AEON's FY23 results beat our forecast but met market expectations. Its FY23 turnover was flattish while net profit increased by 3%. Consumer spending sentiment is likely to remain subdued amidst sustained high inflation. Nonetheless, we raise our FY24F earnings forecasts by 8%, lift our TP by 9% to RM1.00 (from RM0.92) but maintain our UNDERPERFORM call.

AEON's FY23 net profit beat our forecast by 8% but only met market expectations. The variance against our forecast came primarily from a bumper 4Q driven by stronger-than-expected sales and margins. It declared a 4.0 sen DPS (a payout ratio of 49%), mirroring the previous year's distribution.

YoY, its FY23 turnover was flattish. A 2% decline in retail business revenue, was cushioned by a 10% rise in property management services revenue. The softer performance of its retail business could be attributable to a weakened spending sentiment coupled with the disruption from store closures for renovation. Conversely, its property management segment benefited from higher occupancy rates and favourable rental renewals.

Its EBIT fell by 10%, we believe, on heavier price discount and higher staff and utilities costs. Nevertheless, its net profit increased by 3%, thanks to a lower effective tax rate.

QoQ, its turnover increased by 8% in 4QFY23, fuelled by a 9% rise in the top line performance at its retail business on festive and year-end holiday shopping and a 5% improvement at its property management division on improved occupancy rates and effective rental renewals. Its EBIT surged by a steeper 39% primarily due to better cost absorption on a significantly expanded top line.

Outlook. Over the immediate term, consumer spending sentiment is likely to remain subdued amidst sustained high inflation and the lack of clarity over subsidy rationalisation. Once subsidy rationalisation measures are revealed during the year, we believe consumers will gradually “come to terms” with them and resume spending within their means. A gradual pick-up in the local economy and job market in-line with the recovery in the global economy in the later part of the year may also help.

Forecasts. We raise our FY24F net profit forecast by 8%, taking into account improved margins and lower interest expenses. We also introduce our FY25F numbers.

Valuations. Consequently, we raise our TP to RM1.00 (from RM0.92 previously) based on an unchanged 12x FY24F PER, at 20% discount to the departmental store/apparel players’ average historical forward PER of 15x to reflect the eroded spending power of their target customers, i.e. the M40 group. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) a strong recovery in consumer spending as inflation cools or the impending subsidy rationalisation turns out to be less painful to consumers, (ii) industry consolidation keeping competition in check, and (iii) cost pressures to ease.

Source: Kenanga Research - 26 Feb 2024