AEON Co (M) Bhd (April 13, RM2.40)

Upgrade to hold with an unchanged target price (TP) of RM2.20: Post meeting with management, we came out slightly more positive on AEON Co (M) Bhd’s earnings growth outlook. We upgrade our rating to “hold” (from “sell”) given the limited downside to our unchanged TP of RM2.20, as its share price had fallen 18% over the past 12 months, the new AEON malls are gaining traction, and we believe some recovery in retail-segment earnings would come in soon. Our earnings forecasts are intact. Our TP of RM2.20 is pegged at 28 times financial year ending Dec 31, 2018 (FY2018) price-earnings ratio.

To recap, the retail segment achieved only an RM3.3 million operating profit in 2016 (2015: RM44.5 million), largely due to high operating expenditure (opex) from its newer malls, soft consumer sentiment and stiff competition.

We think this segment could grow year-on-year (y-o-y) in 2017, as we understand that the newer malls are gaining traction (improving sales and shopper traffic) and incurring less start-up opex. Furthermore, AEON expects better sales contribution from its Mid Valley Megamall outlet post major renovation works, as the outlet had partial closures in 2016 which affected sales.

Nonetheless, we maintain our FY2017 operating profit forecast of RM4.6 million (+40% y-o-y) for the retail segment. We note that AEON plans to open one new mall in Kempas, Johor, in the second half of 2017, and one mall in Kuching, Sarawak, in FY2018 (versus two in 2016), which are in line with our forecast of one new outlet per annum.

We maintain our earnings forecasts, pending better visibility of earnings growth from the retail segment. We anticipate seasonally stronger results (y-o-y) for the first quarter ended March 31, 2017, in conjunction with Chinese New Year festive shopping and higher contributions from new stores. AEON’s earnings continue to be supported by its stable property management services segment, which contributes to 98% of our FY2017 operating profit estimate. — Maybank IB Research, April 13

This article first appeared in The Edge Financial Daily, on April 14, 2017.

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