Aeon’s 1Q20 core PAT of RM7.5m (QoQ: -85.0%, YoY: -77.1%) was below ours and consensus expectations, making up just 6.7% and 6.8% of full year forecasts, respectively. The results shortfall was due to weaker earnings from both retail and property management services divisions due to Covid-19 impact on foot traffic in Aeon shopping malls. We lower our FY20/21 earnings forecasts by 29.4%/4.6% due to Covid-19 impact on shopping mall foot traffic in FY20 and postponement of outlet openings to end FY21. After rolling over our valuation year to mid-FY21, we lower our TP to RM0.86 (from RM0.96) based on an unchanged PE multiple of 12x. Our call is downgraded from a Hold to a SELL.

Below expectations. Aeon’s 1Q20 core PAT of RM7.5m (QoQ: -85.0%, YoY: - 77.1%) was below ours and consensus expectations, making up just 6.7% and 6.8% of full year forecasts, respectively. The shortfall in earnings was due to weaker earnings from both retail and property management services divisions due to the Covid-19 impact on foot traffic in Aeon shopping malls. 1Q20 core PAT figure was arrived at after adjusting for fair value losses of RM26.7m.

Dividend. None Declared. (1Q19: None).

QoQ. Despite significantly lower shopping mall foot traffic even before the MCO period, Retailing (which consists of grocery and department store operations) revenue rose 3.5%. This was due to ‘panic buying’ in the first two weeks of March, as consumers stocked up on groceries and other essential items (toothpaste, shampoo etc.) in preparation for the MCO. Despite this, Retailing EBIT dived -65.8%. This was due to a sharp decline in department store sales (apparel, consumer electronics etc.), which commands much higher margins than groceries. In the property management services division (PMS), lower EBIT contribution (-9.2%) was due to lower sales commission received by Aeon from its tenants, particularly during the MCO period when non-essential services were barred from operating. Overall, core PAT declined by -85.0%.

YoY. Sharp core PAT decline (-77.1%) was due to lower retailing (-39.8%) and PMS (-16.9%) EBIT contribution due to similar reasons mentioned above.

Outlook. After opening two shopping malls in FY16 and one in each of the following three years (FY17: Aeon Bandar Dato’ Onn, FY18: Aeon Kuching, FY19: Aeon Nilai), Aeon does not plan on opening any more in FY20. Furthermore, Aeon has pushed back the opening of any department stores or pharmacies to end-21 for now. We are positive on this as we expect foot traffic to shopping malls to be sluggish even after the MCO is lifted entirely.

Forecast. We lower our FY20/21 earnings forecasts by 29.4%/4.6% from Covid-19 impact on shopping mall foot traffic in FY20 and postponement of outlet openings to end FY21, which we had previously expected to occur in FY20/FY21.

Downgrade to SELL. After rolling over our valuation year from FY20 to mid-FY21 and adjusting for lower earnings, we lower our TP to RM0.86 (from RM0.96) based on an unchanged PE multiple of 12x. Note that Aeon traded at 12x PE during the H1N1 outbreak. Our call is downgraded from a HOLD to a SELL.

Source: Hong Leong Investment Bank Research - 21 May 2020