INVESTMENT HIGHLIGHTS

• 1QFY17 earnings dropped -21.1% to RM22.7m keeping pace with expectations

• Retailing segment still experiencing subdued performance

• Property management segment recorded higher revenue but earnings declined marginally

• Upgrade to NEUTRAL with revised TP of RM2.21 based on a PER18 and EPS18 of 28x and 7.90sen respectively

Met our and consensus expectations. Aeon Co’s 1QFY17 earnings shrank by -21.1%yoy to RM22.7m, keeping pace with our and consensus expectations at 22.7% and 21.5% of full year FY17 earnings forecasts respectively.

Higher expenses drag to earnings. Aeon Co’s 1QFY17 revenue dropped marginally by -0.3%yoy to RM1.072b. However, the group’s 1QFY17 earnings dropped significantly by -30.8%yoy to RM26.5m mainly due to non-operating expenses and high interest expense incurred during the quarter.

Retailing segment still experiencing subdued performance.

Retail segment revenue registered RM908.8m, which was lower by - 2.5%yoy whilst earnings dropped by -6.3%yoy to RM1.4m because of the continuous weak consumer sentiments and cautious spending behaviour. In addition, segmental profit margin was stable as the corresponding quarter at 0.2%.

Property management segment recorded higher revenue but earnings declined marginally. Revenue from its property management segment recorded a growth of +14.0%yoy to RM163.1 million mainly due to the contributions from its new and refurbished shopping malls. However, earnings declined by -1.0%yoy to RM54.1m as segmental profit margin dropped-5.0ppts to 33.2%.

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 subdued in FY17. The group will continue to employ appropriate pricing, re-aligning the merchandise mix and assortment, active promotion activities and strengthening operational efficiency to ensure that its performance will improve.

We upgrade to NEUTRAL stance with a revised TP of RM2.21. Despite the year-over-year decline in profit, we believe that Aeon Co’s share price will remain range-bound for the medium term as we are still expecting overall FY17 profit to be higher compared with FY16 and net margin expansion to continue into FY18. Therefore, we upgrade Aeon Co to NEUTRAL with a revised target price of RM2.21 per share as we roll forward our valuation base year to FY18. Our target price is based on PER18 and EPS18 of 28.00x and 7.90sen respectively. Our target PER is premised on the average PER of the company for the past two years.

Source: MIDF Research - 26 May 2017