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PP 7767/09/2010(025354)

Malaysia Corporate Highlights `

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
R e su lt s N o te Company No: 233327 -M

19 May 2010

AEON Co Share Price

Fair Value
Earnings Impact From 1U Contract Well Buffered Recom : Outperform

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.
(RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) Yld. (%)
2009a 2,808.2 133.5 38.0 10.7 13.1 - 1.8 0.1 13.8 2.4
2010f 2,997.3 145.2 41.4 8.7 12.0 41.0 1.6 Net cash 13.5 2.4
2011f 3,275.8 158.8 45.2 9.4 11.0 45.0 1.4 Net cash 13.2 2.4
2012f 3,734.7 180.2 51.3 13.5 9.7 48.0 1.3 Net cash 13.5 2.4
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC ^ Consensus Based On IBES Estimates

♦ In line. AEON’s 1QFY12/10 net profit of RM41.2m was within our and RHBRI Vs. Consensus
consensus expectations, accounting for 28% and 29% of our and consensus Above
forecasts respectively. As expected, no dividend was declared during the In Line
quarter. Yoy, net profit jumped 58.0% on the back of: 1) 4.7% increase in Below
revenue due to contributions from AEON Melaka 2 (opened in Feb 10) coupled
with SSS growth of 3-4% yoy in 1Q10; and 2) improving retail EBIT margin Issued Capital (m shares) 351
by +3.0%-pt yoy. Market Cap(RMm) 1,751.5
Daily Trading Vol (m shs) 0.2
♦ Adoption of new accounting policies. In 1Q10, AEON adopted two new 52wk Price Range (RM) 4.04-5.50
accounting policies i.e. amendments to FRS 118 and IFRIC 13. FRS 118 Major Shareholders: (%)
affects the presentation of revenue from a gross level to a net level. What this AEON Co. Ltd (Japan) 51.0
means is that AEON would now recognise sales from its concessions at a net Aberdeen Asset Mgt 17.3
level in place of a gross level, such as in the case of Parkson Retail Group. EPF 6.3
While we estimate around 25% drop in our FY10-12 revenue forecasts, our
net profit forecasts would remain unchanged. In addition, under IFRIC 13, FYE Dec FY10 FY11 FY12
AEON would have to make a one-off yearly adjustment for customer loyalty EPS chg (%) (0.8) (2.9) (2.8)
programme. Previously, AEON recognised its customer loyalty points at a cost Var to C.EPS (%) 0.9 0.5 6.9
level, which now has to be adjusted up to its revenue level. Hence, net impact
to our bottomline would remain unchanged. PE Band Chart

♦ SSS likely to be around 3-4% in FY10. Management has guided for 3-4% PER = 18x
SSS growth in FY10, which is above our expectations of 2.0% in FY10. As PER = 15x
such, we now adjust up our SSS growth to 3.5% in FY10. Our SSS growth PER = 12x
PER = 9x
estimates of 5% p.a. for FY11-12 remains unchanged.

♦ High probability of AEON losing first phase of 1U contract? According to

a recent news article, AEON will cease to manage the first phase of 1U, once
its contract expires in Aug 10. However, AEON would then obtain a larger
retail space. While we have yet to confirm with management on this matter,
we are now taking a more conservative stance and have removed the
property management income from its 1U contract from our forecasts. 1U Relative Performance To FBM KLCI
currently contributes approximately 10% of the group’s rental revenue and
operating profit. This, we estimate this would reduce AEON’s net profit by
RM6-7m on a full-year basis. Furthermore, AEON has hinted at a full scale AEON Co

refurbishment of its 1U Jusco outlet, which we believe could reduce FY10

earnings by another RM1-2m, which we have also taken into account.

♦ Forecasts. Following the above adjustments, our earnings forecasts are

reduced by 0.8-2.9% p.a. for FY10-12.

♦ 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.
Hoe Lee Leng
♦ Investment case. Following the earnings adjustment, our fair value for
(603) 92802239
AEON has been reduced marginally to RM5.80 (from RM5.85) based on
unchanged 14x (average PER for retail sector) FY10 EPS. We maintain our
Outperform recommendation on the stock.

Please read important disclosures at the end of this report. Page 1 of 3

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Table 2: Earnings Review (YoY)

FYE Dec 2009 2009 2010 % Chg % Chg

Observation/ Comments
(RMm) 1Q 4Q 1Q QoQ YoY

Turnover 697.3 742.0 730.3 (1.6) 4.7 Higher revenue yoy due to contributions from AEON Melaka 2 store
(opened in Feb 10) coupled with SSS growth of 3-4% yoy in 1Q10.

- Retailing 604.9 646.9 633.1 (2.1) 4.7

- Property mgt 92.4 95.1 97.2 2.2 5.2 Boosted by increase in lease space from the opening of new AEON
shopping centre.
EBIT 38.5 78.1 59.1 (24.4) 53.5

Net interest (0.7) (0.3) 0.3 >100 >100 Interest income of RM0.3m was recorded in 1Q10 due to net cash
income/(expense) position of RM175m vs. net debt of RM72m in 1Q09.

PBT 37.8 77.8 59.4 (23.6) 57.2 Flow through from EBIT and interest income.

Taxation (11.7) (22.0) (18.2) (17.3) 55.6

Net Profit 26.1 55.7 41.2 (26.2) 58.0 Flow through from PBT and lower effective tax rate.

EPS (sen) 7.4 15.9 11.7 (26.2) 58.0

DPS 0.0 12.0 0.0 - -

EBIT Margin (%) 5.5 10.5 8.1 2.6 2.6 Yoy, higher EBIT margin due mainly to improvements in retail margin
(+3.0%-pt yoy).

Pretax Margin 5.4 10.5 8.1 2.7 2.7

Net Margin (%) 3.7 7.5 5.6 1.9 1.9

Effective Tax Rate 31.0 28.3 30.7 (0.3) (0.3) Higher than statutory tax rate as certain expenses are not deductible for
(%) tax purposes.
Source: Company, RHBRI

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

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

Turnover 2,808.2 2,997.3 3,275.8 3,734.7 Number of new stores 2 2 2

(Jusco and MaxValu)
Turnover growth (%) (18.2) 6.7 9.3 14.0 Same store sales growth (%) 3.5 5.0 5.0

Cost of Sales (1,913.6) (2,051.7) (2,255.8) (2,583.9)

Gross Profit 894.6 945.6 1,020.0 1,150.8

EBITDA 347.3 361.5 381.6 422.9

EBITDA margin (%) 12.4 12.1 11.6 11.3

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

Net Interest (2.8) (3.0) (0.9) (3.0)

Pretax Profit 194.4 210.4 230.1 265.0

Tax (60.8) (65.2) (71.3) (84.8)
Net Profit 133.5 145.2 158.8 180.2
Source: Company data, RHBRI estimates


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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 FBM 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 FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

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

Industry/Sector Ratings

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

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

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

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