AEON anticipates better YoY growth for 1HFY24 despite a softer 2Q in the absence of major festivities, and due to less favourable product mix as well as elevated inflation. It will deploy a premium lifestyle concept at its KL Midtown mall due for opening by end-2025. We maintain our forecasts, TP of RM1.21 and MARKET PERFORM rating.

We came away from a meeting with AEON with a mixed feeling on its near- term prospects. The key takeaways are as follows:

1. Anticipates better YoY growth in 1HFY24. AEON expects a softer 2Q sequentially in the absence of major festivities, and due to a less favourable product mix and elevated inflation hurting consumer spending. The introduction of EPF's Account 3 since 12 May 2024 has had minimal impact so far. Despite the projected weaker 2Q, AEON remains optimistic on its overall 1HFY24 performance, expecting YoY improvement supported by exceptionally strong 1Q contributions driven by festive spending and a better product mix. Additionally, ongoing cost-saving initiatives in energy and labour costs could bolster margins, providing some supports to its financial performance in 2Q. For the full financial year, AEON expects its PAT margin to be within 2.5%-2.8%, despite a strong 4.9% in 1QFY24, due to anticipated diminished contributions from high-margin products (i.e. softline) and sustained cautious consumer spending as a result of the rising cost of living.

2. Building an ecosystem within the Aeon group. The group will continue developing its AEON Living Zone ecosystem, aiming to accelerate digital integration into its existing business models by increasing the number of app users and expanding the cashless payment network. Additionally, it will seamlessly provide products, services, and infrastructure from the perspective of local consumers. The group has also collaborated with its local sister companies, such as AEON Credit and AEON Bank, to enrich its customers' lifestyles by offering higher rewards, loans, and instalment schemes for shoppers (see exhibit 1).

3. Premium AEON in KL Midtown. It will deploy a premium lifestyle concept at its KL Midtown mall due for opening by end-2025, probably emulating the design of its parent company's malls in Japan, with an estimated renovation budget of approximately RM50m. Recall, AEON signed an agreement with KL Midtown Sdn Bhd (70% owned by Hap Seng Consolidated) in 2023 to be the anchor tenant at the KL Midtown shopping mall encompassing a total area of 500,000 sq ft (see exhibit 2).

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 on same-store sales growth (SSSG) rates of -2.0% and -0.6% and blended EBIT margin of 6.7% each in FY24-FY25.

Valuations. We also keep our TP of 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 weakened 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 cost pressures.

Source: Kenanga Research - 10 Jul 2024