• Selling for cash consideration of RM87.8m

• Disposal is in-line with its corporate strategy

• The proceeds are to be utilised as working capital and to reduce borrowings

• We maintain our NEUTRAL stance with an unchanged TP of RM2.21 based on a PER18 and EPS18 of 28.00x and 7.90sen respectively

Selling for cash consideration of RM87.8m. AEON plans on disposing a piece of freehold land together with a two-storey retail shopping centre known as AEON Mahkota Cheras Shopping Centre for RM87.8m to Foremost Wealth Management Sdn Bhd, an investment holding company. The net book value of this property as of FY16 was RM67.4m and the age of the building is seven years. The proposed disposal is expected to give rise to an estimated gain of RM17.0m in FY17 after adjusting for necessary expenses and taxes upon completion which is expected to be four months from the date of the agreement.

Disposal is in-line with its corporate strategy. Due to the subdued performance of its business especially in the retailing segment, AEON has been reorganising and consolidating its current portfolio and planned projects. It had aborted several planned projects in Sungai Petani, Senawang and Batu Pahat as well as terminating a tenancy agreement for a yet to be build mall. These, together with the disposal of AEON Mahkota Cheras which is no longer strategic to its requirement are deemed necessary to sustain its business.

The proceeds are to be utilised as working capital and to reduce borrowings. With a depleting cash balance coupled with higher borrowing, management intends to use the cash proceeds as working capital as well as to reduce its borrowing. As of 1QFY17, the net gearing increased +18.0ppts yoy to 53% while the quarterly cash interest paid has increased to RM9.5m (+65.4% yoy increase). In addition, the proposed disposal is not expected to have any significant effect on net assets and gearing of AEON.

Impact to earnings. The proposed disposal is not expected to have any material effect on our forecasted earnings as the contribution of the property to the group earnings is minimal.

Source: MIDF Research - 30 Jun 2017