1H17 net profit of RM48.0m (0% YoY) came in within our and consensus expectations, at 51% and 47%, respectively. No dividend was declared, as expected. We trimmed our earnings assumption for FY17E and FY18E by 2% and 4%, respectively, to factor in the higher interest expenses and higher effective tax rate. Maintain MARKET PERFORM with a lower Target Price of RM2.20 (from RM2.45, previously).

1H17 within expectations. The reported 1H17 net profit of RM48.0m (0% YoY) is within our and consensus expectations, at 51% and 47%, respectively. No dividend was declared during this quarter, as expected.

YoY, 1H17 revenue was marginally higher by 1% due to flattish growth performance in Retailing business division mainly on higher sales base in 1H16 from contributions of its new stores and shopping malls that opened in March and May last year, respectively. However, the lower sales were cushioned with the stronger performance in Property Management division (+12%) on the back of higher occupancy rate and rental income. Correspondingly, 1H17 EBIT was higher by 12%, with improved margin at 5% (+0.5ppts), from stronger EBIT in both of the segments. The stronger EBIT in Retailing business division (162%) was attributed to better marketing and pricing strategies. Whereas, higher EBIT in Property Management division (+6%), was attributed to lower operating expenses. Nonetheless, higher interest expense (+29%) was further exacerbated by a high effective tax rate of 45% (1H16: 40%), resulting in flat growth of 1H17 net profit.

QoQ, 2Q17 revenue decreased by 6% due to weaker performance in both segments of Retailing business division (-7%) and Property Management division (1%), due to stronger festive season sales in 1Q17 and slightly higher occupancy rate and rental income. Nonetheless, EBIT jumped by 17% with improved margin at 5% (+1.0ppts) from stronger EBIT in both of the segments. The stronger EBIT in Retailing business division (265%) was attributed to better marketing and pricing strategies. Whereas, higher EBIT in Property Management division (+3%), was attributed to lower operating expenses. However, net profit increased by a milder quantum of 12% due to higher interest expense (+7%) and slightly higher effective tax rate of 45% (1Q17: 44%).

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.

Post results, we trimmed our earnings assumption for FY17E and FY18E by 2% and 4%, respectively, to factor in the higher interest expenses and higher effective tax rate.

Maintain MARKET PERFORM with a lower Target Price of RM2.20 (from RM2.45, previously), based on 1.65x FY18E PBV, which is close to -1 SD over its 5-year historical mean PBV. Reiterate MARKET PERFORM call.

Source: Kenanga Research - 25 Aug 2017