INVESTMENT HIGHLIGHTS

• FY18 normalised earnings rose by +6.6%yoy to RM113.1m, supported by the retail segment

• We expect that SSSG to be in the negative territory in absence of the tax holiday spending spree

• Rental rate expected to remain depress leading lower profit contribution from property management segment

• Maintain SELL with a revised TP of RM1.41

Earnings exceed expectations. Aeon Co. (M) Bhd (Aeon Co)’s 4QFY18 earnings came in at RM53.5m, a strong increase of +33.0%yoy. Nonetheless, its full year FY18 recorded earnings grew more marginally at +0.1%yoy. After excluding exceptional items, its full year FY18 normalised earnings came in at RM113.1m (an increase of +6.6%yoy) which exceeded ours and consensus expectations.

Retail segment boosted by one-off factors. The retailing segment’s operating profit grew by +RM12.4m to RM51.7m in FY18. Consequently, overall same-store-sales-growth (SSSG) for FY18 is expected to range between +1.5% to +2.0% from -3.4% recorded in FY17. However, we believe that this is caused by the: (i) tax holiday spending where revenue for retailing segment rose +11.9%yoy in 3QFY18; and (ii) closure of non-profitable stores such as AEON Mahkota Cheras and Index Living Mall furniture outlets during the year. Nonetheless, we expect to be in SSSG the negative territory in FY19 due to the absence of aforementioned one-off factors.

Property management services segment impacted by higher OPEX. The property management services’ FY18 revenue rose by +3.5%yoy to RM687.3m. This was mainly due to the contribution from the newly opened AEON Bandar Dato’ Onn, Johor Bahru and Aeon Kuching as well as shopping malls that has been renovated and expanded i.e. Aeon Taman Maluri and Aeon Queensbay. However, operating profit declined by -5.2%yoy to RM209.8m due to higher operating expenses incurred. Moving forward, we expect operating profit from the segment to remain depresssed. We view that the abundant supply of retails space will provide very little room for the management to charge higher rental rate.

Impact to earnings. Post earnings announcement, we are revising our FY19 and FY20 forecast upwards by +4.1% and +0.7% respectively as we input a lower effective tax rate due to the change in revenue mix. Note that historically the property management segment incurred a higher effective tax rate.

Source: MIDF Research - 28 Feb 2019