INVESTMENT HIGHLIGHTS

• Revenue from the retailing segment has been on a declining trend since 1Q15

• Despite showing better revenue growth than the industry, retailing segment was hit hard by high operational cost

• Retailing segment is not expected to show a meaningful recovery in 2017

• Property management segment shows limited growth

• Downgrade to SELL with a revised TP of RM2.00 per share

Revenue from the retailing segment has been on a declining trend since 1Q15. Over the last two years, retailing segment accounts for an average of 85% of total revenue while the remaining is contributed by property management segment. Apart from 2Q16, yearover-year revenue growth for the retailing segment has been on a declining trend since 1Q15, with 2Q15 registering a contraction of - 7.81%yoy as sales was badly affected due to the implementation of GST. Excluding 2Q16 growth of +21.76%yoy which was due to the low base effect from 2Q15, retailing segment has not recovered post GST.

Despite showing better revenue growth than the industry, retailing segment is hit hard by the high operational cost.

Despite the decline in revenue growth, retail segment exhibited a relatively higher growth compared to the retail industry’s departmental store cum supermarket sector sales. However, due to the higher operating cost, operating profit for retailing segment has declined to RM1.52m and RM1.00m in 1Q16 and 2Q16 respectively before turning to a loss of -RM14.1m in 3Q16. In the same period, operating margin drop from 0.2% to -1.7%.

Retailing segment is not expected to show a meaningful recovery in 2017. The CPI rose to +1.8%yoy in November 2016 mainly contributed by the +3.8%yoy increase in food and non-alcoholic beverage while the prices of clothing and footwear has continued to drop an average of -0.4%yoy throughout 2016 which signals stiff price competition. In addition, Consumer sentiment index (CSI) for 3Q16 has dropped to 73.60 (-4.9pts) which is attributable to the pessimistic view of consumers towards the current economic environment. Due to the rising prices of consumer staples, spending on consumer discretionary item is expected to reduce. These factors will retain pressure on the top line revenue, coupled with high operating costs; we do not expect that the retailing segment will show a meaningful recovery in 2017.

Property management segment shows limited growth. With the subdued performance of its retailing segment, AEON Co’s operating profit has largely been contributed by the property management segment with an operating profit of RM54.65m (+5.38yoy), RM49.29m (-6.39%yoy) and RM51.25m (0.71%yoy) from 1Q16 to 3Q16 respectively. Nevertheless, property management segment shows unaspiring operating profit growth due to the higher operational costs due to the opening of three new shopping malls in FY16 i.e. AEON Shah Alam, AEON Kota Bahru and AEON Ipoh Falim. Thus, operating margin has declined to as low as 33% in FY16 compared to the average of 39% in the past three years. AEON Co also targets to open another two shopping malls in 2017 i.e. AEON Bandar Dato Onn, Iskandar Malaysia and AEON Kuching, Sarawak in addition to the 27 shopping malls it manages at the end of 2016. The property management services industry is equally affected by the current challenging business climate, which has affected tenants’ sales performance and their ability to sustain shopping malls rentals and hence, the competition for tenants and rental pressure remains. Hence, we remain cautious on the outlook for this segment.

Earning revision. We are revising our FY16F and FY17F earnings by -0.62% and -48.53% respectively. The downward revision is due to: (i) the unlikely event that 4Q16 result for retailing segment will record a year-over-year growth despite being the segment best performance in FY16; (ii) the expectation that retail segment performance will remain subdue in FY17 with a growth at best of +4% and; (iii) potential challenges the property management segments might face in maintaining tenants amidst the challenging business climate.

We downgrade from NEUTRAL to SELL stance with a revised TP of RM2.00. We downgrade Aeon Co. to SELL and revised our target price to RM2.00 (previously RM2.35 per share). Our target price is based on PER17 and EPS17 of 35.05x and 5.7sen respectively. Our target PER is premised on the average PER of the company for the past one year.

Source: MIDF Research - 13 Jan 2017