Footfall traffic has shown encouraging recovery coupled with the boost from the festive season in the 2Q22. We gather that the malls are recovering with PMS occupancy rate in 1H22 at 89.9% (vs 1H21: 87.2%). However we remain cognizant on the stiff competition in the retail mall space with the increasing number of NLA in the market. Note that PMS EBIT margin registered a decline of -3.5% QoQ and -6.9% YoY. Additionally, management expects a ramp up in the maintenance work for the mall in 2H22 which we opine will cause uptick in opex. Reiterate HOLD with a higher TP of RM1.48 (from RM1.40) based on 15x PE multiple of FY23 EPS. We remain cautious on the inflationary environment coupled with the price lock campaign which could pose margin shrinkage risk.

We Left Aeon’s 2Q22 Briefing With Following Takeaways:

Stable sales. Management shared that with the full resumption of economic activities, footfall traffic has shown encouraging recovery coupled with the boost from the festive season. This was reflected in the increase sales of RM1.1bn (QoQ: +9.4%; YoY: 25.3%). Note that this also came from a low base effect as 1Q22 was hampered by the Omicron wave and 2Q21 from MCO3.0. Furthermore, despite operating at full capacity in the endemic phase, revenue was still -9.1% lower than pre-pandemic level in 1H19. However, thanks to the group’s proactive effort in exercising prudent cost management, opex was lowered by -10.9% vs 1H19 (pre-pandemic) which contributed to the improvement in the core PAT by 44.7% vs SPLY.

Property management services (PMS). We gather that the malls are recovering with PMS occupancy rate in 1H22 at 89.9% (vs 1H21: 87.2%). With the group’s adaptation of commission rental structure as opposed to the traditional fixed rent, 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 post challenging environment. The income composition for fixed and variable income stands at 57% and 43%, respectively. The improvement in sales also was due to the better revenue from temporary rental space and car park income. Despite that, we expect stiff competition in the retail mall space with the number of new entrants and increasing number of NLA in the market. Note that PMS EBIT margin registered a decline of -3.5% QoQ and -6.9% YoY.

Margin pressure. We gather that despite the prudent cost management, opex was higher by 19.8% QoQ. This was on the back of (i) higher COGS; and (ii) higher electricity cost from the hike in electricity tariff surcharge for non-domestic users. Management shared that the group will continue with its anti-inflationary campaign on core basic items in order to capture customer retention. Despite the intention of preserving value for customers, we opine that this will put a strain on margins moving forward. Additionally, management expects a ramp up in the maintenance work for the mall in 2H22 which we opine will cause uptick in opex.

Forecast. We increase our FY22/23/24 forecast by 32%/5%/5% as we tweak our previously conservative margin assumptions.

Reiterate HOLD with a higher TP of RM1.48 (from RM1.40) based on 15x PE multiple of FY23 EPS. While we are confident with the recovery in sales aided by economic reopening, we remain cautious on the inflationary environment coupled with the price lock campaign which could pose margin shrinkage risk.

Source: Hong Leong Investment Bank Research - 25 Aug 2022