1H20 sum core LAT of -RM2.1m (from core PAT of RM52.1m in 1H19) was below ours and consensus expectations. We lower our FY20/21/22 forecasts by to 20.1%/17.1%/9.8%. After our earnings adjustment, our TP falls from RM0.86 to RM0.71 pegged to an unchanged 12x PE multiple of mid-FY21 earnings.

Below expectations. Aeon’s 2Q20 core LAT of -RM9.6m (from core PAT of RM7.5m in 1Q20 and core PAT of RM19.5m in 2Q19) brought 1H20 core LAT sum to -RM2.1m (1H19: core PAT of RM52.1m). This was below ours and consensus expectations, as we had expected Aeon to be profitable due to “panic buying” during the MCO period. The shortfall in earnings was due to weaker earnings from both retail and property management services divisions due to the Covid-19 impact. 1H20 core LAT figure was arrived at after adjusting for fair value losses of RM21.5m.

Dividend. None declared. (2Q19: None). 1H20: None (1H19: None). Note that Aeon typically declares dividend just once a year, typically in April/May of the following FY.

QoQ/YoY. Lower sales (QoQ: -19.9%, YoY: -13.2%) and subsequent core LAT of - RM9.6m (from core PAT of RM7.5m in 1Q20 and core PAT of RM19.5m in 2Q19) was due to similar reasons mentioned below.

YTD. Revenue decline (-7.0%) was due to lower sales in both retailing (-6.3%) and property management services (PMS; -10.7%) segments. Despite resilient grocery revenues, lesser ‘non-essential’ retail sales (apparel, beauty products, consumer electronics etc.) resulted in lower retailing profitability (Retailing EBIT: -57.0%). In a normal non-Covid-19 environment, we estimate groceries to account for 50% of retailing sales. Note that Aeon did not operate “non-essential retail” from mid-March to mid-May due to MCO restrictions. In the property management division, rebates given, lower sales commissions from tenants and temporary space renters (particularly during the MCO period) resulted in PMS’s EBIT declining by -20.7%. Overall, core LAT totalled –RM2.1m (from core PAT of RM52.1m) due to lesser sales and fixed costs.

Outlook. In the property management segment, we understand Aeon granted rental rebates to ~70% of total tenants. While July rental collection has recovered to RM50m, we understand this is still lower than pre-Covid-19 rental income of RM58m/month. Furthermore, our channel checks indicate that many retail players have either (i) closed a number of physical retail stores and/or (ii) renewed leases from shopping mall operators in recent months at significantly cheaper rates. In conclusion, we expect the PMS division (which accounted for ~75% of EBIT in FY19) to continue to suffer as Covid-19 puts pressure on physical retailers and hence, shopping mall operators. Note that even before MCO, occupancy rate slipped to 90.7% in FY19 (from 91.4% in FY18) due to the supply glut of rentable retail space.

Forecast. We lower our FY20/21/22 forecasts by to 8.5%/24.1%/14.7% to account for weaker than expected retailing sales in 1H20, lower shopping mall occupancy rates and lower rental yield from retailers renewing leases at cheaper rates.

Maintain SELL. After our earnings adjustment, our TP falls from RM0.86 to RM0.71

pegged to an unchanged 12x PE multiple of mid-FY21 earnings. While the reopening of non-essential retail with the relaxation of MCO rules bodes well from Aeon going into 2H20, we expect the MCO to exacerbate the largest issue facing shopping mall operators, which is the supply glut of available retail space in Malaysia.

Source: Hong Leong Investment Bank Research - 28 Aug 2020