AEON Co profit seen to improve on retail sector recovery

AEON Co (M) Bhd (March 1, RM1.61)

Upgrade to buy with a higher target price (TP) of RM2.04: AEON Co (M) Bhd’s earnings for fourth quarter of financial year 2017 (4QFY17) increased to RM39.2 million, bringing its full FY17 earnings to RM105 million. After taking into account exceptional items of RM1.1 million, cumulative normalised earnings came in at RM106.1 million. This was above our and consensus expectations, accounting for 125.9% and 117.9% of full FY17 forecast earnings respectively. The stronger-than-expected FY17 performance was due to a better-than-expected profit margin of the retailing segment and a continued strong performance of property management services.

Full FY17 retailing segment revenue increased marginally by +0.2% (year-on-year) y-o-y to RM3.42 billion. Nevertheless, the operating profit (OP) grew by more than double to RM39.3 million from RM14.7 million recorded in FY16, premised on the improvement in OP margin. This was mainly due to the: i) contribution from the new store/supermarket launched at AEON Bandar Dato’ Onn, Johor Bahru; ii) full-year contribution from store launched or renovated in FY16 (AEON Tebrau City); and iii) better pricing strategies as the newly gazetted Price Control and Anti-Profiteering Act 2017 focuses more on regulating prices of food and beverage products and not on hard-line and soft-line products.

The property management services’ revenue and OP increased strongly by +10.5% y-o-y and +14.7% y-o-y respectively. This was mainly due to the contributions from the rental and property management services provided at AEON Bandar Dato’ Onn, Johor Bahru, which started operation in September 2017, and the full-year contributions from new shopping malls opened in FY16 (AEON Shah Alam and AEON Kota Baru).

Post earnings announcement, we revise our FY18 and FY19 earnings estimates upward by +29.3% and +35.7% respectively. This is mainly to account for the faster-than-expected recovery and improved OP margin for the retailing segment. We upgrade our recommendation to “buy” (previously “neutral”) with a revised TP of RM2.04 (previously RM1.70). Our TP is based on FY18 forward price-earnings ratio (PER) and earnings per share (EPS) of 27 times and 7.6 sen respectively. Our target PER is premised on the average PER of the company for the past two years.

We expect earnings to improve further going forward driven by the continuous recovery in retailing segment and the stable growth for the property segment contributed by the planned opening of one shopping mall each year for the next three years as well as a stable occupancy rates of 90%. Hence, we believe the stock is a value buy at this juncture as it currently trades at 21.4 times PER, which is approximately -1.0 standard deviation of its historical five-year average PER of 28.1 times. — MIDF Research, March 1

This article first appeared in The Edge Financial Daily, on March 2, 2018.

For more stories, download EdgeProp.my pullout here for free.