• Downgrade to HOLD (TP: RM1.18). AEON’s 9MFY23 net profit of RM82.2mn (- 4.8% YoY) is below our and consensus expectations, accounting for 60% and 66% respectively. The deviation was mainly due to lower sales in the retail segment and higher-than-expected operating costs. In 3QFY23, AEON's revenue fell to RM955.9mn (-7.5% QoQ), while net profit dropped to RM13.8mn (-54.3% QoQ). This decline was primarily attributed to lower sales in the absence of festivities, along with higher overall operating costs and effective tax rate of 52% (+13.8 ppts). We are caution on AEON’s outlook, underpinned by weak consumer sentiment and tighter disposable income especially for retail business. We revised down our FY23f/FY24f earnings by 17%/12% to account for lower retail sales, increased costs, and lower margins. In tandem, our TP is reduced to RM1.18 (RM1.50), pegged at a lower PER of 13x (AEON’s -0.5SD average historical forward PE) to FY24 EPS of 9.1sen. The lower valuation is to reflect the cautious retail outlook and potential 2024 inflationary pressures. Downgrade to HOLD from BUY.

• Key highlights. In 3QFY23, revenue declined by 7.5% QoQ, primarily attributable to lower sales for Retail (-8.6%) and PMS (-1.8%) segments, due to seasonality lower sales. The net profit saw a sharper decline of 54.3% QoQ, driven by higher overall operating costs and effective tax rate, resulting in a profit margin compression of 1.5 ppts to 1.4%. Overall, 9MFY23 net profit fell by 4.8% YoY, primarily driven by soft sales and higher overall operating costs. Sales in the Retail business segment (contributes over 80% of AEON's total revenue), declined by 1% YoY due to high base effects last year and partial store closures for renovations. Conversely, the PMS segment improved by 9.4% YoY, due to higher occupancy rate and effective rental renewal.

• Earnings Revision. We reduced our FY23f/FY24f earnings by 17%/12% to account for lower retail sales contribution, increased cost, and lower margins.

• Outlook. We are caution on AEON’s Retail segment due to softer consumer spending, practically for the Softline and Hardline good categories, despite resilient Foodline growth. PMS segmental earnings are anticipated to remain consistent, driven by growing occupancy rates (c.93%-95%). Nevertheless, we expect operating cost to persist at higher level in the near term, particularly in A&P and utilities costs. While the installation of solar panels will yield more substantial savings, these benefits are expected to materialize over the longer term.

Source: BIMB Securities Research - 27 Nov 2023