1H19 CNP of RM55.6m (-0.3% YoY) came below expectations of our/consensus at 39%/42% of full-year estimates due to weaker-than-expected 2Q19 sales, which should have been one of the stronger quarter on seasonality. Upcoming 3Q19 is expected to register lower sales due to absence of festivities, but 4Q is still the best quarter for AEON on year-end sales. As such, we cut our FY19-20E CNP by 25-21%. Downgrade to MP from OP with a lower TP of RM1.70 (from RM2.10).

1H19 below expectations. 1H19 CNP of RM55.6m (-4% YoY) came in below expectations of our/consensus at 39%/42% of full-year estimates due to weaker-than-expected 2Q19 sales, which should have been one of the stronger quarters on seasonality. No DPS was declared for the quarter as expected. The group typically pay dividends in 4Q.

QoQ, 2Q19 CNP plunged 39% mainly due to: (i) lower sales (-9%), despite sales-boosting Hari Raya Aidilfitri from softer demand post stronger CNY festive season sales in the previous quarter, with lower Retailing segment sales (-10.4%), but softer drop in Property management services (-0.1%) from higher rental space from the new mall, and (ii) higher effective tax rate of 51.3% (1Q19: 41.4%).

YoY, 1H19 CNP decreased 0.3%, despite higher sales (+6%) mainly from the changes in accounting standards of MFRS 16 (lease interest charges). The higher operating expenses (+4%) was well-contained rising lesser than sales from higher rental and utilities in tandem with the opening of two new malls since 1H18. The stronger sales was attributed to higher contribution from the new AEON Mall Kuching (commenced in 2Q 2018) 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, CNP was cushioned by the lower effective tax rate at 45.5% (1H18: 52.0%).

Outlook. Management highlighted that for the retailing space, they will 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.

Cut FY19-20E CNP by 25-21%. We cut our FY19-20E by 25-21% to reflect lower-than-expected sales as well as adjusting for a higher effective tax rate of 48% (previously at 40%) and lease interest charges under MFRS 16.

Downgrade to MP from OP with a lower TP of RM1.70 (from RM2.10) based on unchanged 21x FY20E EPS, at -1.0SD of its 5-year historical mean PER.

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

Source: Kenanga Research - 27 Aug 2019