We came away feeling comforted on its prospect after a meeting with AEON Executive Director, Mr Poh Ying Loo. Although the near-term outlook for its retail division is expected to be challenging, its property management division is expected to continue its solid run with opening of new shopping malls and stores. We maintain UNDERPERFORM with higher Target Price of RM2.21, based on higher 1.61x FY17E PBV.

FY16 revisited. For FY16, the company registered a revenue of RM4,038.7m (+4.6%), passing its RM4.0bn mark for the first time since listing in 1996. This record-breaking feat came from the introduction of the new shopping malls and store openings. However, FY16 operating profit dipped by 20.2% to RM181.2m, mainly dragged down by lacklustre performance in retailing, which decreased by 92.6% to RM3.3m on high operating costs while operating profit contribution from property management division was flattish (+0.5%) to RM209.1m. Coupled with higher interest expense (+100.3%) and further exacerbated by a high effective tax rate of 49.0% as compared to 37.5% in FY15, FY16 PATAMI dipped 43.1% to RM75.0m.

Expansion. As of FY16, the company has introduced two new shopping malls featuring the first and only Aeon Mall in Kota Bharu, Kelantan and Shah Alam, Selangor with occupancy rate of 90.0% within 3 months of its opening. The company are expected to introduce new shopping malls or stores at least once a year with the main focus on suburban location. Two new shopping malls are expected to be introduced; in Kempas, Johor in 2H17 and Kuching, Sarawak in 1H18. The capex allocation for each shopping mall is in the range of RM200.0m to RM300.0m. The turnaround time for each of the mall is in a range of 6 to 7 years.

SEA Games. After 16 years, Malaysia is once again hosting the 29th chapter SEA Games. The retail sector is expected to benefit from this occasion with the government targeting to attract around 30m tourist arrivals. We expect AEON to capitalize on this opportunity to promote SEA games-related merchandises and promotions, supported by its wide chain of malls and stores to cater to the big crowd.

Waiting for recovery. Looking forward, we foresee the near-term outlook for its retail division to be challenging considering the persistently weak consumer sentiment and subdued spending, rendering AEON unable to hike selling prices to remain competitive. Its property management division is expected to continue its solid run with more openings of new shopping mall and store. 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 cautions stance on AEON and expect the expansion of the new shopping malls and stores will provide the company with strong advantage once the general sentiment recovers.

Post-meeting, we maintain our earnings forecasts as our numbers have factored in the current the development of the company.

Maintain UNDERPERFORM with a higher Target Price of RM2.21, based on higher 1.61x FY17E PBV, which implied -1SD-level over its 5-year historical mean PBV to better reflect AEON unique business model and normalisation in CAPEX at RM500.0m. (Previously Target Price of RM2.06 based on 1.54x FY17E PBV, which is close to -2SD- level over its 5-year historical mean PBV.) At our target price of RM2.21, it implies a FY17E PER of 33.7x, which is inline with +0.5 SD level of its historical PER band.

Source: Kenanga Research - 22 Mar 2017