Aeon shared that footfall traffic has shown encouraging recovery with the resumption of economic activities. We gather that the malls are gaining traction with PMS occupancy rate registered at 89.7% vs 88.5% in 1Q21. We understand that the group will roll out another anti-inflationary campaign in order to capture customer retention. Recall that the first round of Harga Jamin campaign in 1Q22 saw retail segment EBIT margin contracted by -3.2ppt QoQ. Downgrade to HOLD, with lower TP of RM1.40 (from RM1.78) based on 15x PE multiple of FY23 EPS. While we are confident with the recovery in sales aided by economic reopening, we gather that the inflationary environment coupled with the price lock campaign will result in shrinkage in margin moving forward.

We left Aeon’s 1Q22 briefing feeling lukewarm over the medium to long term prospects despite the imminent re-opening of the economy.

Sales holding up well. Management shared that with the resumption of economic activities, footfall traffic has shown encouraging recovery. This was reflected in the stable sales recorded since 4Q21 with revenue of RM1.0bn (QoQ: +1.0%; YoY: - 1.2%). Despite further relaxation, note that 1Q22 was still affected by Covid-19 in which the group registered weak foot traffic and revenue in the month of Feb on the back of resurgence of cases after CNY. Furthermore, despite operating at full capacity (no closure) the revenue was still -17% lower than pre-pandemic level in 1Q19. Additionally, the change in consumer behaviour also contributed to the lower sales from food-line as consumer resume outdoor activities and dine-out rather than buying groceries for cooking at home.

Property management services (PMS). We gather that the malls are gaining traction with PMS occupancy rate registered at 89.7% vs 88.5% in 1Q21. With the group adaptation of commission rental structure as opposed to the traditional fixed rental structure Aeon has garnered higher sales commission as tenants improved their sales. With this flexibility, Aeon managed to retain more tenants and have a stable occupancy rate for its malls amidst the challenging environment. The income composition for fixed and variable income stands at 58% and 42%, respectively.

Margin pressure. Note that 1Q22 registered a weakened EBITDA margin by -5.0ppt QoQ (1Q22: 19.4% vs 1Q22: 24.4%). This was on the back of (i) inflationary pressure on Harga Jamin; and (ii) higher electricity cost from the hike in electricity tariff surcharge for non-domestic users ending of electricity tariff that ended in Dec 2021. Management shared that the group will roll out another anti-inflationary campaign on core basic items in order to capture customer retention. Recall that the first round of Harga Jamin campaign in 1Q22 saw retail segment EBIT margin contracted by -3.2ppt QoQ. Despite the intention of preserve value for customers, we opine that this will put a strain on the margin moving forward.

Forecast. We decrease our FY22 forecast by -6.5% to account for margin challenges.

Downgrade to HOLD from Buy, with lower TP of RM1.40 (previously RM1.78) based on lower PE multiple of 15x (from 19x) of FY23 EPS. This valuation multiple is -1SD below its 3-year historical mean PE. While we are confident with the recovery in sales aided by economic reopening, we gather that the inflationary environment coupled with the price lock campaign will result in shrinkage in margin moving forward.

Source: Hong Leong Investment Bank Research - 23 May 2022