Highlights

• We came away from our meeting with Aeon’s management feeling neutral about the group’s prospects going forward.

• Retail Segment: Despite dwindling contributions from its departmental stores (due mainly to an increasing shift in consumer preference to more trendy options, such as Uniqlo, Topshop, Zara etc), revenue at the retail segment grew 5% in FY16. This was attributed to the opening of new outlets (2 new supermarkets, 9 new pharmacies, and 3 new Daiso flat price shops in FY16).

• Moving forward, we believe the retail segment (in terms of top and bottom lines) will continue to grow moderately, underpinned by expansion of new stores and the relaxation of The Price Control and Anti-Profiteering Regulation (since early-2017, which allows Aeon to raise prices of certain products gradually).

• Currently, Aeon operates 33 supermarkets, 3 Max Values, 48 Wellness (Pharmacy) and 39 Daiso (low value concept store) stores.

• Property Management segment (PM): Aeon registered an average occupancy rate of more than 90% across its 26 shopping malls. It is worth noting that Aeon Shah Alam and Aeon Kota Baru (which were launched in 2016) registered occupancy rates of over 93%. Management guided that a number of tenants have renewed rental agreements to variable agreements (fixed rate + a % of sales) from a conventional fixed rate agreement, given the vast supply of retail space in Malaysia. While such move allows Aeon to maintain its high occupancy rates amidst vast supply of retail space in the market, we believe the high occupancy rates are achieved at the expense of lower rental, which accounts for the shrink in PM operating profit margin from 38% in 1Q16 to 33% in 1Q17.

• Outlook: Aeon will continue its long-term plan of opening store in Malaysia (albeit at a slower pace of one shopping mall a year instead of two) to capitalise on the growing urban, middle class population in Malaysia. The group is scheduled to open AEON Mall Kempas, Johor Bahru by the third quarter of this year and its first mall in Kuching, East Malaysia by the first quarter of 2018.

Risks

• Persistent weak consumer sentiment and spending; threat of intensifying competition; Difficulties in executing expansion; higher-than-expected new store expenses.

Forecasts

• Unchanged

Rating

HOLD ( ↔ )

• We like Aeon for its potential to capitalise on the growing urban, middle class population in Malaysia that we believe will slowly begin switching its retail preferences from more traditional wet markets to all-in-one retailers like Aeon.

• The group is still in an expansionary phase, hence a margin pressure should be expected. We foresee margins to improve gradually in line with the recovery of consumer sentiment and the slowdown of aggressive expansion.

Valuation

• We maintain HOLD call with an unchanged TP of RM2.16 based on 23x FY18 EPS of 9.4 sen.

Source: Hong Leong Investment Bank Research - 7 Jun 2017