AEON is acquiring 23 acres of commercial land in Seremban 2 for RM103m cash on which it intends to build an extension to its existing mall. We believe the premium land pricing is justifiable given the location next to its existing mall. We are positive on the acquisition as it will increase its scale of operation in Seremban with a growing middle class population. We maintain our forecasts, TP of RM1.21 and MARKET PERFORM rating.

AEON is acquiring 23 acres of commercial land in Seremban 2, Negeri Sembilan from Real Attraction Sdn Bhd (controlled by the founder of construction company Road Builder, Tan Sri Dato’ Sri Dr. Chua Hock Chin) for RM102.89m cash. The land is located just next to AEON Mall in Seremban 2 and as such AEON plans to construct an extension to be linked to the existing mall to expand its operation in Seremban 2.

At RM102.50 per sq ft (psf), the pricing is at a premium to the asking price of RM87 psf of a 2.6-acre commercial land in Seremban 2. We believe the premium is justifiable given that the land to be acquired is located just next to AEON’s existing mall.

The RM103m outlay will raise AEON’s net debt and gearing of RM149.9m and 0.08x as at end-Mar 2024 to RM252.9m and 0.13x, respectively, which are still highly manageable.

We are positive on the acquisition as it will increase its scale of operation in Seremban—the capital city of Negeri Sembilan with a growing middle class—over the medium to long term.

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 as additional earnings from the mall extension will come in beyond our forecast period.

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. Maintain MARKET PERFORM.

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 cos pressures.

Source: Kenanga Research - 5 Jun 2024