Aeon Co (M) Bhd
(Jan 6, RM6.21)
Maintain market perform at RM6.16 with fair value RM6.47: We understand that for the 9MFY10, Aeon’s same store sales (SSS) growth remained relatively weak at less than 1%, brought down by a few poor performing stores such as its Melaka and Cheras Selatan stores. The poor performance of the stores was due to cannibalisation from its own stores in nearby locations. For Cheras, its Cheras Selatan store was competing against its own Bandar Mahkota Cheras (opened in 2008) store in terms of customer traffic, thus affecting sales.
As we highlighted in our results note dated Dec 1, 2010, Aeon’s retail earnings before interest and tax (Ebit) margin expanded strongly by 2.8 percentage points (ppts) year-on-year in the 9MFY10 to 6.3%. Management attributed the margin expansion to the cost-cutting measures Aeon has taken since end-2009. The measures involve the streamlining of separate departments, thus allocating resources more efficiently, and other cost-saving initiatives such as reducing the usage of plastic bags and electricity consumption. For FY10, management expects the retail margin to rise to circa 7% to 8%, in line with our forecast of 7% with improvement in 4Q10 coming from festive season spending. However, we understand that going forward, there will be little room for further margin improvement, thus we are leaving our FY11/12 retail margin at 7%.
Aeon is now in arbitration with the 1Utama management over the management of the shopping mall’s old wing. We believe that it is already well known that Aeon will not retain the management contract which we have already removed from our forecasts. However, we understand that Aeon is negotiating for a bigger retail space in the shopping mall in exchange for losing the management contract. Aeon is now negotiating for the new tenancy and the issues relating to rental, location, layout and size.
After adjusting our FY10 SSS growth assumptions, our earnings were revised downwards by less than 1% per year for FY10/12.
The risks include: (i) eroding market share due to intensifying competition; and (ii) weakening of domestic economic conditions which could lead to a decline in consumer sentiment. Our fair value is maintained at RM6.47 based on unchanged 12 times FY11 target price-earnings ratio. Maintain “market perform”. — RHB Research Institute Sdn Bhd, Jan 6
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