Earnings for AEON from property management seen to be resilient

This article first appeared in The Edge Financial Daily, on October 19, 2018.
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AEON Co (M) Bhd
(Oct 18, RM1.67)
Maintain buy with an unchanged target price (TP) of RM2.50:
Relating to the court case for the tenancy at AEON Mall Bukit Tinggi, the two parties have resolved the year-long proceeding, followed by a six-year lease renewal. Our earnings forecasts and RM2.50 TP for AEON (pegged at 28 times financial year 2019 [FY19] price earnings ratio [PER] at +0.5 standard deviation of mean) are intact as AEON’s tenancy in the said mall is status quo.

 
Pertaining to AEON’s suit against Gemilang Waras Sdn Bhd, the two companies have reached an amicable settlement and entered into a supplemental lease agreement for the renewal of AEON’s lease for AEON Mall Bukit Tinggi for a term of six years with a six-plus-three-year option (total 15 years). Hence, AEON and Gemilang Waras have proceeded to withdraw their respective appeal and cross appeal.

To recap, on Nov 9, 2017, AEON commenced a suit against Gemilang Waras — mainly to prevent the said company from terminating its lease agreement and evicting AEON and its tenants from AEON Mall Bukit Tinggi. On April 27, 2018, the High Court ruled in favour of Gemilang Waras, and AEON proceeded with its appeal and stay applications.

Our FY18 to FY20 earnings estimates are unchanged as previously we have not imputed any earnings impact from the aforementioned court case pending its final outcome. We understand that AEON Mall Bukit Tinggi contributes approximately 8% to AEON’s revenue per annum (retailing plus property management services segments).

We believe AEON’s current valuation of 19 times FY19 estimate PER is undemanding, backed by resilient earnings from the property management services segment (82% of AEON’s first half of FY18 operating profit) and earnings upside potential from the gradual recovery of the retailing segment’s margin (from lower operating expenditure and better product mix).

There are several risk factors for our earnings estimates, TP, and rating for AEON. Shortfall in the retailing segment’s sales and higher-than-expected operating expenses may lead to lower earnings for AEON. Increasing competition and weak consumer sentiment are additional earning risk factors. — Maybank IB Research, Oct 18