• Aeon registered a 3Q20 core net profit of RM16.4m (>100%) boosted by an expansion in margins from improvement in the merchandise margin & mix as well as overall cost control measures.
• YTD, core earnings contracted by 76% yoy to RM14.3m owing to losses suffered in 2Q20 due to lockdowns. Nonetheless, the result are in-line as 4Q typically commands a sizeable portion of the group’s full-year earnings.
• No changes to our earnings forecasts. Maintain BUY with an unchanged TP of RM1.00, based on 15.5x 2021E EPS.

3Q20 Core Net Profit Spiked >100% Yoy on Margin Expansion

In spite of a lower revenue of RM989.6m (-6.9% yoy) due to lower retail receipts and rental income, Aeon’s 3Q20 core net profit soared >100% yoy to RM16.4m. This was predominantly driven by margin expansion, on the back of: i) improvement in the merchandise GP margin and mix, ii) changes in marketing mechanics, and iii) overall cost control measures. On a YTD basis, core net profit contracted 76% to RM14.3m, largely on losses in 2Q20 due to the severe impact of the Covid-19 disruptions. Overall, the net profit was within our expectation as 4Q20 typically contributes to a sizeable proportion (c.38%-47%) of the group’s full-year earnings in tandem with year-end festive spending.

Better Cost Controls Could Support Margins

Revenue was up by 3.7% qoq amid better consumption spending and rental collection during the RMCO period. Hence, earnings returned positive territory from losses suffered in 2Q20, partly aided by margin expansion on the aforementioned factors. Looking ahead, some softness is expected amidst the reinstatement of the CMCO which is leading to softened footfall and consumption spending. That said, we expect aggressive cost control measures to be sustained, providing support to margins, as the management looks to embark on refining the business model to streamline the cost base, along with increased investment on digitalisation opportunities.

Undemanding Valuations; Maintain BUY

As the 9M20 results are in line with our expectations, we made no changes to our earnings forecasts. We keep our BUY rating on Aeon, with an unchanged TP of RM1.00 based on 15.5x 2021E EPS. Aeon’s 2021E PER looks undemanding at 11.8x, (2SD below its 3-year mean PER), considering likely sequential earnings improvement from the low base in 2020 in both its retail and property management divisions. Moreover, the increasingly upbeat development on vaccines could see Aeon returning to some normalcy in the latter part of 2021.

Key Risks

Downside risks to our call include: i) a major wave of Covid-19 outbreak leading to a reimposition of the MCO, ii) sharp fall in retail traffic, and iii) further deterioration in macro conditions and consumer sentiment.

Source: Affin Hwang Research - 26 Nov 2020