We reiterate our BUY rating on Aeon with an unchanged target price of RM2.30. Share price has been on declining trend since 2014 tracking the net profit decline. But, we believe that the earnings could have bottomed out on the back of a recovery in retailing revenue and cost efficiency efforts by the management. An increase in consumer disposable income on a favourable 2018 budget and excitement over the upcoming general election are positive catalysts to support the gradual improvement in private consumption.

Consumer-friendly 2018 Budget

In 2018 Budget, Government has introduced several initiatives to increase the disposable income of households to spur private consumption expenditure. To recap, individual income tax cut by 2% for 3 chargeable income tax bands from RM20,000 to RM70,000 will increase disposable income by RM300 to RM1,000, resulting in an additional of RM1.5bn in disposable income. Additionally, there will be one-off special payment of RM1,500 and RM750 for government servants and government retirees which will be made in 2 tranches. RM600m will be allocated to increase monthly allowance of 144,000 senior citizens. Lastly, BRIM is maintained at RM1,200 per year. We believe that these positive initiatives should benefit broad-based affordable retailing players, such as AEON.

Excitement of General Election Is Around the Corner

Historically, Aeon’s SSSG for the retailing segment tends to perform better during general election years, such as 2004, 2008, and 2013. This could be due to the feel-good effect of government’s policies, which translate into improved consumer sentiment. As the next general election is expected before August 2018, the positive sentiment and macroeconomic indicators should lead into better performance of Aeon’s retailing segment. While SSSG is estimated to be flattish in 2017, we forecast a 3% growth in 2018.

Maintain BUY With Unchanged TP of RM2.30

Reiterate our BUY rating with an unchanged TP of RM2.30, based on a 2018E PE of 25x (slightly below its 6-year mean PE). Aeon’s share price has been trending down to -1 STD due to its earnings disappointment. We believe the worst is over as earnings recovery is likely to be extended into 2018 on the back of an improvement in retailing revenue and effective cost management. Key risks include lower-than-expected domestic consumer spending and higher-than-expected operating expenses.

Source: Affin Hwang Research - 4 Jan 2018