David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Someone is getting it badly wrong on Japan's biggest retailer.

Analysts haven't had a single buy rating on supermarket and mall giant Aeon Co. since September 2015, according to data compiled by Bloomberg. But the stock has risen by nearly one-third since March 2015, the last time two separate analysts thought it worthy of a "buy."

Overdue an Upgrade
Equity analysts are finally coming round to shareholders' view of Aeon
Source: Bloomberg

With annual results due Wednesday, Aeon sits on a blended forward 12-month price-earnings ratio of 62 -- not far behind Inc.'s 66, and well above the 16 median of global retailers with at least $10 billion in annual sales. On the less predictive measure of historic price-earnings ratios, it's the most richly valued member of that group, on 223, compared with Amazon's 183, Alibaba Group Holding Ltd.'s 54, and Inditex SA's 33.

Big in Japan
Aeon's price-earnings ratios are among the highest in the global retail sector
Source: Bloomberg
Note: Shows only retailers with at least $10 billion in trailing 12-month sales. Shows only top 10 retailers by blended forward 12-month price-earnings ratios. Rite Aid is the subject of a takeover bid from Walgreens Boots Alliance Inc. doesn't have a historic p/e ratio because it made losses in the previous period.

What's going on?

It's not hard to see why analysts are down on the stock. Japan's retail industry is highly fragmented, with Aeon's 4 percent share enough to make it the market leader in 2016, according to Euromonitor International. Even in the fields of supermarkets and mixed retailing, where it's also the biggest player, the company has respective market shares of 8.6 percent and 19 percent, according to Euromonitor.

You Can Bank on It
The low margins in Aeon's main retail chains make it a financial services company in all but name
Source: Company reports, Gadfly calculations
Note: Based on 2016 fiscal year numbers.

Large-format retailers where Aeon dominates have been losing ground to convenience stores like those run by Seven & i Holdings Co. and FamilyMart UNY Holdings Co. for several years, as Japan's population ages and people turn to local outlets. Margins in its core chains are now so low that Aeon typically makes the bulk of its earnings from financial services and shopping mall development -- businesses that account for less than 10 percent of revenue.

That might be part of the explanation, though. Aeon's financial and real estate businesses are huge, with 4.7 trillion yen ($43 billion) in gross assets and 162 billion yen of Ebitda in the year through February 2016.

Apply the median Ebitda multiple of 15.23 for Japanese financial companies to that sum and give the units a share of Aeon's cash proportionate to their debts, and the market cap of the businesses alone should be about 1.63 trillion yen -- more than the 1.44 trillion yen value for the group as a whole.

Low Prices Everyday
Aeon's operating profits are recovering, but it's no growth stock
Source: Bloomberg

Unfortunately, you can't wish away the retail stores with which the finance units are intertwined. Full-year operating profit at the group as a whole will rise about 4 percent to 185 billion yen, the Nikkei Asian Review reported last week, without saying where it got the information -- markedly below the 7.4 percent gain the company forecast as recently as January. Revenue will be flat at 8.2 trillion yen, Nikkei reported, in contrast to the company's 8.4 trillion yen forecast.

There are significant headwinds to improving that picture -- particularly the uncertain turnaround of the Daiei Inc. chain, which Aeon took over in 2014.

Analysts have lifted their price targets 18 percent so far this year, bringing their discount to the share price close to the narrowest levels since 2014 The challenges of flat growth, fragmented markets and unprofitable stores suggest a sustained recovery remains a way off. Aeon's worst years may now be behind it -- but it's no

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Book-value estimates tend to be better for financial companies, but it's hard to work out such a number for Aeon's financial-services units. Subtracting the value of gross debts, banking and lessee deposits from their gross assets, you get a figure of 1.11 trillion yen, but that's almost certainly an overestimate. At the median 0.96 book-value multiple for Japanese financial-services companies, it would suggest a valuation of 1.07 trillion yen.

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