1Q17 net profit of RM22.7m (-21.1% YoY) came in within our estimates, but below consensus expectations, at 25% and 18%, respectively. No dividend was declared, as expected. No changes in earnings assumption. As such, we keep our Target Price unchanged at RM2.38. Upgrade to MARKET PERFORM (from UNDERPERFORM) as the share price has fallen within our target price range.

Within our expectation. The reported 1Q17 net profit of RM21.1m (- 21.1% YoY) was within our expectation at 25% of total annual forecast. However, it was at 18%, below consensus estimates. No dividend was declared during this quarter, as expected.

YoY, 1Q17 revenue was marginally lower by 0.3% due to weaker performance in Retailing business division (-2.5%) mainly due to the continuous weak consumer sentiments and cautious spending. However, the negative impact was lessened with the stronger performance in Property Management division (+14.0%) on the back of new shopping malls and stores? openings. Correspondingly, 1Q17 operating profit dipped by 5.8%, mainly dragged down by lacklustre performance in Retailing business division (-6.3%) due to high operating costs while operating profit contribution from Property Management division was marginally lower (-1.0%) due to below optimal occupancy rate. Coupled with higher interest expense (+65.4%) and further exacerbated by a high effective tax rate of 44.1% (1Q16: 37.6%), 1Q17 net profit dipped 21.1%.

QoQ, 1Q17 revenue grew by 4.8%, driven by the stronger performance in both segments of Retailing business division (+5.0%) and Property Management division (+3.8%), in which attributed to seasonality as well as additional sales from new outlets. However, operating profit dipped by 30.8%, with the lower operating profit margin of 4.4% (4Q16: 6.6%), impacted from the higher operating expenses (+7.2%) incurred in current quarter. Net profit declined by a milder quantum of 8.1% as the effective tax rate was lower at 44.1% from 57.1% in 4Q16.

Outlook. 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 raise prices to remain competitive. Its property management division is expected to continue its solid run with more openings of new shopping malls and stores. However, as retail contributes the lion?s share of revenue (>85%), the sluggish performance in the division is expected to constraint earnings growth. Moving forward, we expect the expansion of the new shopping malls and stores will provide the company with strong advantage once the general sentiment recovers.

No changes in earnings assumption. As such, we keep our TP unchanged at RM2.38 based on retained 1.61x FY18E PBV, which is close to -1 SD over its 5-year historical mean PBV. We upgrade our call to MARKET PERFORM from UNDERPERFORM as the share price has fallen within the range of our target price.

Source: Kenanga Research - 26 May 2017