Review

• Aeon Co. (M) Bhd’s (AEON) 9MFY23 core earnings of RM77.6mn (- 14.5% YoY) came in at 68% and 62% of ours and consensus’ full-year estimates, respectively, after stripping off the c.RM9mn fair value gain from lease de-recognition of Kota Bahru land and other one-off items. We view the results to be within our expectations as we anticipated stronger sales would materialise only in 4QFY23 following the reopening of the AEON malls at Ayer Keroh and Cheras Selatan.

• No dividend was declared for the quarter under review.

• YoY, 9MFY23 revenue registered a flattish growth of 0.5% compared to 9MFY22 on the back of improving tenancy renewal and occupancy rate in the property management segment, partly offset by the decline in the retail segment owing to the high base effect and low seasonal. Consequently, the group EBIT plunged 15.5% due to higher OPEX.

• QoQ, 3QFY23’s revenue tumbled to RM955.9mn (-7.5% QoQ), attributed to higher festive spending during 2QFY23 across the boards. In tandem with the decline in topline, the group EBIT was down by 23.2% QoQ to RM55.8mn. Notably, the effective tax rate of 52.2% (+13.8ppt QoQ) was largely underpinned by non-tax-deductible items during the partial closure of the two AEON malls for renovation.

• Retail Segment. The 9MFY23’s sales revenue and EBIT declined by 1% and 15.3% YoY, respectively, owing to the high base effect during 9MFY22 and partial closedown in the two malls during ongoing renovation work. To recap, the AEON malls at Ayer Keroh and Cheras Selatan have been partially closed since 2QFY23 for rejuvenation purposes, with only basic grocery and food lines operating as usual. That said, there was an improvement in the segmental cost of goods sold (COGS) by mid-single digits, primarily due to reduced inventory changes. Nonetheless, this improvement was partly muted by the rising OPEX (i.e., the utility costs and wage expenses).

• Property Management Segment. The segmental turnover and EBIT grew 9.4% and 22.4% YoY, respectively, thanks to higher occupancy rates and rental renewal. Per the guidance, we learned that the occupancy rate was 91.8% (versus 90.3% in 9MFY22). Note that the segmental income was not affected by the closure of two AEON malls because the tenants were obligated to pay a lump sum for maintenance and renovation fees, an amount nearly equivalent to their rental fees. A pre-tax fair value gain of c.RM15mn was realised for the quarter under review due to the lease de-recognition after acquiring the Kota Bahru land, the site of its mall. With an estimated effective tax rate of 40%, we anticipate the group’s core earnings to be impacted by c.RM9mn from this fair value gain.

Impact

• No changes to our FY23-25 earnings projections.

Outlook

• The company is cautiously optimistic about its business outlook, aiming to leverage its ecosystem to strengthen partnerships with tenants and suppliers, particularly in the face of rising OPEX. As we approach the end of 2023, the company remains committed to offering more attractive promotional mixes during anniversary sales to engage customers effectively. Meanwhile, the company also guided that there will be a new AEON store to be established at Setia City Mall on 1QCY24.

• Additionally, we gather that the sales and foot traffic have grown significantly since the reopening of AEON Ayer Keroh Mall on November 1, 2023. Consequently, we anticipate that the timely reopening of Ayer Keroh and Cheras Selatan malls (expected by early December 2024) will help capture year-end festive sales.

Valuation

• Reiterate Buy on AEON with an unchanged target price of RM1.57/share based on DDM valuation approach (k: 7.1%; g: 3.0%).

Source: TA Research - 27 Nov 2023