• 4QFY16 earnings dropped -30.5% to RM26.5m which met our expectations but lagged consensus

• Revenue grew by +4.8%yoy for 4QFY16 despite the earnings dropped

• FY16’s earnings for retailing segment declined by -40.2% to RM3.3m

• Earnings for property segment for FY16 grew marginally at +0.5% to RM209.1m

• We maintain SELL with unchanged TP of RM2.00 based on a PER17 of 28.2x

Met our expectations but lagged consensus. Aeon Co’s 4QFY16 earnings dropped -30.8%yoy to RM26.5m, whilst full year FY16 earnings dropped -40.2%yoy to RM79.7m. The full year FY16 earnings met our expectations, accounting for at 104% of our FY16 earnings estimates but lagged consensus expectations at 91% of their full year forecasts.

Revenue grew by +4.8%yoy for 4QFY16 despite the earnings dropped. Aeon Co’s 4QFY16 revenue grew by +4.8yoy to RM1.02b whilst full year FY16’s revenue grew by +5.5%yoy to RM4.04b mainly attributable to the contribution from new shopping malls. However, the group’s 4QFY16 earnings dropped -30.8%yoy to RM26.5m whereas full year earnings dropped -40.2%yoy to RM79.7m mainly due to the higher operating costs, new store expenses and higher interest expense.

FY16’s earnings for retailing segment dropped -40.2% to RM3.3m. The full year FY16 earnings for retailing segment dropped - 40.2% to RM3.3m despite revenue grew by +4.6% to RM3.4b. The increase in revenue was due to the contribution from its new stores. In FY16, three new shopping malls namely AEON Shah Alam, AEON Kota Bahru and AEON Ipoh Falim were launched. In addition, operating profit (OP) margin dropped by -1.3ppts to 0.1% due to higher operating expenses.

Earnings for property segment for FY16 grew marginally at +0.5% to RM209.1m. Property segment recorded earnings growth of +0.5% to RM209.1m premised on revenue growth of +9.8%. In addition, OP margin dropped +3.2ppts to 34.9% mainly due to higher operating cost as well as additional expenses incurred from opening of the new stores. Despite over 86% of revenue for FY16 were contributed by the retailing segment, earnings attributable to property segment accounted for 82% of total earnings.

Prospects. 2017 will remain as a challenging year for AEON Co as the rising cost of living will continue to erode disposable income for discretionary spending. We expect that retail segment performance will remain subdue in FY17. The property management segment which is deemed to be more stable due to its recurring income nature might also face challenges in maintaining tenants amidst the challenging business climate, which we opine will be offset with the opening of the aforementioned three new malls.

We maintain our SELL stance with an unchanged TP of RM2.00. We maintain our SELL stance with unchanged target price of RM2.00 as we believe that valuation remains lofty. Our target price is based on PER17 and EPS17 of 28.2x and 7.10sen respectively. Our target PER is premised on the average PER of the company for the past two years.

Source: MIDF Research - 28 Feb 2017