative outlook.

Source: Kenanga Research - 25 Nov 2016