1H18 CNP of RM57.1m (+6%) came in within our/consensus expectations at 48%/47% of full-year estimates. The 1H18 CNP excludes a one-off recognition in divestment of an associate company, Index Living Mall Malaysia Sdn Bhd, with impairment loss at RM8.0m and share of YTD operating loss of RM11.4m. Maintain OUTPERFORM with unchanged TP of RM2.60.

1H18 within expectations. 1H18 CNP of RM57.1m (+6%) came in within our/consensus expectations at 48%/47% of full-year estimates. The 1H18 CNP excludes a one-off recognition in divestment of an associate company, Index Living Mall Malaysia Sdn Bhd (ILMM), with impairment loss at RM8.0m and share of YTD operating loss of RM11.4m. ILMM is a joint-venture company (51%/49%) between AEON and Index Living Mall Company Limited (ILM) which was incorporated in Thailand and engaged in the operations of furniture retailer which will be closing down its remaining outlets in Malaysia by 3Q18. No dividend was declared for the quarter, as expected. The group typically pay its dividend in 4Q.

YoY, 1H18 CNP rose 6% mainly due to higher sales (+4%) with the stronger performance in Retailing business division (+5%) and Property Management division (+4%). The positive growth was attributed to the maiden contribution from new opening of AEON Mall Kuching (opened in 2Q18) and supported by the stronger contribution from new mall opening (AEON Kempas, Johor) last year as well as shopping malls that were renovated and expanded. Additionally, 1H18 EBIT was higher by 6%, with improved margin by 0.1ppt to 5.4% from 5.3% in 1H17, as a result of better marketing and pricing strategies.

QoQ, 2Q18 CNP decreased by 6% dragged down by: (i) lower sales (- 5%) as AEON, which had previously absorbed GST into their respective merchandising prices, cut its selling prices for the 6%-rated products effective on 1st June 2018, and (ii) lower EBIT margin by 0.1ppt to 5.3% from 5.4% in 1Q18 as AEON was giving early discount starting 16th May 2018, prior to the zero-rated tax.

Outlook. With the zero-rated GST starting 1st June 2018, AEON, which had previously absorbed GST into their respective merchandising prices, cut its selling prices for the 6%-rated products, which encouraged consumer to loosen their purse strings. Management noted that for retailing business, they would continue to employ appropriate marketing and pricing strategies, and seek to expand its supermarket business and further expand its 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 FY18 (FY17: RM500m) for the construction of the new mall and renovation of existing malls.

Maintain OUTPERFORM with an unchanged TP of RM2.60 based on 26.5x FY19E EPS, at its 5-year historical mean PER. 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 namely retailing and business property management services.

Risks to our call include: (i) lower-than-expected sales, and (ii) higher- than-expected operating expenses.

Source: Kenanga Research - 30 Aug 2018