INVESTMENT HIGHLIGHTS

• 2QFY18 normalised earnings dropped by -35.4%yoy to RM17.8m due to share of losses from an associate

• Retailing segment recorded solid recovery

• Property management impacted by new mall’s start-up cost

• Maintain NEUTRAL with an unchanged TP of RM2.11

Earnings within our expectation. Aeon Co. (M) Bhd (Aeon Co)’s 2QFY18 normalised earnings came in at RM17.8m. This brings its 1HFY18 normalised earnings to RM45.7m which is broadly in line with ours but lagged consensus’ expectations, accounting for 43.0% and 38.0% of full year FY18 earnings forecasts respectively. Against last year, 2QFY18 revenue rose by +5.4%yoy whilst normalised earnings fell by -35.4%yoy. The fall in earnings was mainly due to its share of operating losses from an associate company, Index Living Mall Malaysia Sdn Bhd, of -RM11.4m (vs 2QFY17 of -RM0.3m).

Retailing segment recorded solid recovery. The retailing segment posed an encouraging performance as 2QFY18 revenue improved by +5.9%yoy to RM893.2m whilst operating profit (OP) grew more than double year-on-year to RM17.0m. This was mainly due to: (i) contribution from the new stores, i.e. AEON Bandar Dato’ Onn, Johor Bahru and Aeon Kuching, which were launched in September 2017 and April 2018 respectively; (ii) better merchandise assortment; and (iii) operational efficiencies.

Property management impacted by new mall start-up cost. The property management services’ 2QFY18 revenue rose by +3.9%yoy to RM170.9m. This was mainly due to: (i) contribution from the rental and property management services provided by AEON Bandar Dato’ Onn, Johor Bahru and Aeon Kuching; and (ii) contribution from shopping malls that were renovated and expanded last year, i.e. Aeon Taman Maluri and Aeon Queensbay. In addition, Aeon Co managed to sustain an occupancy rate of approximately 90.0% despite the current tough market environment. However, OP declined by -10.3%yoy to RM50.1m due to the: (i) start-up cost for AEON Kuching Mall in April 2018; and (ii) increased in promotion expenses during festive seasons.

Impact to earnings. Post earnings announcement, we made no changes to our forecasts as the result is in line with our expectation.

Target price. We maintain our TP at RM2.11. This is based on pegging FY19EPS of 7.8sen against forward PER of 27.0x. Our target PER is premised on the average PER of the company for the past three years.

Downgrade to NEUTRAL. We expect the group to post strong earnings next quarter mainly due to: (i) tax holiday spending; and (ii) low base effect of previous corresponding quarter performance. However, on a longer term horizon, we remain wary on the group’s financial performance in anticipation of: (i) weak sales performance in the immediate quarter after the reimplementation of SST; and (ii) continue share of losses from Index Living Mall Malaysia. Note that Aeon’s associate is in a state of slowing down its business with plan closure of its remaining outlets. Nonetheless, we believe the group’s earnings will continue to improve over a longer term, supported by the commitment of opening one shopping mall each year. Based on the aforementioned reasons, we are maintaining our NEUTRAL recommendation on the stock.

Source: MIDF Research - 30 Aug 2018