Aeon Co (M) Bhd
(Nov 5, RM11.90)

Maintain sell with target price of RM9.30: Aeon Japan is buying Carrefour Malaysia. Cannibalisation is expected to be minimal at this stage, since Aeon BIG will comprise hypermarkets with a different target audience.

Moreover, based on our research, there are only about eight out of 26 Carrefour (M) stores within a 2km radius of an Aeon (M) store. Positively, with an enlarged presence in Malaysia, there are potential synergies in aspects such as information technology, distribution network and product development.

The price tag of RM990 million is slightly  higher than our expected RM900 million and it equates to a price-to-sales ratio of 0.58 times, compared with 1.19 times at which Carrefour Thailand was sold and AEON Malaysia’s 1.32 times.

Post-acquisition, Carrefour Malaysia will be rebranded AEON BIG, under the independently operated Aeon BIG (M) Sdn Bhd. We are neutral on this deal — there is no financial impact to Aeon (M) Sdn Bhd and we do not expect much  cannibalisation at this stage.

Aeon Japan has plans to open 100 stores in various formats in Malaysia and aims to achieve ¥300 billion (RM11.45 billion) in revenue by 2020. It is unclear at this stage as to what this strategy entails. It is also not certain as to how Aeon Malaysia would feature within this overall strategy.

Applying Aeon Malaysia’s five-year average retail earnings before interest and tax (Ebit) margin of 5%, Aeon BIG could generate operating profit of RM85 million on the back of RM1.7 billion revenue if the turnaround plan succeeds. Aeon Japan will study the performance of each store and would not rule out closing non-performing Carrefour stores.

We maintain our “sell” call, but the turnaround and future injection of Aeon BIG into Aeon Malaysia, if on the cards, could result in a re-rating of the stock. If integrated, Aeon Malaysia would be the second largest retailer in Malaysia after GCH Retail (M) Sdn Bhd, which runs the Giant stores, generating annual sales of close to RM5 billion. — Maybank IB Research, Nov 5

This article first appeared in The Edge Financial Daily, on Nov 6, 2012.