Compared to the previous MCO, we opine the impact of MCO3.0 will be less severe as the group is more equipped, having braced through the worst in Mar May 2020. We gather that US-based Boxed partnership will be a complementary service that will create end-to-end e-commerce support to aid Aeon’s digital transformation. We remain confident on the group’s longer term outlook with its strategic plans in (i) expanding presence in online platform; (ii) introduction of specialist concept store to drive better margin; and (iii) refurbishing existing malls to attract better foot traffic. Maintain BUY with unchanged TP of RM1.32 pegged to an unchanged 19x PE multiple of mid FY22 earnings.

Below Are Key Takeaways From Aeon’s 1Q21 Analysts Briefing.

Short term retail impact. We expect softer retail sales in the near term on back of lower footfall traffic in light of MCO3.0 and rising Covid-19 cases. Compared to the predecessor 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, the group has taken a proactive effort in tightening the security measures and limit the number of shoppers allowed to prevent future outbreak.

Online expansion with Boxed partnership. Currently, Aeon is operating in three different online platforms namely (i) myaeon.com.my; (ii) fresh.myaeon.com.my; and (iii) myaeon-sg.com to cater for customers in Singapore. 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. We gather that US-based Boxed partnership will be a complementary service that will create end-to-end e-commerce support to aid Aeon’s digital transformation. Additionally, in the property management services (PMS), Aeon just launched e-tenant platform to provide options in managing with the back-end services (reviewing invoices and making payment for existing tenants) while simultaneously operate in the online marketplace.

Focus on improving retailing gross margin. Note that 1Q21 EBIT margin for retailing has been on an upward trend (+2.7ppt QoQ; +3.8ppt YoY). This was mainly buoyed by the product mix strategy that focuses more on food-line (dairy, perishable, processed frozen food) and soft-line (casual apparel). Additionally, 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) Inner Casual, for speciality in casual wear; and (iii) Komaiso, flat-price concept store that scheduled to be rolled out in 3Q21.

Outlook. We opine that 1H21 will likely fare better YoY as restrictions in MCO 3.0 were less stringent than its predecessor last year. Going into 2H21 we believe that retail sales is poised for a strong rebound as we expect loosening of travel restrictions going forward as vaccine rollouts picking up at an urgent pace. We remain confident on the group’s longer term outlook with its strategic plans in (i) expanding presence in online platform; (ii) introduction of specialist concept store to drive better margin; and (iii) refurbishing existing malls to attract better foot traffic.

Maintain BUY, TP: RM1.32 pegged to unchanged 19x PE of mid FY22 EPS. We are confident in the group’s agile approach in adapting through with changes in marketing mechanics and sustainable cost reduction structures. Despite the short term uncertainties, we reckon Aeon will be able to brace through another storm with their effective strategy to chart for recovery.

Source: Hong Leong Investment Bank Research - 21 May 2021