AEON’s 2Q15 results were below our and consensus expectations, with earnings declining 67% YoY to MYR15.7m. Maintain NEUTRAL with a lower DCF-derived TP of MYR2.70 (from MYR3.09, 3% downside) as we raise our WACC assumption to 9.7% (from 8.3%) due to macroeconomic headwinds. Its 2Q earnings were soft, mainly due to slower sales growth and higher operating costs.

Below expectations. AEON’s 2Q15 sales dipped 5.4% YoY to MYR811.1m, mainly due to weaker consumer spending post goods and services tax (GST) implementation, with its retail segment reporting a 7.8% YoY decline in revenue. The property management segment, on the other hand, continues to be the saving grace for the group, having posted 8.7% YoY sales growth, mainly on contributions from its new shopping centres. Last year, AEON opened a new store in Quill City Mall, Kuala Lumpur, and two new malls in Bukit Mertajam and Taiping.

Retail continues to suffer. 2Q15 EBIT margin, however, plunged to 3.2% (1Q14: 8.4%) as its retail business recorded a segmental loss of MYR18.3m during the quarter. This can be attributed to: i) slower sales growth, ii) higher operating costs, and iii) greater initial costs associated with new store openings. Sequentially, 2Q15 revenue and earnings declined 30.3% QoQ and 52.5% QoQ respectively, due to strong preGST buying in 1Q15.

Forecasts and risks. As we are turning utterly cautious over the GST impact on AEON’s retail business, we trim our FY15F -17F earnings by 16.1-20.3% after factoring in slower same-store sales growth (SSSG)and higher opex structure. Further weakening in consumer sentiment and intensified competition remain key risks.

NEUTRAL maintained. We fine tune our DCF-derived (Figure 5) TP to MYR2.70 (from MYR3.09) as we lift our WACC rate to 9.7% (from 8.3%) due to macroeconomic headwinds; this is in line with RHB’s revised valuation assumptions. We believe the current valuation is fair, given that our implied FY16F P/E of 19.3x is near its 5-year historical average P/E of 18.3x. The stock currently trades at 20.0x FY16F P/E. Challenges are likely to continue to persist for AEON over the near term, as consumer spending recovery could take longer than expected.