It has seen its earnings slipping in recent quarters as it has to grapple with weakening consumer sentiment, higher operating costs and competition from a booming e commerce market. This may weigh down on the company’s growth in 2015.
It had to spend more on marketing to buoy demand even as consumers scaled back on spending during the nine month period. Higher promotional and utility costs could contribute to a contraction in core operating profit, the retailing segment’s operating profit declined 42% to rm57.3 million for 9MFY2014.
Over the next 12 months (Jan 2015 to Dec 2015) the property division will continue to be the main earnings contributor for AEON. This division should experience relatively stable growth but higher operating, marketing and promotion expenses from the retail segment will hamper the overall performance of AEON.
It has two core business – retail and property management. For its retail segment, it operates a chain of department stores and supermarkets under the AEON name, while its property management segment focuses on shopping centre operations and rental income from retailers.
Its key risks include weaker consumer sentiment and the emergence of new competitors on the retail landscape.
It is worth nothing that the ubiquity of e commerce in China has caused stiff cross border competition in the retail segment. Rather than traditional outlets, consumers are more inclined to make purchases online.
Additionally, with the increased adoption and convenience of smartphones and tablets, expect this trend to continue in the coming years from Jan 2015 onwards. The e commerce market is booming globally.
Critics however viewed the challenges faced by AEON from online retailers will not have much impact as e commerce companies in Malaysia are mainly fashion retailers which affect just the part of its retail business.
Its revenue improved in 9MFY2014 driven mainly by netter turnover from the retail segment, a higher revenue from property management with contributions from its new shopping centres and higher rental rates and sales commissions from tenant revamps in some existing malls.
However its long term prospects are boosted by its plan to consistently increase the number of outlets.
It will continue with its plan to open six stores from FY2014 to FY2017. It plans to solidify its presence in the East Coast, starring in Kota Bharu, as well as in Sabah and Sarawak.
Its capex for FY2014 to Fy2015 will be on the high side of rm500 million to rm600 million.
Another long term catalyst could be its expansion into the furniture retail market. It had entered into a 70:30 JV with Thailand’s biggest furniture player Index Living Mall Co Ltd by opening its first home and interior furnishing store in IOI City Mall. It is still uncertain about how it will differentiate itself from IKEA, Courts and Harvey Norman.
It will tap the strong card base of AEON Big and cross sell its personal financing, credit cards, insurance and general easy payment scheme.
AEON Credit is committed to complying with the obligatory debt to equity ratio of less than 5.25 and a net cost of capital below 5%.
On a segmental basis, AEON Credit’s transaction volume in FY2014 for the vehicle easy payment segment, credit card business and personal financing recorded a growth of 77%, 15% and 3%.
SME segment is another operation that AEON Credit will strengthen.
AEON Credit max tenure for its financing portfolio is five years.
Its 1QFY2013 ended May 31 core profit of rm56 million was within market expectations.
Its interest income surged along with 44% receivables growth. Vehicle financing, which combines the motor, used car and new car segments, was the top performer with 108% year on year growth in receivables.
AEON Credit’s capital adequacy ratio, at some 19% was above the minimum 19% was also above the minimum 16% requirement due to the rm143 million perpetual notes.
Net interest margins continued to be compressed at 15.6% versus 16.7% a year ago.
Asset quality deteriorated further as its NPL ratio reached a five year high of 2.18% from 1.56% in 1QFY2014. It was noted that collection ratios fro some segments within the vehicle easy payment scheme dropped due to its exposure to low income customers.
The company is enhancing its credit scoring system and tightening its approval criteria.
Investors want more dividends having noticed that AEON has sizeable tax credits to frank them. They also want AEON – which is 51% owned by Japan’s AEON Co Ltd (AEON Japan) – to increase the free float of its shares and follow its parent in explosring the benefits of injecting its many shopping malls into a REIT.
However its executive director said the group is still in growth stage. A reason why a REIT is not materialized anytime soon is due to AEON has rm400 million cash. He declined to comment on whether the board will consider a stock split to broaden its investor base or a share placement to raise cash for expansion.
Whether its cash needs change could depend on how well its negotiations with third parties to set up the first AEON shopping mall in Sabah and Sarawak go. The East Malaysia mall will likely be built and owned by a third party and leased to AEON.
In deciding whether or not to go ahead with a REIT, AEON will need to balance the conflict between maximizing profits as a retailer and master tenant of its properties with the role of REIT owner seeking higher rent. It will also have to weigh the potential dilution of income from property management which currently (June 2013) accounts for a sizeable 43% of pre tax earnings.
There is a value in the AEON brand and its earnings have steadily grown at about 15% per annum in the past four years prior to 2013.
Sentiments are likely to be upheld by the group’s strong franchise value, stable growth momentum and expanding base of stable recurring revenue from mall management.
Its parent AEON Japan has embarked on a stock split and seems open to the idea of REIT.
Right now (June 2013), AEON Big is managed independently by AEON Japan and is not part of AEON Malaysia. There is no overlap between AEON and AEON Big in Malaysia due to their different target markets.
AEON Malaysia is first a retailer and then a property manager.
Disclaimer:
Please note that all data given are merely blogger's opinion. It is strongly recommended that you do your own analysis and research before investing.