This article first appeared in The Edge Financial Daily on November 27, 2017 - December 3, 2017

AEON Co (M) Bhd
(Nov 24, RM1.88)
Downgrade to sell call with a lower target price (TP) of RM1.66: AEON Co (M) Bhd’s cumulative nine-month ended Sept 30, 2017 (9MFY17) profit after tax and minority interests (Patmi) of RM57.6 million (+8.2%) came in below expectations, accounting for just 55%-57% of Hong Leong Investment Bank (HLIB) and consensus full-year estimates.

The deviations were higher-than-expected effective tax rate of 46.2% (versus 39% we assumed), and slower-than-expected turnaround at the retailing segment.

On a year-on-year (y-o-y) basis, core Patmi accelerated by 71.6% to RM9.3 million in the third quarter of FY17 (3QFY17), due to higher contribution from a new AEON mall opened in Johor in 3QFY17 as well as a low base effect (as AEON was severely affected by the minimum wage hike in FY16).

The 3QFY17 core Patmi, however, fell 63.2% mainly due the retail division posting an operating loss of RM12.2 million in 3QFY17 (versus an operating profit of RM5.2 million in 2QFY17 due to Hari Raya occurring in 2QFY17).

Year-to-date (YTD) 9MFY17 core Patmi increased by 8.2% to RM57.6 million, due to narrowed losses from the retail division (which has begun turning around after being hit by poor consumer sentiments and higher minimum wage in 2016) and a 5.2% growth in the property management services division from the opening of a new mall in Johor in 3QFY17.

AEON will continue its long-term plan of opening shopping malls in Malaysia and increasing its market share in the growing urban, middle-class population.

However, the group plans to slow down its expansion drive from two malls a year to one given the less-than-favourable market conditions. The group will open an AEON Kuching Mall in the first half of 2018.

The risks include persistently weak consumer sentiments and spending, threat of intensifying competition, difficulties in executing expansion and higher-than-expected new store expenses.

We lower our FY17-FY19 Patmi forecasts by 11.3%/7.8%/4.3% respectively to account for the higher tax rate and slower-than-expected turnaround of the retail division.

With the glut of available retail space in the general market at the moment and the overall poor consumer sentiment level, Aeon’s prospects look challenging.

We downgrade our call to sell (from hold), with a lower TP of RM1.66 (from RM2.07 previously), to reflect lower earnings forecasts, lower target price-earnings ratio multiple of 20 times (from 23 times previously), given the slowing growth prospects.

Our new TP of RM1.66 is based on revised 20 times FY18 earnings per share of 8.3 sen. — Hong Leong Investment Bank, Nov 24