9MFY19 CNP of RM64.0m (-8% YoY) came below our/consensus expectations at 63%/55% of full-year estimates due to higher-than-expected lease interest charges under MFRS 16. As such, we cut our FY19-20E CNP by 10-5%. Downgrade to MP from OP with a lower TP of RM1.60 (from RM1.70). Upcoming 4QFY19 is expected to record stronger sequential sales on year-end promotions.

9MFY19 below expectations. 9MFY19 CNP of RM64.0m (-8% YoY) came below our/consensus expectations at 63%/55% of full-year estimates due to higher-than-expected lease interest charges under MFRS 16. No dividend was declared for the quarter which typically paid in 4Q.

YoY, 9MFY19 CNP decreased 8%, mainly from the changes in accounting standards by MFRS 16 (on lease interest charges recognition), despite higher sales (+4%) and expanded EBIT margin by 2.1ppt to 6.8% from 4.7% in 9MFY18 from favourable merchandise mix. Additionally, CNP was cushioned by the lower effective tax rate at 45.8% (9MFY18: 49.4%) and operating expenses (+2%) was wellcontained, rising lesser than sales from higher rental and utilities in tandem with the opening of two new malls. The stronger sales was attributed to higher contribution from the new AEON Mall Kuching (commenced in 2QCY18) 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.

QoQ, 3QFY19 CNP plunged 60% on the seasonally weakest quarter, mainly due to: (i) lower sales (-3%) with absence of festivities and inability to match Hari Raya festivities sales with lower Retailing segment sales (-4%), but with a softer drop in Property management services (-0.7%) from higher rental space from the new mall, and (ii) contraction in EBIT margin by 1.6ppt to 5.5% from 7.1% in 2QFY19, on higher discounting activities to sustain demand.

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 the construction of the new mall and renovation of existing malls for FY19.

Cut FY19-20E CNP by 10-5%. We cut our FY19-20E CNP by 10-5% to reflect higher-than-expected lease interest charges under MFRS 16.

Downgrade to MP from OP with a lower TP of RM1.60 (from RM1.70) based on unchanged 21x FY20E EPS, at -1.0SD of its 5-year historical mean PER.

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

Source: Kenanga Research - 29 Nov 2019