1Q19 CNP of RM32.6m (+17% YoY, -39% QoQ) came in within expectations of our/consensus at 24%/26% of full-year estimates. Retailing business division performed strongly, attributed to higher contribution from the new AEON Mall Kuching (2Q18) and maiden contribution from the new AEON Mall Nilai, Negeri Sembilan (January 2019). Reiterate OP with a higher TP of RM2.10 (from RM2.00) as we roll over our valuation base-year to FY20E.

1Q19 within expectations. 1Q19 CNP of RM32.6m (+17% YoY, -39% QoQ) came in within expectations of our/consensus at 24%/26% of fullyear estimates. No DPS was declared for the quarter as expected. The group typically pay dividend in 4Q.

YoY, 1Q19 CNP surged 17% mainly due to higher sales (+8%) with stronger performance in Retailing business division (+9%) and Property Management division (+3%). The surge is attributed to higher contribution from the new AEON Mall Kuching (commenced in 2Q18) and maiden contribution from the new AEON Mall Nilai, Negeri Sembilan (commenced in January 2019) as well as its other shopping malls that were renovated and expanded. Additionally, the effective tax rate was also lower at 41.4% (1Q18: 43.9%)

QoQ, 1Q19 CNP plunged 39%, despite the higher sales growth (+9%) from better CNY festive season sales, as it was dragged by contraction in PBT margin by 3.1ppt to 4.6% from 7.7% in 4Q18, due to the impact of MFRS 16 accounting changes relating to leasing rental (-RM28.5m). Furthermore, the effective tax rate was also higher at 41.4% (4Q18: 37.1%).

Outlook. Management highlighted that for the retailing space, they would continue to refurbish selected stores and employ appropriate marketing and pricing strategies, merchandise assortment reformation, maintaining quality customer service and further expand its ecommerce presence. For property management services, they expect occupancy rate and rental rates to remain challenging. AEON will continue to leverage on its competitive strengths to draw customer traffic to its malls to maintain its position as a popular shopping destination. The group has opened a new AEON mall in Negeri Sembilan in January 2019. The group has allocated RM400m capex for FY19 for the construction of the new mall and renovation of existing malls.

Maintain OUTPERFORM with a higher TP of RM2.10 (from RM2.00) as we roll over our valuation base-year to FY20E (from FY19E) based on unchanged PER of 21x, at -1.0SD of its 5-year historical mean PER. We like AEON for its: (i) dual-income streams, which are less vulnerable to price changes during implementation of the new SST, and (ii) on-going operational restructuring, improving margin for retailing, and sustained property income.

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

Source: Kenanga Research - 31 May 2019