• Maintain NEUTRAL, new DCF-derived MYR1.26 TP from MYR1.15, 4.9% upside. AEON Co M’s 1Q24 results are above expectations, thanks to stronger-than-expected festive season consumer spending. That said, we maintain our cautious outlook, due to the highly competitive nature of the retailing industry as well as persistent inflationary pressure, which will impact discretionary spending. Its current valuation (-1SD) is fair, considering the unexciting outlook, thin margins and lacklustre ROE.

• 1Q24 results above estimates. Net profit of MYR57.5m (+50.5% YoY) accounted for 47% and 45% of our and consensus full-year forecasts. The positive deviation was due to better-than-expected festive sales and margin expansion from operating leverage for the retail segment.

• Results review. YoY, 1Q24 revenue rose by 5.5%, thanks to better results from both the retailing (+4.2% YoY) and property management (+13% YoY) segments. Both segments benefited from the more favourable timing of the Lunar New Year (2024: 10 Feb vs 2023: 22 Jan) and Aidil Fitri (2024: 9 Apr vs 2023: 23 Apr), where festive spending was captured in 1Q24. 1Q24 EBIT margin expanded by 2.4ppts to 10%, likely due to higher sales which in turn led to operating leverage. QoQ, 1Q24 sales jumped 13% from an increase in festive spending. Consequently, 1Q24 net profit rose by 76.4% QoQ to MYR57.5m.

• Outlook. We expect sales to soften in the near term due to seasonal factors, following a strong 1Q performance. Beyond the immediate term, management remains cautious about elevated inflationary pressures and forthcoming subsidy rationalisation, which could dampen consumer spending. Hence, AEON plans to maintain its robust marketing efforts and offer promotional discounts to stimulate consumer spending. Additionally, given the competitive nature of the industry and the saturation of retail space, the company will focus on rejuvenating its malls to enhance the shopper experience and improve competitiveness. Further ahead, it plans to launch a new mall at KL MidTown in FY25-26, with a focus on mid- to high- income customers and an upscale concept.

• Forecast and ratings. Post-results, we raise FY24-26F earnings by 13% after revising our sales and margin assumptions for the retail segment. Our DCF- derived TP drops to MYR1.26 with a 6% ESG premium baked in, as AEON’s ESG score of 3.3 is above the country median. Our TP implies a 12.1x FY25F P/E (-0.5SD from its 5-year mean).

• Key upside risks include stronger-than-expected consumer sentiment and higher-than-expected opex. The opposite of such circumstances would constitute downside risks.

Source: RHB Research - 16 May 2024