• We hosted a virtual meeting with Aeon Co’s management recently, attended by over 20 local institutional investors.
• Key takeaways: For July month-to-date: (i) retailing saw strong recovery since RMCO, overall sales trended higher yoy; and (ii) rental income has gradually recovered since April, now near 85% of pre-Covid level.
• Given a likely strong pent-up recovery in 2021 (assuming no major second Covid-19 outbreak), we upgrade Aeon to BUY (from Hold) albeit with a slightly lower 12-month TP of RM1.00, based on 15.5x 2021 EPS.

Retail segment staging strong recovery since RMCO

For the retailing segment, management indicated that overall sales are staging a strong recovery since the RMCO, notching up yoy growth in July month-to-date (MTD) – largely led by the softline and foodline segments. Geographically, retail businesses in the group’s Northern and Central regions saw encouraging growth yoy whilst the Southern region is still lagging slightly behind in terms of recovery.

Rental rebates likely to gradually dissipate in 2H20

Aeon granted rental rebates to deserving tenants in non-essential businesses (c.70% of total tenants) over the lockdown period. Following a trough in April’s rental income, we gather that collection has recovered MoM and reached c.85% of the pre-Covid rental income of c.RM58m/month. Barring a recurrence of the MCO, rental relief, if any, will likely be minimal and on a case-to-case basis in 2H20.

Synergy between Aeon Co & Aeon BIG: Much to be gained by both parties

The cooperation between Aeon Co and Aeon BIG will see them sharing services in areas ranging from admin ops to digital endeavours and procurement. There is no incremental financial burden for Aeon Co as the group will be paid a certain sum for services rendered by Aeon BIG that is expected to begin from Sep 2020.

Risk-reward looking favourable; upgrading to BUY

For FY20E, we lowered our earnings estimate by 8.2%, partly to incorporate potentially lower sales in a subdued 2Q20 while the FY21-22E earnings are adjusted by +0.6/0.7%. Assuming no major second Covid-19 outbreak in the country, we foresee a sharp EPS recovery of 77% in 2021, off a low base. With the stock trading at 13x PER, negatives seem priced in, in our view. Upgrade Aeon to BUY, albeit with a lower 12-month TP of RM1.00, based on 15.5x 2021E EPS.

Source: Affin Hwang Research - 29 Jul 2020