AEON: Tentative Signs of Recovery Appear

Background

AEON Co. (M) Bhd ("AEON") was incorporated on September 15, 1984, and listed on Bursa Malaysia in 1997. It is the leading chain of General Merchandising Stores and supermarkets in Malaysia, where most of its outlets are situated in suburban residential areas and catering for the middle income group. AEON Group is also involved in specialty store operations, shopping canter development and operations, credit card business and services.

Past Financial Performance 

AEON's profits peaked in FY2013 and then went into a decline for 3 years in FY2014-2016. Despite a lethargic top-line, AEON's bottom-line reversed in FY2017 due to higher margin and better operation expenses control.


Graph 1: AEON's last 9 yearly results

Recent Financial Performance 

For QE31/12/2017, AEON's net profit rose 321% q-o-q or 26% y-o-y to RM39 million while revenue rose 11% q-o-q or 5% y-o-y to RM1.07 billion. The profit before tax increased by 28.5% q-o-q due to higher margin and better operation expenses control.


Table: AEON's last 8 quarterly results


Graph 2: AEON's last 44 quarterly results

Latest Financial Position

As at 31/12/2017, AEON's financial position is deemed weak with current ratio at only 0.34x and total liabilities to total equity at 1.25x. The extremely low current ratio is due to the use of short-term borrowings and suppliers' credit to finance its property, plant & equipment which amounted to RM3.50 billion as at 31/12/2017. This low level of liquidity can be addressed by capital-raising or by monetizing the shopping centers owned by the group.

Valuation

AEON (closed at RM1.61 yesterday) is now trading at a PE of 23 times (based on last 4 quarters' EPS of 6.86 sen). At this PER, AEON is fully valued. If profit recovery materializes, then PER would drop and the stock will be more attractive.

Technical Outlook

AEON has broken below its long-term uptrend line, SS at RM1.60. If it can recover back above this support, the slow recovery may begin.


Chart 1: AEON's monthly chart as at Mar 1, 2018 (Source: ShareInvestor.com)


Chart 2: AEON's weekly chart as at Mar 1, 2018 (Source: ShareInvestor.com)

Conclusion

Based on improved financial performance, AEON could be a good stock for a recovery play.

Note:
I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.