Aeon Co (M) Bhd
(Sept 15, RM3.84)
Maintain underperform with target price of RM3.14: It has been reported in the media that Aeon Co is venturing into the furniture retail market with the opening of its first home and interior furnishing store at IOI City Mall in Putrajaya in November. The store, measuring 6,800 sq m, will be run by Aeon Index Living Sdn Bhd, which is a 70:30 joint venture (JV) with Index Living Mall Co Ltd (ILM), a Thai furniture company.

Aeon Co is looking to leverage on the expertise of its partner ILM, which is the biggest player in Thailand’s furniture industry with 19 stores and 20 branches. ILM has also been expanding abroad and currently has eight branches overseas covering Asian and the Middle Eastern markets.

The JV paves the way for Aeon Co to diversify its business into new areas, on top of its current retail and property management activities. With the retail business performance being underwhelmed by soft consumer sentiment and heightening competition, innovation or diversification could be the key growth factor going forward.

Meanwhile, funding its new business is of no issue to the group judging from its net cash position.

We are generally neutral and cautious about the venture in view of the tight competition in the local home and interior furnishing market.

We reckon that the success of its new business will provide the much needed spark to its earnings growth.

With the company’s first half ended June 30 of financial year 2014 (1HFY14) results turning out to be disappointing, we expect earnings to recover in the second half, supported by better performance of the retail division in view of the festive seasons (Hari Raya in the third quarter [3QFY14] and Christmas and New Year in 4QFY14).

In a nutshell, we remain negative on the outlook of Aeon Co in view of its negative FY14 earnings per share (EPS) growth of 11%.

Meanwhile, the group would also have to deal with the challenging business environment going forward in view of the high operating costs as well as soft consumer sentiment.

We leave our earnings forecast unchanged as we do not expect significant material impact on earnings in the near term until a further concrete plan is drafted for the development of its furniture business venture.

Risks to our call include lower-than-expected operating costs and better-than-expected consumer sentiment. — Kenanga Research, Sept 15
 

This article first appeared in The Edge Financial Daily, on September 17, 2014.