Aeon Co (M) Bhd 
(Aug 28, RM2.78)
Maintain neutral with a lower target price (TP) of RM2.70: Aeon Co (M) Bhd’s (Aeon) second quarter ended June 30 of financial year 2015 (2QFY15) sales dipped 5.4% year-on-year to RM811.1 million, mainly due to weaker consumer spending post-goods and services tax (GST) implementation, with its retail segment reporting a 7.8% y-o-y decline in revenue. 

The property management segment, on the other hand, continues to be the saving grace for the group, having posted 8.7% y-o-y sales growth, mainly on contributions from its new shopping centres. Last year, Aeon opened a new store in Quill City Mall, Kuala Lumpur, and two new malls in Bukit Mertajam and Taiping. 

2QFY15 earnings before interest and tax margin, however, plunged to 3.2% (1QFY14: 8.4%) as its retail business recorded a segmental loss of RM18.3 million during the quarter. This can be attributed to slower sales growth, higher operating costs, and greater initial costs associated with new store openings. Sequentially, 2QFY15 revenue and earnings declined 30.3% q-o-q and 52.5% q-o-q respectively, due to strong pre-GST buying in 1QFY15.

As we are turning utterly cautious about the GST impact on Aeon’s retail business, we trim our FY15 to FY17 forecast earnings by 16.1% to 20.3% after factoring in slower same-store sales growth and higher operating expenditure structure. Further weakening in consumer sentiment and intensified competition remain key risks. 

We fine-tune our discounted cash flow-derived TP from RM3.09 as we lift our weighted average cost of capital rate to 9.7% (from 8.3%) due to macroeconomic headwinds; this is in line with RHB Research’s revised valuation assumptions. We believe the current valuation is fair, given that our implied FY16 forecast price earnings ratio (PER) of 19.3 times is near its 5-year historical average PER of 18.3 times. 

The stock currently trades at 20.0 times FY16 PER. — RHB Research Institute, Aug 28

This article first appeared in digitaledge Daily, on September 1, 2015.