1Q18 CNP of RM27.9m (+7%) came in within our/consensus expectations at 23%/24% of full-year estimates. The stock has risen by 64% since our upgrade to OUTPERFORM and we continue to like AEON, especially for its dual income stream leading to a better position under the zero-rated GST, and strong brand name with 27 malls in operations all over Malaysia. As such, we raised our TP to RM2.60 based on the revised 26.5x FY19E EPS (from TP of RM2.00 based on 23.5x FY18E EPS).

1Q18 within expectations. 1Q18 CNP of RM27.9m (+7%) came in within our/consensus expectations at 23%/24% of full-year estimates. No dividend was declared for the quarter, as expected. The group typically pay its dividend in 4Q.

YoY, 1Q18 revenue increased by 4% from the stronger performance in both division of Retailing business division (+3%) and Property Management division (+4%). The positive growth was attributed to the stronger contribution from the opening of a new shopping mall in September 2017 (in Kempas, Johor) and supported by shopping malls that were renovated and expanded in the previous year. Subsequently, 1Q18 EBIT was higher by 16%, with improved margin by 0.6pp to 5.4% from 4.8% in 1Q17, attributed to the higher EBIT in both division of Retailing business division (+38%) and Property Management division (+6%), as a result of better marketing and pricing strategies. CNP grew slower by 7% due to a higher effective tax rate of 43.9% (1Q17:38.9%).

QoQ, 1Q18 revenue increased by 4% due to better reception of CNY festive season sales compared to the usual year-end promotion in 4Q17. Nevertheless, CNP plunged 31% due to lower other operating income at RM1.5m compared to RM21.3m in 4Q17 (year-end rebate voucher recognition in 4Q17 as other operation income).

Outlook. With the zero-rated GST starting 1st June 2018, AEON, which had previously absorbed GST into their respective merchandising prices, may lower its selling prices for all of its brands, which encourage consumer to loosen their purse strings. Management noted that for retailing business, they will continue to employ appropriate marketing and pricing strategies, and seek to expand its supermarket business and further expand its online e-commerce presence. For property management services, the company expects the occupancy rate and rental pricing to remain stable and sustainable throughout the year. In 2Q18, the group has opened one new AEON mall at Kuching, Sarawak and in 1Q19, the group plans to open one AEON mall at Negeri Sembilan. The group has allocated RM400m in CAPEX for this year (FY17: RM500m) for the construction of the new mall and renovation of existing malls.

Maintain OUTPERFORM with a higher TP of RM2.60 based on the revised 26.5x FY19E EPS, at its 5-year historical mean PER (from TP of RM2.00 based on 23.5x FY18E EPS, implying -0.5SD of its 5-year historical mean PER). AEON is the main beneficiary for the zero-rated GST given its dual income stream from (i) own stores (general merchandise stores and supermarket) and (ii) rental income profit sharing with its tenants. The stock has risen by 64% since our upgrade to OUTPERFORM and we continue to like AEON for its: (i) dual income streams, which lead to a better position under the zero-rated GST, (ii) strong brand name with 27 malls in operations all-over Malaysia, and (iii) improved margins for both segments of retailing and business property management services. Risks to our call include: (i) lower-than-expected sales, and (ii) higherthan-expected operating expenses.

Source: Kenanga Research - 25 May 2018