PP 7767/09/2010(025354)

10 August 2010
Corporate Highlights
Malaysia RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
V is it No te Company No: 233327 -M

10 August 2010
MARKET DATELINE

AEON Co Share Price

Fair Value
:
:
RM5.07
RM5.28
Slower-Than-Expected SSS Growth In 1HFY12/10 Recom : Market Perform
(Downgraded)

Table 1 : Investment Statistics (AEON; Code: 6599) Bloomberg: AEON MK

Turnover Net Profit EPS Chg PER C. EPS^ P/NTA Net gearing ROE Gr. Div.
FYE Dec
(RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) Yld. (%)
2009a 2,808.2 133.5 38.0 10.7 13.6 - 1.8 Net cash 13.8 2.3
2010f 2,971.7 144.1 41.1 7.9 12.6 41.0 1.7 Net cash 13.4 2.3
2011f 3,192.0 154.6 44.0 7.2 11.7 45.0 1.5 Net cash 12.9 2.3
2012f 3,479.8 166.6 47.5 7.8 10.9 48.0 1.3 Net cash 12.6 2.3
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC ^ Consensus Based On IBES Estimates

♦ Key takeaways from our recent company visit: 1) SSS growth is expected Issued Capital (m shares) 351
Market Cap (RMm) 1,779.6
to be lower than our previous assumptions; 2) increasing competitive market
Daily Trading Vol (m shs) 0.1
not favourable for margins; 3) the Bandar Sri Permaisuri outlet’s opening is
52wk Price Range (RM) 4.30-5.50
delayed due to some unexpected hiccups; and 4) its negotiations pertaining to Major Shareholders: (%)
the 1Utama lease is still on-going. AEON Co. Ltd (Japan) 51.0
Aberdeen Asset Mgt 6.4
♦ Lower-than-expected SSS growth in 1HFY12/10. We have previously EPF 5.1
assumed SSS for FY12/10 to be at 3.5%. However, we understand that AEON’s
1HFY12/10 SSS was at around 2%, while management is expecting full year FYE Dec FY10 FY11 FY12
SSS growth to be similar to 1H10 at around 2-3%. We are thus adjusting our EPS chg (%) (0.8) (2.2) (7.9)
Var to C.EPS (%) 0.2 (2.2) (1.1)
SSS growth assumptions to 2.5% for FY10 and 3.5% for FY11 (from 3.5% and
5% respectively). PE Band Chart

♦ Store openings to be slower in FY11. In FY10 so far, AEON has opened one
new store (AEON Bandar Mahkota) in Apr 10. We understand that there will be PER = 18x
PER = 15x
no more new store openings in FY10 and that AEON is expecting its Bandar Sri PER = 12x
PER = 9x
Permaisuri store as well as its Kinta (Ipoh) store to open at end FY11 at the
earliest. We had previously projected the Bandar Sri Permaisuri store to open
in end FY10. We understand that the delay in the Bandar Sri Permaisuri store
is due to various issues arising from the property developer side coupled with a
few hiccups from the Government in terms of required approvals.

♦ Revised down FY10-12 earnings by 0.8-7.9%. We have revised down our Relative Performance To FBM KLCI

earnings forecasts for FY10, FY11 and FY12 by 0.8%, 2.2% and 7.9%
respectively after: (1) revising our SSS growth assumptions; and 2) number of AEON Co

store assumptions.
FBM KLCI
♦ Risks. The risks include: 1) eroding market share due to intensifying
competition; and 2) weakening of domestic economic conditions which could
lead to a decline in consumer sentiment.

♦ Investment case. After cutting our earning’s assumptions, we have reduced

our fair value of AEON to RM5.28 (from 6.30) based on target of 12x FY12/11
EPS (from 14x previously). We have lowered our target PE to 12x (from 14x)
to reflect the weaker outlook caused by the erosion of AEON’s market share
given intensifying market competition. Our PE of 12x is the lower-end of
AEON’s historical PE range of 12-15x. As such, we are downgrading our call on
the stock to Market Perform (from Outperform).

Hoe Lee Leng

(603) 92802641
Please read important disclosures at the end of this report. hoe.lee.leng@rhb.com.my

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♦ Four key takeaways from our recent meeting. Our recent meeting with management has changed slightly
our perception of the outlook for FY10. Key takeaways from the recent meeting: 1) SSS growth is expected to be
lower than our previous assumptions, due to the lower-than-expected SSS in 1HFY12/10; 2) increasing
competitive market not favourable for margins; 3) the Bandar Sri Permaisuri outlet’s opening is delayed due to
some unexpected hiccups, while there will be no other store opening in 2010; and 4) its negotiations pertaining
to the 1Utama lease is still on-going.

♦ Lower-than-expected SSS growth in 1HFY12/10. We have previously assumed SSS for FY12/10 to be at
3.5%. However, we understand that AEON’s, 1HFY12/10 SSS was at around 2%, while management is expecting
full year SSS growth to be similar to 1H10 at around 2-3%. We are thus adjusting our SSS growth assumptions
to 2.5% for FY10 and 3.5% for FY11 (from 3.5% and 5% respectively). The lower SSS growth stems from: 1) a
cutback in consumer spending after the recent subsidy cuts in 2H FY12/10; 2) potential further subsidy cuts in
the FY11-12 which could weigh down on consumer spending; and 3) the implementation of GST which could
further drag down consumer spending in FY11-12 as average ticket prices increase. Despite the expected growth
in GDP for FY10 of 6.8%, the expectation is that consumer spending will not improve immediately due to the lag
effect of salary adjustments which are normally made at the beginning of the year.

♦ Supermarket division facing intensified competition. We understand that Jusco’s supermarket segment is
facing tougher times arising from the sprouting up of new smaller players i.e. 99 Speedmart, KK Mart, etc. as
well as the intensified competition from big hypermarket players such as Carrefour, Tesco and Giant. Despite the
increasingly unfavourable competitive environment for its supermarkets, we understand that AEON does not plan
to change its business model and expects to maintain its supermarket revenue contribution at 40% with the rest
coming from its department stores. Instead, it will continue to focus on improving efficiency and productivity,
while also undertaking cost-cutting measures such as energy saving. On a more general note, it plans to further
expand its margins by increasing its own brands in its product mix (both department stores and hypermarkets).
Currently, about 8% of AEON’s sales are for its own brands and it is targeting to increase this contribution to 20%
within the next 2-3 years.

♦ Store openings to be slower in FY11. In FY10, so far AEON has opened one new store (AEON Bandar
Mahkota) in Apr 10. We understand that there will be no more new store openings in FY10 and that AEON is
expecting its Bandar Sri Permaisuri store as well as its Kinta (Ipoh) store to be opened at end FY11 at the
earliest. We had previously projected the Bandar Sri Permaisuri store to open in end FY10. We understand the
reason for the delay in the Bandar Sri Permaisuri store is due to various issues arising from the property
developer side coupled with a few hiccups from the Government in terms of required approvals. We are thus
reducing our new store growth assumption to 0 (from 2 previously) for FY11, and maintaining our 2 store growth
assumption for FY12. Although at first glance the delay might seem detrimental to AEON, we believe that it is not
such a bad thing as it was recently reported in the media that the retail property market is likely to face an
oversupply in FY10. This oversupply would put pressure on rental margins as shopping malls try to secure
tenants. Furthermore, it is expected that the retail market in Cheras (near where Bandar Sri Permaisuri is
located) will be even more competitive with at least five new retail centres expected to be opened in FY10, thus
amplifying the negative impact arising from saturation.

♦ 1Utama lease still in negotiations. Management informed us during the meeting that it is still in negotiations
with 1Utama for the property management of 1Utama’s old wing. To recap, 1Utama provides AEON with
approximately 8-9% of revenues for both its property management and its Jaya Jusco store. Our opinion is that
AEON’s Jaya Jusco will be able to stay as the anchor tenant for 1Utama, although we are not so confident that it
will be able to renew its property management of the old wing. We understand that the property management
side contributes around 3-4% of revenues, which we have already previously discounted in our forecasts. That
being said, we expect a final outcome to be known by the end of Aug 10.

Risks

♦ Risks to our view. The risks include: 1) eroding market share due to intensifying competition; and 2) weakening
of domestic economic conditions which could lead to a decline in consumer sentiment.

♦ Mitigating factors. Mitigating factors to the risks include: 1) ability in fending off competition due to its strong
customer loyalty programme which now has 820,000 members; and 2) improving consumer sentiment from
better economic indicators.

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Forecasts And Assumptions

♦ Revised down FY10-12 earnings by 0.8-7.9%. We have revised down our earnings forecast for FY10, FY11
and FY12 by 0.8%, 2.2% and 7.9% respectively after: (1) revising our SSS growth assumptions; and 2) number
of store assumptions.

Valuations And Recommendation

♦ Downgrade to Market Perform. After cutting our earning’s assumptions, we have reduced our fair value of AEON
to RM5.28 (from 6.30) based on target of 12x FY12/11 EPS (from 14x previously). We have lowered our target PE
to 12x (from 14x) to reflect the weaker outlook caused by the erosion of AEON’s market share given intensifying
market conditions. Our PE of 12x is the lower-end of AEON’s historical PE range of 12-15x. As such, we are
downgrading our call on the stock to Market Perform (from Outperform).

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Dec (RMm) FY09a FY10F FY11F FY12F FYE Dec FY10F FY11F FY12F

Turnover 2,808.2 2,971.7 3,192.0 3,479.8 Number of new stores 2 0 2

(Jusco)
Turnover growth (%) (18.2) 5.8 7.4 9.0 Same store sales growth (%) 2.5 3.5 5.0

Cost of Sales (1,913.6) (2,032.8) (2,193.3) (2,399.5)

Gross Profit 894.6 938.9 998.7 1,080.4

EBITDA 347.3 359.7 376.6 402.2

EBITDA margin (%) 12.4 12.1 11.8 11.6

Depr&Amor (150.0) (148.1) (150.6) (155.0)

Net Interest (2.8) (2.7) (2.0) (2.1)

Pretax Profit 194.4 208.9 224.0 245.1

Tax (60.8) (64.8) (69.4) (78.4)
Net Profit 133.5 144.1 154.6 166.6
Source: Company data, RHBRI estimates*

Chart 1: AEON Technical View Point

♦ The share price of AEON retreated sharply after
touching a high of RM5.64 in May 2008, but
managed to stabilise near the long-term support at
the UTL near RM3.44 – RM3.80 region in Mar 2009.

♦ The stock launched a steep technical rebound last

year and reached at above the RM5.04 level in Jan
2010, but failed to sustain above that level.

♦ However, following a mild consolidation near

RM4.70 – RM4.90 region, the stock regenerated a
technical recovery leg and managed to pierce
above the RM5.04 significant resistance level in the
recent trading.

♦ Closed with a negative candle and a poor

momentum reading, the stock is threatening to fall
to below the RM5.04 level, which could trigger a
correction in its share price in the near term.

♦ Technically, although the stock remains soundly

above its long-term UTL, it still faces significant risk
of follow-through profit-taking pressure ahead.

♦ Investors should use RM5.04 as a trigger for the

short-term technical outlook on the stock. Losing
this level indicates a short-term “sell”, but a
sustainable trade at above this level implies further
upside potential to RM5.50.

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IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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