We recently met AEON’s management to get some updates on the company. Maintain NEUTRAL with a lower DCF-derived TP of MYR2.99 (2.3%  downside),  valuing  the  stock  at  an  implied  20x  FY15F  P/E.  We believe  that  its  steady  mall  expansion  strategy  will  continue  to  propel its  topline  growth.  However,  earnings  growth  could  be  dampened  by weaker consumer spending in 2015 and stiffer competition.

New  malls  in  the  pipeline.  AEON  is  opening  two  new  malls  in  FY15, which  will  be  located  at  Klebang,  Melaka  (net  lettable  area  (NLA): 500,000 sqf) and Shah Alam, Selangor (NLA: 600,000 sqf). For FY16, a new mall will be opened in Kota Bharu, Kelantan (NLA: 500,000 sqf). We are positive about this expansion plan, but remain wary of  the potential margin  compression  over  the  near  term,  which  could  be  due  to continuous  marketing  efforts  and  higher  initial  costs  incurred  from  new store openings. This is clearly reflected in Figure 4 below.  

Possible  slower  consumer  spending.  The  decline  of  Malaysian Institute  Of  Economic  Research’s  (MIER)  consumer  sentiment  index  to 83  points  at  end  4Q14  echoes  our  cautious  stand  on  the  challenging outlook for the retail sector in 2015. We believe that this could be due to looming  concerns  on  a  weaker  consumer  spending  environment  given the forthcoming implementation of the goods and services tax (GST) in Apr  2015.  Our  concern  is  further  backed  by  the  downward  revision  of retail  growth  estimates  in  2015,  to  5.5%  from  6.0%  by  Retail  Group Malaysia.  As  we  become  more  cautious  of  the  softening  consumer sentiment going forward, we further trim our FY15F earnings by 3.1% to reflect the earnings impact from the GST implementation.  

NEUTRAL  maintained.  We  fine-tune  our  TP  to  MYR2.99  (from MYR3.67, WACC: 8.3%, terminal growth: 1%) as we roll over our DCF valuation. We believe that valuation is fair, given that our implied FY15F P/E of 20x is near its 3-year historical mean P/E of 21x.  We also believe that the group should be trading  on par with its historical  P/E given the unexciting  single-digit  earnings  growth  for  FY15F.  Although  its  store expansion  strategy  will  continue  to  drive  its  topline  growth,  we  remain cautious  on  the  margin  pressure  especially  for  its  retail  business,  as AEON  is  incurring  more  promotional  expenses  to  stimulate  demand.  Thus, we maintain NEUTRAL on the stock.  

Financial Exhibits

SWOT Analysis

Company Profile

AEON operates a chain of superstores and shopping centres.

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Source: RHB