9M17 net profit of RM57.3m (+8%) came in below expectations attributed to the lower-than-expected retailing business revenue. No dividend was declared, as expected. Post-results, we downgrade both of our FY17E/FY18E earnings assumption by 13%, on expectation of lower sales per mall. Maintain MARKET PERFORM with a lower Target Price of RM2.00 (from RM2.20, previously).

9M17 below expectations. The reported 9M17 net profit of RM57.3m (+8%) is below our/consensus expectations at 62%/56%, attributed to the lower-than-expected retailing business revenue. No dividend was declared during this quarter, as expected.

YoY, 9M17 revenue was marginally higher by 1% from the stronger performance in Property Management division (+10%) and netted off by the flattish growth in Retailing business division. The positive growth was attributed to the full revenue contribution from the two shopping malls opened last year (in Shah Alam, Selangor and Kota Bharu, Kelantan) and maiden contribution from the recent opening of a new shopping mall (in Kempas, Johor). Correspondingly, 9M17 EBIT was higher by 14%, with improved margin at 4.2% (9M16:3.8%), attributed to the higher EBIT in Property Management division (+5%), and narrower losses in Retailing business division to RM5.6m (9M16:RM11.6m) as a result of better marketing and pricing strategies. However, net profit increased by a milder quantum of 8% due to higher interest expense (+17%) and higher effective tax rate of 46.2% (9M16: 43.9%).

QoQ, 3Q17 revenue decreased by 5% attributed to weaker performance in both segments - Retailing business division (-5%) and Property Management division (-3%), due to stronger festive season sales in 2Q17. Subsequently, EBIT plunged by 51% with the lower contribution from both segments attributed to the lower revenue and higher operating expenses as a result of the start-up costs of a new shopping mall in September 2017. Coupled with the higher effective tax rate of 53.1% (2Q17: 45.4%), net profit plunged by 63%.

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 (latest opening of a new mall at Kempas, Johor in September 2017, and another opening of a new mall at Kuching, Sarawak, tentatively in 1H18). 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 consumer sentiment recovers.

Post-results, we downgrade both our FY17E and FY18E earnings assumption by 13.0%, on expectation of lower sales per mall as we were previously too optimistic with our numbers.

Maintain MARKET PERFORM with a lower Target Price of RM2.00, based on the revised 1.5x FY18E PBV, which is close to -1.5 SD over its 5-year mean PBV considering the limited growth in its core business (from RM2.20, previously, based on 1.65x FY18E PBV). Our TP implies Fwd PER of 32.6x. Risks to our call include: (i) lower-than-expected sales, and (ii) higher-than-expected operating expenses.

Source: Kenanga Research - 24 Nov 2017