AEON has entered into a SPA in respect of the proposed disposal of land and shopping mall valued at RM87.8m. We are positive on the proposed disposal as we understand that the shopping mall is currently operating below optimal occupancy rate. We believe AEON will be leasing back floor space for its AEON store. We upgrade our earnings assumptions for FY17E/FY18E by 1%/2%. We increase our TP to RM2.45 (from RM2.38, previously). Reiterate MARKET PERFORM call.

Land and shopping mall valued at RM87.8m. The Company has on 29th June 2017 entered into a Sale and Purchase Agreement (SPA) with Foremost Wealth Management Sdn. Bhd. (Purchaser) in respect of the disposal of a piece of freehold land in Cheras, Selangor together with a 2-storey retail shopping mall known as AEON Mahkota Cheras Shopping Centre valued at RM87.8m (total build up area at 304,920 sq ft). As of FY16, the net book value of the shopping mall is at RM67.4m. The proposed disposal is expected to be completed in 4 months’ time and expected to book a one-time estimated gain of c.RM17m. The cash proceeds from the proposed disposal will be used as working capital and to reduce its borrowings. We believe the property is fairly valued considering its potential development value and as an income generating commercial property.

Leasing back for the AEON store. After the completion of the SPA, we believe AEON will not be closing down its AEON store, instead, the group will be leasing back floor space for the store. Thus, the retail income contribution will remain unchanged. Based on our FY17E assumptions, we estimated that the shopping mall contributed c.3% to the revenue. After the disposal, the loss in rental income will be insignificant at c.1% of the revenue, however, we expect improvement in the property management division’s EBIT as we believe that the shopping mall is currently operating below optimal occupancy rate and the disposal will ease overhead costs.

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 construction of new shopping malls and stores will provide the company with strong advantage once the general sentiment recovers.

Gearing will be reduced to 0.48x. For illustration purposes, based on the proposed disposal value of RM87.8m, AEON’s net gearing is expected to be reduced from RM1,004.7m to RM916.9m (from 0.53x to 0.48x) as at 31st March 2017.

We upgrade our earnings assumptions for FY18E and FY19E by 1.1% and 2.2%, respectively, with expected improvement in the property management division’s EBIT after the disposal as we believe that the shopping mall is currently operating below optimal occupancy rate and the disposal will ease overhead costs. We have not taken account of the estimated one-time gain of c.RM17m (1.2 sen/share) into our assumptions.

We increase our TP to RM2.45 (from RM2.38, previously) based on target 1.65x FY18E PBV, which is close to -1 SD over its 5-year historical mean PBV. Reiterate MARKET PERFORM.

Source: Kenanga Research - 3 Jul 2017