Review

• Aeon Co. (M) Bhd’s (Aeon) 9MFY19 adjusted net earnings of RM62.3mn accounted for 44% and 50% of our and consensus full-year forecasts respectively. While still largely within expectations, the earnings was at the lower end of our expectation. Note that the group’s earnings tend to be back-end loaded in the fourth-quarter due to i) strong year-end festive season sales and ii) year-end rebate. In the recent 3 years, fourth-quarter earnings accounted for 43-55% of respective year’s earnings. No dividend was declared for the quarter.

• Revenue for 9MFY19 increased by 3.9% YoY to RM3.37bn attributed to growth from Retailing (+4.1% YoY) and Property Management (+2.7% YoY). These were attributable to opening of new malls i.e. Aeon Kuching and Aeon Nilai alongside newly-renovated stores, however, partly mitigated by temporal stores closure for renovation. While the group’s reported PBT grew by 7.5% YoY to RM109.6mn, the adjusted PBT (mainly adjusted for MFRS impacts in FY19 and removal of operating loss from disposed associate) dropped 4.5% YoY. The dip in adjusted PBT can be attributed to higher utilities and rental arising from Property Management and temporal stores closure for renovation.

• On segmental operating profit, 9MFY19 Retailing earnings grew tripled YoY to RM55.5mn (or more than doubled to RM44.0mn after adjusting for absence of rental expense and presence of right-of-use amortisation). With a similar adjustment method, Property Management adjusted earnings was RM142.6mn (-8.4% YoY) instead of the reported operating profit of RM207.5m (+33.3% YoY). The decline was due to higher operating expenses i.e. rental expenses and utilities. Note that, lease interest of RM91.2mn was only accounted at the group level instead of the segmental level.

• Sequentially, 3QFY19 revenue dropped 3.4% QoQ to RM1.06bn, whilst reported PBT was 65.0% lower than 2QFY19. This was largely due to absence of festive season sales in 3QFY19.

Impact

• We trim our earnings downward by 4-8% as we adjust the cost of operations i.e. rental higher.

Outlook

• The group’s strategy on Retail business of i) scaling its specialty stores, ii) introducing attractive merchandises alongside iii) marketing and pricing strategies have been fruitful, resulting in growing revenue and profitability.

• Despite a challenging market for Aeon’s Property Management, we understand that the group has a commendable average occupancy rate of 90% (i.e.: higher than the industry’s average of 79.3% for FY18 based on NAPIC data). This is typical reflection of Aeon’s capability in leveraging on its strong branding in managing family malls. Moreover, upon completion of renovation and expansionary works on Aeon Taman Maluri by 4QFY19, net lettable area of the mall would nearly double and occupancies along rentals are expected to improve.

Valuation

• Target price is unchanged at RM1.85/share, and we recommend Buy on weakness leading into a strong fourth quarter.

Source: TA Research - 29 Nov 2019