AEON has launched its 40th-anniversary celebrations with the grand opening of its 35th store in Setia Alam to counter the post-festive lull. It is embarking on rejuvenation works at four malls during the low season to minimise sales disruption. We keep our forecasts, TP of RM1.21 and MARKET PERFORM call.

We came away from AEON’s analyst briefing feeling mixed on its near- term prospects. The key takeaways are as follows:

1. Strong 1Q, cautious outlook ahead. Despite robust 1QFY24 results fuelled by festive spending, AEON anticipates a cautious spending outlook due to escalating inflation which may weaken consumer purchasing power. The company also expects a downturn in its high- margin soft-line segment, which expanded by 8% YoY to RM191m, accounting for c.20% of its retail turnover in 1QFY24. The expected decrease is largely attributed to the lack of upcoming key festive events. Moreover, AEON projects a lower PAT margin for the full year, of approximately 2.5%-2.8% compared to 4.9% in 1QFY24, primarily due to the anticipated diminished contributions from its high-margin products combined with sustained cautious consumer spending.

2. Countering the post-festive lull. To counter the post-festive lull, AEON has, among others, launched its 40th-anniversary celebrations with the grand opening of its 35th store in Setia Alam last month. To mark this milestone, the group has initiated the ‘Senyum Tour’ roadshow, which features attractive discounts, exclusive promotions, and a variety of engaging activities for shoppers. Scheduled to visit AEON malls across Malaysia from April through the end of the year, the roadshow offers unique shopping experience at each location (see Exhibits1&2). Its new store in Setia City Mall, opened in early-April, has been well received as reflected in c.5k sign-ups for its AEON Member Plus card during the first week (see Exhibit 3).

3. Store rejuvenation and expansion during low season. AEON is embarking on rejuvenation and facelift works at AEON IOI Bandar Puchong, AEON Bukit Indah, AEON Ipoh Station 18, and AEON Tebrau City over the next six months, i.e. during the low season in 2Q and 3Q to minimise disruption to sales (see Exhibit 4).

4. Sustained property management services. AEON expects continued improvement in mall occupancy rates, projecting an increase to 94% by the end of FY24, up from 93.6% in 1QFY24 and 93.2% in 4QFY23, bolstered by successful mall rejuvenation projects and store facelifts. The property management services segment has demonstrated robust performance with a 13% YoY revenue growth to RM187m and accounted for 16% of the group’s turnover in 1QFY24. We believe this strong growth momentum will be sustained, driven by the improved occupancy rates and effective rental renewals.

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. Maintained, based same-store sales growth (SSSG) rates of - 2.0% and -0.6% and blended EBIT margin of 6.7% each in FY24-25F.

Valuations. We also keep our TP unchanged at RM1.21, based on 13.5x FY25F PER, at a 10% 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).

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 - 17 May 2024