AEON Co (M) Bhd (Aug 27, RM1.65)
Downgrade to market perform with a lower target price (TP) of RM1.70: First half of financial year ended 2019 (1HFY19) core net profit (CNP) of RM55.6 million (-4% year-on-year [y-o-y]) came in below expectations of our and consensus at 39% and 42% of full-year estimates due to weaker-than-expected second quarter FY19 (2QFY19) sales, which should have been one of the stronger quarters on seasonality. No dividend per share was declared for the quarter as expected.
Quarter-on-quarter, 2Q19 CNP plunged 39% mainly due to: i) lower sales (-9%), despite the sales-boosting Hari Raya Aidilfitri festive season from softer demand post stronger Chinese New Year season sales in the previous quarter, with lower retailing segment sales (-10.4%), but softer drop in property management services (-0.1%) from higher rental space from the new mall; and ii) higher effective tax rate of 51.3% (1Q19: 41.4%). Y-o-y, 1HFY19 CNP decreased 0.3%, despite higher sales (+6%) mainly from the changes in accounting standards of the Malaysian Financial Reporting Standards 16 (MFRS 16). The higher operating expenses (+4%) was well-contained, rising lesser than sales from higher rental and utilities in tandem with the opening of two new malls since 1H18. The stronger sales were attributed to higher contribution from the new AEON Mall Kuching and maiden contribution from the new AEON Mall Nilai, Negeri Sembilan and its other shopping malls that were renovated and expanded. CNP was cushioned by the lower effective tax rate at 45.5% (1H18: 52.0%).
The management highlighted that for the retailing space, it will continue to refurbish selected stores and employ appropriate marketing and pricing strategies, merchandise assortment reformation, maintaining quality customer service and further expand its ecommerce presence. For property management services, it expects occupancy and rental rates to remain challenging. AEON Co (M) Bhd will continue to leverage on its competitive strengths to draw customer traffic to its malls to maintain its position as a popular shopping destination.
We cut our FY19 and FY20 CNP forecasts by 25% to 21% to reflect lower-than-expected sales as well as adjusting for a higher effective tax rate of 48% (previously at 40%) and lease interest charges under MFRS 16. Downgrade to “market perform” from “outperform” with a lower TP of RM1.70 (from RM2.10) based on an unchanged 21 times financial year ending 2020 (FY20) earnings per share, at -1.0 standard deviation of its five-year historical mean price-earnings ratio. Risks to our call include: 1) lower-than-expected sales; and 2) higher-than-expected operating expenses. — Kenanga Research, Aug 27
This article first appeared in The Edge Financial Daily, on Aug 28, 2019.