INVESTMENT HIGHLIGHTS

• Absence of future loss from Aeon’s associate to improve the group’s 2HFY18 financial performance

• Property management’s financial performance to get better as Aeon Kuching Mall gain further traction

• Resilient earnings for the retailing segment, in-line with continuous addition of new retail stores

• Upgrade to BUY with an unchanged TP of RM2.11

Earnings to rebound in 2HFY18. To recall, 1HFY18 recorded earnings dropped by -29.8%yoy to RM37.7m. This was in view of impairment and share of operating losses from an associate company, Index Living Mall Malaysia Sdn. Bhd (ILMM) of RM8.01m and RM13.7m respectively. Moving forward, we expect strong 2HFY18 earnings premised on: (i) recovery of property management segment; (ii) retailing segment to continue recording solid performance and; (iii) no further impairment or significant share of losses from associates.

Property management’s financial performance to recover. Historically, the property management segment contributed about 80.0% to 85.0% of the group’s operating profit (OP). Excluding 2QFY18, the segment has recorded commendable OP growth since 2QFY17. We believe that the -10.3%yoy decreased in 2QFY18 OP was a temporary blip, owing to the start-up cost incurred for Aeon Kuching Mall which was opened in April 2018. Nonetheless, we expect that the OP for the segment to stage a recovery in in 2HFY18 as: (i) Aeon Kuching Mall gain more traction and; (ii) stable occupancy rate of approximately 90.0% for its existing shopping malls.

Retailing segment solid performance to continue. Meanwhile, AEON Co’s retailing segment has continued to contribute positively to group’s earnings since it rebounded in 4QFY17. In the 2QFY18, retailing segment posed an encouraging performance as OP grew more than double year-on-year driven by contribution from the new stores i.e. AEON Bandar Dato’ Onn, Johor Bahru and Aeon Kuching. We expect the segment solid performance will continue particularly in the 3QFY18 given the; (i) tax holiday spending and; (ii) low base effect of previous corresponding quarter performance. Over a longer term, we expect that the opening of new shopping mall in Nilai in 1QFY19 will contribute positively to earnings.

ILLM to end operation by 3QFY18. We expect no further operating loss to be incurred by ILMM as its remaining outlets in Malaysia is targeted to be shut downed by 3QFY18. Moreover, the management has fully impaired the remaining balance of ILMM’s cost of investment in the 2QFY18.

Target price. We are maintaining our target price of RM2.11. This is based on pegging FY19EPS of 7.8sen against historical PER of 27.0x.

Upgrade to BUY. We like Aeon Co despite the continuing challenge facing departmental store sub-sector and proliferating shopping malls as Aeon Co’s possesses a unique business model as it positions itself as a neighbourhood shopping mall making it a preferred choice shopping mall in the suburban areas for middle income families. In the near term, we expect Aeon to stage earnings recovery in 2HFY18 as: (i) property management segment recovers; (ii) retailing segment to continue recording solid performance and; (iii) absent of any impairment or significant share of losses from associates. On another note, Aeon Co’s share price has retraced by -12.9% subsequent to its 2QFY18 quarterly announcement. Due to this, the stock is now trading at a forward PER of 23.8x which is more than one- standard deviation below its three-year historical PER of 31.0x. We view that this would present an opportunity for investors, who favour consumer discretionary stocks, to increase exposure on Aeon. All factors considered, we are upgrading our stock recommendation for Aeon to BUY from neutral previously.

Source: MIDF Research - 25 Sept 2018