INVESTMENT HIGHLIGHTS

• 1HFY19 earnings rose by +13.9%yoy to RM52.1m, which within is ours but lagged consensus expectations

• Retail segment registered an improved performance mainly driven by new stores and better profit margin

• However, contribution from property management segment declined due to higher operating expenses

• Maintain NEUTRAL with an unchanged TP of RM1.60

1HFY19 earnings within our expectation. Aeon Co. (M) Bhd (Aeon Co)’s 2QFY19 normalised earnings rose by +9.3%yoy to RM19.5m. This brings its cumulative 1HFY19 earnings to RM52.1m, which is within ours but lagged consensus expectations at 45.1% and 40.6% of full year FY19 forecast earnings respectively. 1HFY19 normalised earnings grew by +13.9%yoy to RM52.1m due to the: (i) improved performance by retail segment and; (ii) absence of share of loss from associates in 1HFY18 of RM12.6m. However, this was softened by the lower contribution from property management segment.

Retail segment boosted by new stores. The 1HFY19 operating profit for the retail segment grew more than doubled to RM53.3m from the last corresponding period. After excluding the impact of MFRS 16, the retailing segment’s 1HFY19 operating profit amounted to RM45.7m (+92.8%yoy). This was mainly attributable to: (i) the newly renovated stores; (ii) newly opened speciality stores; (iii) new stores at Aeon Kuching, Sarawak (April 2018) and Aeon Nilai, Negeri Sembilan (January 2019) and; (iv) better profit margin. Nonetheless, the higher growth was partially subdued by the refurbishment and maintenance works at existing stores during the period.

Lower contribution from property management. Meanwhile, the property management segment registered 1HFY19 operating profit of RM138.3m (+28.7%yoy). However, post adjustment of MFRS 16, operating profit for the period recorded at only RM96.3m (-10.3%yoy). We believe the decline was mainly due to the challenging rental rates and higher operating expenses such as utilities.

Impact to earnings. We are maintaining FY19 and FY20 forecast at this juncture as our estimates are within expectation.

Target price. Our target price remains unchanged at RM1.60 which is based on pegging FY20EPS of 8.0sen against a forward PER of 20.0x. This is premised on -1.0SD below the average PER of the company for the past five years. The discount is to take into account the saturated retail landscape in the country.

Maintain NEUTRAL. We expect the heightening competition among brick and mortars retailers as well as aggressive promotions at e-commerce platforms to suppress overall retail prices. Moreover, consumers are becoming more selective in their spending, being more skewed towards basic necessities and commodities instead of discretionary items due to the lingering concerns over rising cost of living and subdued consumer sentiment. Due to this, the management has remained cautious on new shopping mall expansion plan beyond FY19. In addition, we think that the bottom line contribution from the property management segment will remain subdued as the group is unlikely to revise the rental rate upwards in the foreseeable term to maintain its occupancy ratio at the 90.0% level. However, we are cognisant of the management efforts to refurbish and maintenance existing stores in order to stay relevant in the face of competitions from surrounding areas. All things considered, we maintain NEUTRAL recommendation on the stock.

Source: MIDF Research - 27 Aug 2019