AEONCo ... Grapple With Weak Consumer Senti, High Opex & New Competitors !

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.