AEON's 1QFY24 results beat expectations due to stronger-than- expected festive sales. We hold the view that the impact of sustained elevated inflation on consumer spending could be partially mitigated by a significant pay rise for civil servants in Dec 2024. We raise our FY24-25F earnings forecasts by 6% each, lift our TP by 20% to RM1.21 (from RM1.01) and upgrade our call to MARKET PERFORM from UNDERPERFORM.

AEON's 1QFY24 net profit of RM57.5m surpassed expectations at 49% and 45% of our full-year forecast and the full-year consensus estimate, respectively. The key variance against our forecast came largely from stronger-than-expected festive sales. No dividend was declared during the quarter as expected.

YoY, its 1QFY24 turnover increased by 5.5%, fuelled by a 4% rise in retail sales. This uptick was largely due to increased festive spending, particularly in food and clothing. Its property management services revenue also grew by 13%, supported by a rise in occupancy rates (93.6% vs. 91.6%) and favourable rental renewals. Its EBIT improved by a sharper 40% mainly due to increased contributions from the higher-margin soft-line segment (i.e. textile, footwear) and enhanced margins in the property management division, following improved occupancy rates and effective rental renewals.

QoQ, its turnover rose by 13%, driven by a 14% increase in retail top line performance, attributable again to festive spending, and a 7% improvement in the property management division due to better occupancy rates and rental strategies. Its EBIT surged by 51%, primarily due to more effective cost absorption alongside significant top-line expansion.

Outlook. We remain cautious over its near-term outlook given subdued consumer spending on sustained elevated inflation and consumers’ anxiety over the impending fuel subsidy rationalisation. On a brighter note, a 13% salary increase for civil servants from Dec 2024 should at least partially restore spending power of consumers.

Forecasts. We raise our FY24-25F net profit forecasts by 6% each, having reflected: (i) smaller contractions for our same-store sales growth (SSSG) assumption at -2.0% and -0.6% (vs. -2.5% and -1.3% previously); and (ii) a slightly higher blended EBIT margin assumption of 6.7% for both years (vs. 6.6% previously).

Valuations. Correspondingly, we lift our TP by 20% to RM1.21 (from RM1.01) based on a higher targeted FY25F PER of 13.5x. This represents a 10% discount to the departmental store/apparel sector's average historical forward PER of 15x, narrower from 20% we assumed previously, largely to reflect reduced earnings risk with partial restoration of consumer spending power by the civil servant pay rise. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like AEON for: (i) being a proxy to consumer spending locally; (ii) its unique business model as mall operator that offers control over mall tenant mix coupled with recurring rental incomes, and (iii) its strong brand name with a long presence in the local market. However, we are mindful of the cautious consumer spending at present due to high inflation.

Risks to our call include: (i) consumer spending weighed down by high inflation, subsidy rationalisation and a weak job market; (ii) an influx of new players, intensifying competition for footfall, and (iii) escalation in cost pressures.

Source: Kenanga Research - 16 May 2024