We came away from Aeon Co. (M) Berhad (Aeon)’s analyst briefing yesterday with the following key takeaways:

1. Retail Margin Improvement Expected Throughout FY24

2. Ongoing Refurbishment of 4 Malls/Stores.

3. Additional 11 Malls Equipped with Solar Photovoltaic (PV) is in the Pipeline

We have revised our FY24-26 earnings forecast upwards by 2.0% to 10.5%. Maintain Buy with a revised target price of RM1.68/share, based on DDM valuation (k: 7.1%; g: 3.0%) and rolled forward our base year to FY25.

Retail Margin Expects to Improve Throughout FY24

To recap, retail segment’s revenue rose 5.5% YoY in 1QFY24, mainly driven by growth in Foodline (+0.5%-pts to 54.2%) and Softline (+0.8-pts to 19.5%). Additionally, the average basket size (ABS) in this quarter improved by 5.1% to RM69.5 (vs. 1QFY23: RM66.1). The enhancement was mainly driven by resilient festive spending, including early Ramadan and extended Chinese New Year sales.

Moving forward, the retail segment’s EBIT is expected to stabalise at 2.5% for FY24 compared with 2.4% in FY23. This projection is underpinned by the blended results throughout the year and ongoing effective cost initiatives. For instance, management plans to install more self-checkout kiosks to enhance operational efficiency, with the self-checkout rate reaching 29% in 1QFY24.

Furthermore, with the absence of seasonal sales in the upcoming 2Q and 3Q, Aeon plans to implement more engagement activities (refer to Appendix 1) to stimulate customer spending. These activities include i) providing reward vouchers for minimum spending, ii) offering attractive promotions, and iii) organising giveaways for the 40th anniversary celebration to boost its topline. As a result, the ABS for FY24 is targeted at approximately RM63 (vs. FY23: RM61.9).

The Refurbishment of the 4 Malls/Stores Is On-going

The store facelift for Aeon Bandar Puchong began in the mid-March 2024, with the facelifts for the remaining 3 malls/stores expected to commence shortly. The refurbishments for these 3 malls and a store are expected to be completed by early 4QFY24 to coincide with the heightened demand during festive seasons. Meanwhile, we expect no significant impact on the bottom line from the phased temporary closures. The estimated annual capex for FY24 is slated between RM250.0mn and RM300.0mn, which will be partially funded through borrowings. Based on our forecast, the net gearing for FY24 is expected to remain at a healthy level of 0.1x, assuming that 50% of the capex is funded by borrowings.

Additional 11 Malls Equipped with Solar Photovoltaic (PV) is in the Pipeline

Currently, 11 malls owned by Aeon are equipped with solar panels. Among these, 3 malls (Aeon Ayer Keroh, Alpha Angle and Taman Maluri) began generating electricity in 1QFY24. The remaining 7 are expected to commence electricity generation later, by 3QFY24, except for Aeon Bukit Mertajam, where installation is still 80% complete. By incorporating solar photovoltaic panels into these malls, utility costs are expected to see savings ranging from 5% to 8%, depending on the size of the mall. Meanwhile, Aeon plans to equip an additional 11 Aeon malls with solar PV by FY24, focusing on its leased malls.

Impact

We have reduced our cost assumptions for FY24-26 by 0.1% to 1.8%, respectively, underpinned by continuous effective cost measures (reduction in staff costs through digital transformation and savings in utility from the energy management system). All in, we have revised our earnings forecast upwards for FY24-26 by 2.0% to 10.5%, respectively.

Valuation

Maintain Buy with a revised target price of RM1.68/share, based on DDM valuation (k: 7.1%; g: 3.0%) and rolled forward our base year to FY25.

Source: TA Research - 17 May 2024