We expect softer retail sales in the near term given lower footfall in light of MCO2.0. Compared to the previous MCO, we opine the impact will be less severe as the group is more equipped having braced through the worst in MarMay 2020. We remain confident on the group’s longer term outlook with its strategic plans in (i) refurbishing existing malls to attract better foot traffic, (ii) expanding online presence, and (iii) introduction of specialist concept store to drive better margin. Lower FY20/21 earnings forecasts by -12%/-7.0% to reflect near term Covid/MCO2.0 headwinds. Maintain BUY with lower TP of RM1.17 (19x FY22 EPS). Despite the short term uncertainties, we reckon Aeon will be able to brace through another storm with their clear strategy to chart for recovery.

We came away from our meeting with Aeon’s management feeling hopeful about the group’s long term prospects despite short term headwinds.

Short term retail impact. We expect softer retail sales in the near term on back of lower footfall traffic in light of MCO2.0. We understand that all of the Aeon malls are allowed to open but only stores that are deemed “essentials” are operating. Compared to the MCO1.0, we opine the impact will be less severe as the group is more equipped having braced through the worst in Mar-May 2020. Additionally, AEON Mall Kuching Central in Sarawak is still operating as usual as the state is not placed under MCO2.0. To recap, in 2Q20 Aeon lapsed into losses of -RM9.6m for the first time given a -20% drop in top line.

Online expansion. Currently, Aeon is operating in three different online platforms namely (i) myaeon.com.my (started in June 2020); (ii) fresh.myaeon.com.my (started in Oct 2020); and (iii) myaeon-sg.com (started in Dec 2020) to cater for customers in Singapore that were unable to cross borders for their grocery needs. Though the user bases for its online platforms are still very low at this juncture, Aeon targets its online channels to contribute 15-25% of top line in 5 years’ time.

Focus on specialist store to drive margin. Aeon is in the midst of setting up its pilot project in specialist concept stores to drive better margin. In the pipeline currently are (i) Home Coordy, which focuses on household furniture, (ii) Kids Republic, for speciality in kids’ necessities, and (iii) Komaiso, flat-price concept store that scheduled to be rolled out in 2Q21.

Capex plan. The capex for FY21 is guided to be RM220m. From this, 50% are allocated for revamping the existing malls (improving amenities) while 30% will be for upgrading the technology to expand the digitalization effort for their online platform. Additionally, management budgets a bigger capex of RM500m for FY22 with the plan to roll out new malls in 3-5 years’ time.

Outlook. We opine that FY21 will likely pare off better YoY as restrictions in the latest MCO are not as tight as before. Despite that, we think that it may not fully recover to the pre-pandemic level and forecast that stronger recovery will only be seen with successful containment of Covid-19. Going into FY21, we expect retail spending to be positive YoY due to low base effect in 2020. We remain confident on the group’s longer term outlook with its strategic plans in (i) refurbishing existing malls to attract better foot traffic; (ii) expanding presence in online platform; and (iii) introduction of specialist concept store to drive better margin.

Forecast. We lower our FY20/21 earnings forecasts by -12%/-7.0% as we lower footfall traffic assumptions to reflect 4Q20’s domestic Covid-19 resurgence and the recent MCO2.0.

Maintain BUY with lower TP of RM1.17 (from RM1.25), based on unchanged 19x FY22 earnings. Despite the short term uncertainties, we reckon Aeon will be able to brace through another storm with their clear strategy to chart for recovery.

Source: Hong Leong Investment Bank Research - 22 Jan 2021