Aeon shared that Jun and July 2021 saw a tremendous drop in retail sales relative to pre-pandemic level. To compare, when indexed to the average gross sales in 2019 (i.e. 100 points), Jun/July 2021 recorded 46.5/49.3 points vs 58.3 points in April 2020/MCO1.0. The group managed to slash its SG&A expense by 20% through (i) managing its non-trade contracts cost; and (ii) adopting leaner marketing mechanics. As for PMS, Aeon is adopting a rental structure that tilted towards commission-based as opposed to the traditional fixed rental structure to defend its occupancy rate in this challenging environment. Reiterate HOLD, TP of RM1.39 based on unchanged 19x PE multiple of FY22 EPS.

Below Are Key Takeaways From Aeon’s 2Q21 Analyst’s Briefing.

Prolong retail impact. Aeon shared that Jun and July 2021 saw a tremendous drop in retail sales relative to pre-pandemic level. To compare, when indexed to the average gross sales in 2019 (i.e. 100 points), Jun/July 2021 recorded 46.5/49.3 points vs 58.3 points in April 2020/MCO1.0. Despite that, with the further relaxation on operations for non-essential business in mid-August, recovery was recorded albeit at a slow pace. Having said that, management expects 3Q21 to continue being challenging on the backdrop of elevated Covid-19 cases. Note that FMCO/Phase 1 experienced longer store closure of 79 days (1 June - 31 Aug 2021), while MCO1.0 experienced shorter 46 days of closure (18 Mar-3 May 2020).

Defending bottom line with leaner cost structure. Despite muted top line, Aeon has successfully defended its bottom line with a leaner cost structure. We gather that the group has managed to slashed its selling, general and administrative (SG&A) expenses by 20% through (i) managing non-trade contracts by reviewing its housekeeping, security and maintenance cost; and (ii) adopting leaner marketing mechanics.

Change in rent structure to support PMS occupancy. Note that 2Q21 EBIT margin for property management segment (PMS) has been on an upward trend (+44.3ppt QoQ; +7.9ppt YoY). This was mainly on the back of change in rental structure that tilted towards commission based as opposed to the traditional fixed rental structure. With this flexibility, Aeon managed to retain more tenants and have a stable occupancy rate for its malls amidst the challenging environment. Note that occupancy rate for 2Q21 stood at 81% vs 84% in 1Q21.

Outlook. As highlighted, compare to the predecessor MCO, we are comforted to witness the less severe aftermath from the current restrictions thanks to the group’s experience and agility in managing through these unprecedented times. Despite that, we think it may not fully recover to the pre-pandemic levels and forecast that stronger recovery will only be seen with successful containment of Covid-19. Nonetheless, recent reopening measures by the government for fully vaccinated consumers, including dine-ins and 11 types of business can open doors to them, suggests that recovery momentum is underway. Reiterate HOLD, TP RM1.39 based on unchanged 19x PE multiple of FY22 EPS. We reckon that Aeon will chart better numbers ahead following government’s further relaxations on restrictions for fully vaccinated consumers.

Source: Hong Leong Investment Bank Research - 2 Sept 2021