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Monday, 16 January 2017

(The Edge Financial Daily) Aeon to see challenging business climate

Aeon Co (M) Bhd
(Jan 13, RM2.54)

Downgrade to sell with a re-vised target price of RM2 from RM2.35: Over the last two years, Aeon Co (M) Bhd’s retail segment accounted for an average of 85% of total revenue while the remaining was contributed by the property management segment. Apart from the second quarter of 2016 (2QFY16), year-on-year (y-o-y) revenue growth for the retail segment has been on a declining trend since 1QFY15, with 2QFY15 registering a contraction of 7.81% y-o-y as sales was badly affected due to implementation of the goods and services tax (GST). Excluding 2QFY16 growth of 21.76% y-o-y, which was due to the low base effect from 2QFY15, the retail segment has not recovered, post-GST.

Despite the decline in revenue growth, the retail segment exhibited a relatively higher growth compared to the retail industry’s departmental store cum supermarket sector sales. However, due to the higher operating cost, operating profit for the retail segment has declined to RM1.52 million and RM1 million in 1QFY16 and 2QFY16 respectively before turning to a loss of RM14.1 million in 3QFY16. In the same period, operating margin dropped from 0.2% to -1.7%.

Aeon Co (M) Bhd

FYE DEC 31  
(RM MIL)

2013
2014
2015
2016F
     2017F

Revenue
3,514.4
3,705.5
3,834.6
4,001.9
4,237.7

Operating profit

326.1
302.1
227.0
143.3
156.5

Operating profit margin
(%)
9.3
8.2
5.9
3.6
3.7

Pre-tax profit

331.8

301.3

210.8

109.9

114.3

Net profit

231.0

211.9

131.7

76.9

80.0

Net profit margin (%)

6.6
5.7
3.4
1.9
1.9

Basic EPS (sen)

16.5
15.2
9.5
5.5
5.7

Basic EPS growth (%)
8.6
(7.9)
(37.3)
(42.3)
4.0
PER (x)

15.4
16.8
26.7
46.4
44.6

Net DPS (sen)

22.0
5.0
4.0
2.5
2.5

Net dividend yield (%)
8.7
2.0
1.6
1.0
1.0

Sources: Company, forecasts by MIDFR

The retail segment is not expected to show a meaningful recovery in 2017. The consumer price index rose 1.8% y-o-y in November 2016 mainly contributed by the 3.8% y-o-y increase in food and non-alcoholic beverage, while prices of clothing and footwear continued to drop an average of 0.4% y-o-y throughout 2016, which signals stiff price competition. In addition, the consumer sentiment index for 3QFY16 dropped to 73.60 (-4.9 points), which is attributable to the pessimistic view of consumers towards the current economic environment. Due to the rising prices of consumer staples, spending on consumer discretionary items is expected to reduce. These factors will retain pressure on top-line revenue, coupled with high operating costs; we do not expect that the retail segment will show a meaningful recovery in 2017.

The property management segment shows limited growth. With the subdued performance of its retail segment, Aeon’s operating profit has largely been contributed by the property management segment with an operating profit of RM54.65 million, a 5.38% growth y-o-y; RM49.29 million, a 6.39% decline; and RM51.25 million, a 0.71% growth, from first to third quarter respectively. The property management segment shows un-aspiring operating profit growth due to the higher operational costs arising from the opening of three new shopping malls in FY16 — Aeon Shah Alam, Aeon Kota Baru and Aeon Ipoh Falim. Thus, operating margin has declined to as low as 33% in FY16 compared to the average of 39% in the past three years. Aeon also targets to open another two shopping malls in 2017 — Aeon Bandar Dato Onn, Iskandar Malaysia and Aeon Kuching, Sarawak in addition to the 27 shopping malls it manages at the end of 2016. The property manage-ment services industry is equally affected by the current challenging business climate, which has affected tenants’ sales performance and their ability to sustain shopping mall rentals and hence, the competition for tenants and rental pressure remains. Hence, we remain cautious on the outlook for this segment.

We are revising our FY16 and FY17 earnings by -0.62% and -48.53% respectively. The downward revision is due to the unlikely event 4QFY16 results for the retail segment will record a y-o-y growth despite being the segment’s best performance that year; the expectation that retail segment performance will remain subdued in 2017 with a growth at best of +4%; and potential challenges the property management segment might face in maintaining tenants amidst the challenging business climate. — MIDF Amanah Investment Bank, Jan 13