Aeon’s 3Q20 core PAT of RM16.4m (from RM9.6m losses after tax in 2Q20, YoY: +123.3%) brought 9M20 sum to RM14.3m (-76.0%). This is below ours and consensus expectation, at 19.8% and 23.4% of forecasts respectively. Lower FY20/21/22 earnings forecasts by 8. 5%/2.0%/2.0%. After our earnings adjustment and rolling over our valuation year to FY21 (from mid-FY21), our TP rises from RM0.71 to RM0.79 based on an unchanged 12x PE. Upgrade to HOLD.

Below expectations. Aeon’s 3Q20 core PAT of RM16.4m (from -RM9.6m losses after tax in 2Q20, YoY: +123.3%) brought 9M20 sum to RM14.3m (-76.0%). This is below ours and consensus expectation, at 19.8% and 23.4% of forecasts respectively. Note that 4Q is a seasonally strong quarter for Aeon, typically accounting for 35-45% of full year earnings The shortfall in earnings was due to slower-than-expected recovery from both retail and property management services from Covid-19. 9M20 core PAT figure was arrived at after adjusting for fair value losses of RM17.5m.

Dividend. None declared (3Q19: None). 9M20: None (9M19: None). Aeon typically declares dividend once a year, in Apr/May of the following year.

QoQ. Core PAT of RM16.4m marked a return to profitability (from RM9.6m losses after tax in 2Q20). This was mainly due to the relaxation of MCO rules, which resulted in uptick in shopping mall foot traffic.

YoY. Sales decline of -6.9% was due to weaker retailing (-5.9%) and PMS (-11.8%) sales. Softer retail sales were due to cautionary consumer spending in light of the Covid-19 outbreak. Weaker PMS revenue was due to rental waivers and rebates to tenants, lower rental income and sales commission as a result of lower occupancy rate amidst economic uncertainty. Despite lower sales, core PAT more than doubled (+123.3%) due to (i) improvement in merchandise gross margin (ii) lesser A&P spending and (iii) changes to cost structure.

YTD. Lower sales from general merchandise and specialty stores (where general merchandise stores were closed between 18 Mar and 12 May due to being deemed non-essential during the MCO period) resulted in retail sales declining -6.2%. PMS sales declined by -11.1% due to similar reasons mentioned in YoY section. Weaker overall sales (-6.9%) coupled with fixed portion of costs resulted in core PAT decreasing by -76.0%.

Outlook. Despite Aeon returning to profitability in 3Q due to the relaxation of MCO rules, recent reimplementation of CMCO restrictions shoulder result in a subdued earnings in 4Q. While we note that 4Q is seasonally Aeon’s strongest quarter (typically accounting for 35-45% of full year earnings) we expect 4Q20 earnings to be weaker YoY given the soft foot traffic to shopping malls from CMCO restrictions.

Forecast. With soft foot traffic to shopping malls from CMCO reimplementation expected to dampen earnings, we lower our FY20/21/22 earnings forecasts by 8.5%/2.0%/2.0%.

Upgrade to HOLD. After our earnings adjustment and rolling over our valuation year to FY21 (from mid-FY21), our TP rises from RM0.71 to RM0.79 based on an unchanged 12x PE. Despite the results shortfall and CMCO2.0, we reckon the worst is likely over given the reimplementation possibility of stricter MCO restrictions appears unlikely. Upgrade to HOLD. Note that since our initial sell call in May, Aeon’s share price has declined by -32.7%.

Source: Hong Leong Investment Bank Research - 26 Nov 2020