Aeon’s 1Q20 core net profit slumped 73% yoy to RM8.7m, well below our and consensus full-year expectations. On top of a 1.3% dip in revenue, operating margins in the retail and property management segments contracted by 1.3ppt and 5.3ppt respectively. In view of the dismal performance, we cut our earnings forecast by 11-41% for FY20-22E largely to factor in higher operational costs in both of the group’s core segments. In tandem, our TP is revised lower to RM0.67, based on a target PER of 10.5x on 2021E EPS. Maintain SELL.

1Q20 Core Earnings Plunged 73% Yoy

Aeon’s 1Q20 revenue declined by 1.3% yoy to RM1.19bn, mainly attributed to lower turnover from both its core retailing (-0.9% yoy) and property management (-3.6% yoy) segments. The retail segment was impacted by the temporary closure of its general merchandise stores while minimum sales commission from tenants were posted during the quarter. PBT fell 54% yoy to RM25.4m in tandem with an overall contraction in the operating margin. Coupled with higher-than-expected tax expenses, Aeon’s 1Q core net profit slumped by 73% yoy to RM8.7m, well below our and consensus expectations, accounting for only 10% and 8% of our respective full-year forecasts. The variance against our forecast was largely due to the higher-than-expected operating cost and tax expense.

Likely More Pain Ahead

On a qoq basis, core earnings slumped 83% despite a 1.8% top-line growth as the operating margin contracted 5.6ppt qoq on higher opex. Despite the gradual relaxation of the MCO, we expect the retail segment to be severely impacted by Covid-19, as consumer sentiment is likely to remain dampened for the rest of 2020. Challenges are also expected for property management, as rental waivers for the duration of the MCO and a minimum variable rental income will similarly exert pressure on the group’s earnings.

Maintain SELL

In light of the below par results, we cut our earnings forecasts by 11-41% for FY20-22E, largely taking into account higher operational costs in both of the group’s core segments. Post our earnings adjustment, our TP is revised lower to RM0.67, based on an unchanged 2021E target PER of 10.5x. At a 29x 2020E PER, the current valuation looks stretched given the heightened volatility in earnings performance amidst an extremely challenging backdrop for retail-related businesses.

Key Risks

Upside risks: i) sharp recovery in retail traffic; (ii) improvement in mall rental income.

Source: Affin Hwang Research - 22 May 2020