Aeon faces tough operating environment

KUCHING: Aeon Co ( Malaysia) Bhd (Aeon) will likely face a tougher year next year due to the challenging retail market condition and various other factors, analysts observed.

MIDF Amanah Investment Bank Bhd’s research team ( MIDF Research) noted that the overall same- store- sales-growth (SSSG) for FY18 is expected to range between 1.5 to two per cent from a decline of 3.4 per cent recorded in FY17.

“This is supported by the tax holiday spending where revenue for retailing segment rose 11.9 per cent year- on-year ( y- o-y) in the third quarter of FY18 ( 3QFY18), and the closure of non-profitable stores such as AEON Mahkota Cheras and Index Living Mall furniture outlets.

“Nonetheless, we expect SSSG to be in the negative territory in FY19 due to the absence of aforementioned one- off factors,” it opined.

Aside from that, it pointed out that Aeon’s newer mall are expected to experience longer gestation period.

“Coupled with normalisation of SSSG, we expect that profit margin for retailing segment will continue to remain depressed given the downward pressure in average selling price (ASP) as well as expectation of longer breakeven period for stores in newer malls.

“We understand that among the newer stores, AEON Kota Bahru (1st AEON in Kelantan) and AEON Kuching (the first in Sarawak) will take approximately six years to breakeven due to the lower average spending among consumers in these states in comparison to the average four years breakeven period for stores located in the west coast of Malaysia.

“Hence, retailing segment’s performance will continue to be dragged by losses from these stores,” it explained.

As for its rental income, MIDF Research noted that to maintain the average occupancy rate above 90 per cent, the group has revised downwards the fixed rental rate.

“Moving forward, while we expect the group to maintain the fixed rental rate at current level, we view that the variable rental portion which is based on the percentage of sales could trend lower in view of heightening competition in the retail market.

“Moreover, we are expecting FY19 capital spending to reduce by 25 per cent or approximately RM100 million. In view of this, we do not think that there will be aggressive opening of new shopping malls and significant renovation,” it added.

All in, it downgraded its call on Aeon to ‘sell’ from ‘neutral’. It explained: “We re-rated the stock as we believe that the earnings volatility for the retailing segment to persist, and expected decline in contribution from property management service segment.”