INVESTMENT HIGHLIGHTS

• 4QFY17 earnings rose by +65.5yoy to RM39.2m

• FY17 earnings came in above ours and consensus expectations

• Retailing segment rebounded due to an improved profit margin

• Property management continue to record strong performance

• Upgrade to BUY with a higher TP of RM2.04

Above expectations. Aeon Co. (M) Bhd (Aeon Co)’s 4QFY17 earnings increased by +65.5yoy to RM39.2m which brings its full-year FY17 earnings to RM105.0m. After taking into account exceptional items of RM1.1m, cumulative normalised earnings came in at RM106.1m. This is above ours and consensus expectations, accounting for 125.9% and 117.9% of full year FY17 earnings forecasts respectively. The stronger than expected FY17 performance was due to the: (i) better than expected profit margin of the retailing segment and; (ii) continue strong performance of property management services.

Retailing segment rebounded due to an improved margin. Full year FY17 retailing segment revenue increased marginally by +0.2%yoy to RM3,423.8m. Nevertheless, the operating profit (OP) grew by more than double to RM39.3m from RM14.7m recorded in FY16 premised on the improvement in OP margin. This was mainly due to the: (i) contribution from the new stores/supermarket launched at i.e. AEON Bandar Dato’ Onn, Johor Bahru; (ii) full year contribution from stores which was launched or renovated in FY16 e.g. AEON Tebrau City and; (iii) better pricing strategies as the newly gazetted Price Control and Anti-Profiteering Act 2017 focuses more on regulating prices of F&B products and not on hardlines and softlines products.

Property management recorded strong performance. The property management services’ revenue and OP increased strongly by +10.5%yoy and +14.7%yoy respectively. This was mainly due to the: (i) contribution from the rental and property management services provided at AEON Bandar Dato’ Onn, Johor Bahru which started operation in September 2017 and; (ii) full-year contribution from new shopping malls opened in FY16 e.g. and AEON Shah Alam and Aeon Kota Bahru.

Impact to earnings. Post earnings announcement, we are revising our FY18 and FY19 earnings estimates upward by +29.3% and +35.7% respectively. This is mainly to account for the faster-than-expected recovery and improved operating profit margins for the retailing segment.

Upgrade to BUY with a revised TP of RM2.04. We upgrade our recommendation to BUY (previously NEUTRAL) with a revised TP of RM2.04 (previously RM1.70). Our target price is based on forward PER18 and EPS18 of 27.0x and 7.6sen respectively. Our target PER is premised on the average PER of the company for the past two years. We expect earnings to further improve going forward driven by the: (i) continuous recovery in retailing segment and; (ii) stable growth for the property segment contributed by the planned opening of one shopping mall each year for the next three years as well as stable occupancy rates of 90%. Hence, we believe the stock is a value buy at this juncture as it currently trades at 21.4x PER which is approximately –1.0 SD of its historical five-year average PER of 28.1x.

Source: MIDF Research - 1 Mar 2018