Amidst a challenging retail landscape, AEON is striving to defend its footfall via store rejuvenation and expansion, and preserve its margins by further optimising its product offerings in accordance with the income level of the population within the store vicinity. We maintain our forecasts, TP of RM1.01 and UNDERPERFORM rating.

We came away from a meeting with AEON with mixed feeling on its near- term prospects. The key takeaways are as follows:

1. Strong 1Q but cautious outlook thereafter. AEON guided for a commendable 1Q sequentially, bolstered by festive spending. However, the group predicts a shift towards more cautious consumer spending in coming quarters on elevated inflation that is eating into consumers’ spending power. Amidst a challenging retail landscape, AEON is striving to defend its footfall via store rejuvenation and expansion, and preserve its margins by further optimising its product offerings in accordance with the income level of the population around the store.

2. Defending footfall via store rejuvenation and expansion. AEON is set to commence its rejuvenation and facelift projects at several locations during the typically slower business quarters. The renovations, set for AEON IOI Bandar Puchong, AEON Bukit Indah, and AEON Tebrau City in FY24, are expected to be completed within six months and are anticipated to minimally impact business operations. By the end of FY23, the group had already completed renovations at four owned malls and plans to refurbish the balance of ten malls in the upcoming periods. Furthermore, AEON is expanding its retail footprint with new store openings at Setia City Mall in early April and at KL Midtown near the Malaysia International Trade and Exhibition Centre (MITEC) in FY25-26.

3. Preserving margins by further optimising product offerings. For its malls primarily visited by the low-and middle-income groups, AEON is putting forward more softline offerings, such as clothing. Meanwhile, for its malls with a higher concentration of mid-to-higher-income residents, it is expanding foodline offerings, particularly ready-to- serve food items. It also continues to grow private label offerings such as those under TopValu that fetch high margins but currently only make up <5% of its total revenue.

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.

Forecasts. Maintained, based same-store sales growth (SSSG) rates of - 2.5% and -1.3% and blended EBIT margin of 6.6% each in FY24-25 (vs. an estimated SSSG rate of -2.0% and EBIT margin of 7.0% in FY23).

Valuations. We also keep our TP of RM1.01 based on 12x FY25F PER, at a 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 5).

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 - 25 Apr 2024