AEON ... May10

AEON Co. Bhd’s (AEON) profit before tax of RM59.4 million for the 1QFY10 was 57.26% better than 1QFY09. This was achieved as a result of a series of operational and business measures that AEON had embarked in the past 18 months to boost its operational efficiency. We noticed that AEON’s profit margins improved from merely below 5% to above 7% in the past two quarters, hence we expect this trend to continue thus we upgraded our earnings target price to RM6.60 from RM5.90 previously.

Highlights
o Revenue 1QFY10 increased marginally by 4.7% Y-O-Y (within our expectation) – For the period ended March 2010 (1QFY10), AEON reported a 4.7% increased in revenue,
y-o-y, a mild yet balanced improvement in both the retail and property management segments, in tandem with the economic growth during the period. In addition, q-o-q
revenue declined by 26.0% was also within our expectation. Our study shows that since 2006 AEON’s 1Q revenue had the tendency to decline from previous quarter mainly due to consumer spending patterns. Contributions of revenues from
new store openings in the past 18 months have in fact reduced the rate of decline in 1QFY10 to the least since FY2006.

o Profit Before Tax surged by 57.3% Y-O-Y (within our expectation) - PBT surged 57.3% y-o-y was due to substantial improvement in margins from around 5.0% to above 6.0% in the retailing segment, whilst the property management services continue to contribute stable recurring earnings at steady growth of around 4% per annum to
AEON. For q-o-q, AEON’s PBT declined of 23.7% was within our expectation. The rate of decline was actually the lowest in the past four financial years.

o Better Outlook as consumer spendings are expected to pick up further. We anticipate that AEON’s revenue would experience a great surge as consumer spendings are expected to swell as domestic economy recovers. A full swing contributions from stores that opened in the previous year as well as in the first half of this year are expected to boost AEON’s revenue for FY10 and beyond.

o BUY with new target price RM6.60 – We have upgraded our forecast of FY10 AEON’s earnings per share to 55.0 sen from 42.4sen previously. By pegging our estimated industry PER of 12x for AEON, we derive our target price at RM6.60. BUY target price to RM6.60 which offers a 32% upside potential from current price. Key downside risks
include: i)substantial margin deterioration in the next three quarters and ii) sudden deterioration in domestic economy.