9M18 CNP of RM71.0m (+8%) came in at 60%/63% of our/consensus full-year estimates, which we deemed within expectations as 4Q is anticipated to be a strong quarter on the usual year-end promotion which historically accounted for 40% of earnings. Note that, AEON absorbed the SST pricing impact only for September 2018. Maintain OUTPERFORM with unchanged TP of RM2.60.

9M18 deemed within expectations. 9M18 core net profit (CNP) of RM71.0m (+8%) came in at 60%/63% of our/consensus full-year estimates, which we deemed as within expectations as we expect stronger 4Q from the usual year-end promotion which historically accounted for 40% of the group earnings. The 9M18 CNP excludes a one-off recognition (in 2Q18) for divestment of an associate company, Index Living Mall Malaysia Sdn Bhd (ILMM), with impairment loss at RM8.0m and share of 1H18 operating loss of RM11.4m. ILMM is a joint-venture company (51%/49%) between AEON and Index Living Mall Company Limited (ILM). No dividend was declared for the quarter, as expected. The group typically paid its dividend in 4Q.

YoY, 9M18 CNP rose 8% mainly due to higher sales (+7%) with the stronger performance in Retailing business division (+4%) and Property Management division (+6%). The positive growth was attributed to the higher contribution from new opening of AEON Mall Kuching (opened in 2Q18) and supported by the stronger contribution from new mall opened last year (AEON Kempas, Johor) as well as shopping malls that were renovated and expanded. Additionally, 9M18 EBIT was higher by 7%, with improved margin by 0.1ppt to 4.7% from 4.6% in 9M17, as a result of better marketing and pricing strategies.

QoQ, 3Q18 CNP plunged 50%, despite the marginal sales growth (+0.1%), dragged down by lower EBIT margin by 2.1ppt to 3.2% from 5.3% in 2Q18 as AEON absorbed the SST pricing impact, locking the zero-rated pricing only for September 2018 (SST tax percentage brackets are varied based on products, effective 1st September 2018). Note that, 3Q is historically the weakest quarter for the group, without any festivities to boost sales.

Outlook. 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 are less susceptible to price changes during implementation of the new SST, (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 - 29 Nov 2018