We recently met with Mr. Poh Ying Loo, Executive Director of Aeon. Key takeaways are that management is cautious about the weakening consumer sentiment due to the rise in cost of living. It will weather the storm via i) reducing the amount of CAPEX for FY17 and FY18; ii) continuous competitive pricing strategy for its products; and iii) turning around those non-performing stores. Post meeting earnings have been adjusted slightly higher by 2.3% and 2.5% for FY17 and FY18 respectively and we migrate our valuation methodology to Dividend Discount Model (DDM) approach with a discount rate of 7.2%. We maintain Sell call and a target price of RM2.23/share for the stock.

No Significant Threat from e-Shopping

Despite the increasing online shopping trend in Malaysia, Aeon guided that generating earnings through physical retail stores as well as property management will continue be the company’s ‘brick and mortar’ business model. Even that, Aeon also has an online shopping platform called ‘Shoppu’ to stay in trend with the market but the revenue accounts for less than 1% of the total FY16 sales. We are neutral on this as we do not see it as a major threat as well to Aeon. We opine that Malaysia eCommerce market is relatively young and Malaysians generally still enjoy week-end shopping at various shopping malls.

Less CAPEX for FY17 and FY18

Since FY13, Aeon has been spending between RM500mn – RM700mn CAPEX to fund the expansion plan by aggressively acquiring lands as well as opening new malls and stores. This has converted Aeon’s net cash position of RM313.6mn in FY13 to net debt position of RM544.3mn in FY16 with a gearing ratio of 0.3x. Moving forward, management guided that Aeon will normalise its CAPEX spending to less than RM500mn for FY17 and FY18. This CAPEX will mainly be used to fund the opening of new malls in FY17 (Kempas) and FY18 (Kuching) as well as refurbishments of old stores (more than five years). We support Aeon’s efforts in normalising future CAPEX while resting on CAPEX spent in the past to fuel future earnings growth.

Competitive Pricing Strategy

According to the Malaysian Institute of Economic Research (MIER), consumer sentiment index declined by CAGR of 8.4% (1Q11 – 4Q16). Given the weakening of Consumer Sentiment Index (CSI), management guided that Aeon will continue with the competitive pricing strategy to attract customers, who are more sensitive to change in price these days. This would mean continuous heavy discounting strategy will continue to stimulate sales and EBIT margin would continue be under pressure. In our revised forecast, we estimate that revenue will increase by 7.9% and 8.5% for FY17 and FY18 respectively while the EBIT margin to stay at 5.1% and 5.3% in FY17 and FY18 respectively, which is below its 5-years average of 7.3%.

Turnaround of Underperforming Stores

From the meeting, management guided that sales performance of Aeon malls/stores is dependent upon the purchasing power of the population near malls’/stores’ location. For example, Kota Bharu mall sales is not as high as Shah Alam sales given the demographic of the respective location. Hence, some stores are underperforming the others. Moving forward, Aeon will turnaround underperforming stores through re-arranging the interior layout to adapt to the local consumer behaviour and preferences as well as active marketing and promotions.

Sustaining 4-6sen Dividend Payment

Aeon has no dividend policy as the group focuses on absolute value of dividend rather than pay according to a dividend policy. In the past, dividend payout has been in the range of 25% - 35% depending on the group’s earnings performance. Last year was an exception as dividend payout was 70.4% given the decline in earnings. Moving forward, we forecast dividends to be at 4.0- 5.5sen/share or 60-65% payout ratio, generating dividend yield of 1.7-2.3% for FY17 and FY19.

Outlook

We remain cautious on the consumer spending amid weak ringgit performance. To weather to storm, we believe Aeon has adopted a “wait-andsee” strategy by fine-tuning its expansion and capex plans. Future earnings growth, which will be resting on the performance of new mall and store (Aeon Shah Alam, Sunway Velocity, Aeon Kempas and Aeon Kuching), is expected to be insignificant.

Forecast

We increase our earnings forecast slightly by 2.3% and 2.5% for FY17 and FY18 respectively, to factor in lower operating expenses and staff costs.

Valuation

We migrate our valuation methodology to DDM approach with a discount rate of 7.2%. We maintain our Sell call on Aeon with an unchanged target price of RM2.23/share. Potential upside to our call would be recovery of consumer sentiment and recovery of Ringgit exchange rate.

Source: TA Research - 31 Mar 2017