Aeon’s 2019 core net profit of RM109.5m (-3.4% yoy) was broadly in line with our and street’s expectations. Improved performance from the retailing segment was largely overshadowed by softer property management partly due to higher operating costs. In view of a weaker macro outlook, exacerbated by Covid-19, we trim our 2020-21E earnings by 7-10%. Post revision, we downgrade Aeon to a HOLD with a lower TP of RM1.22, based on a lower target PER of 14x (from 19x previously).

2019: Broadly Within Expectations

Aeon’s 2019 revenue increased by +4.3% yoy to RM4.54bn, mainly attributed to contribution from newly renovated stores as well as commencement of new specialty stores and malls. 2019 core net profit came in at RM109.5m (-3.4% yoy), broadly in line with our and street’s expectations, accounting for 96% and 101% of respective full year forecasts. On a like-for-like basis (pre-MFRS 16), property management earnings dipped 13% yoy to RM182.3m owing to higher operating costs related to utilities and depreciation as compared to income growth. Meanwhile, Aeon’s retailing segment earnings surged 91% to RM99m on higher sales and better margins, on top of contribution from new stores.

Challenging 2020 Ahead

Sequentially, both revenue and core earnings were stronger at RM1.17bn (+10% qoq) and RM50m (>100%) respectively, driven by higher sales and margin on year-end festive season. Moving forward, we foresee 2020 to be challenging for Aeon especially with the outbreak of Covid-19 on top the already softening consumer sentiment. On the property segment, rental revenue growth remains sluggish amidst an increasing supply of retail space while tenants are more cautious over new shop openings. The group announced a DPS of 4sen for the year, unchanged from 2018.

Downgrading to HOLD

We trim our 2020-21E earnings by 7-10% to factor in a weaker macro outlook exacerbated by the Covid-19 outbreak. Meanwhile, we assigned a lower target PER of 14x (2SD below 3-year average; from 19x) applied on our 2020E EPS to better reflect the increasingly challenging retail landscape, amidst the increasing supply of retail space and rising cost of operating the malls. Post revision, we downgrade Aeon to a HOLD rating (from Buy), with a lower 12-month TP of RM1.22 (from RM1.75). Risks to our call: i) Decline/increase in retail traffic; (ii) contraction/increase in mall rental income; and iii) deterioration/improvement in macro conditions.

Source: Affin Hwang Research - 25 Feb 2020