FY19 CNP of RM109.3m (+4% YoY) is spot on consensus estimate, but above ours at 119% due to higher-thanexpected margin. Upgrade FY20E CNP by 4% to reflect the stronger-than-expected margin from its on-going operational restructuring. Reiterate OP with a higher TP of RM1.65 (from RM1.60) based on unchanged 21x FY20E EPS, at -1.0SD of its 5-year historical mean PER.

FY19 above expectations. FY19 CNP of RM109.3m (+4% YoY) came spot on consensus, but above our expectation at 119% of estimates due to higher-than-expected margin. A final DPS of 4.0 sen (FY18:4.0 sen) was declared for FY19, as expected.

YoY, FY19 CNP increased 4%, mainly contributed by: (i) the seasonally strongest quarter which accounted for 47% of its full-year earnings which pushed overall sales higher (+4%) with both segments recording stronger sales: The Retailing segment (+5%) on higher footfalls, and Property management services (+3%) on improving rental-per-store as well as higher rental space from the new mall, and (ii) expansion in EBIT margin by 2.2ppt to 7.9% from 5.7% in FY18, on better margin sales as well as reduction in operating costs from downsizing of a store (AEON Quill City Mall department store closed and replaced with AEON MaxValu Prime) at the end of the previous year. The stronger performance was also supported by higher contribution from AEON Mall Kuching (commenced 2QCY18) and the new AEON Mall Nilai, Negeri Sembilan (commenced January 2019) as well as other shopping malls that were renovated and expanded especially AEON Maluri which was re-opened recently(November 2019).

QoQ, 4QFY19 CNP soared 581% in the seasonally strongest quarter, boosted by: (i) higher sales (+10%) on the usual year-end promotional sales with both segments recording stronger sales; Retailing segment (+11%) on higher footfalls, and Property management services (+5%) on improving rental-per-store as well as higher rental space from the new mall, (ii) expansion in EBIT margin by 5.6ppt to 11.1% from 5.5% in 3QFY19, on better margin sales as well as improving operating costs management despite the discounting activities as well as (iii) lower effective tax rate of 42.9% (3QFY19:47.6%).

Outlook. Management highlighted that for the retailing space, they will continue to refurbish selected stores (4 stores for 2020) and employ appropriate marketing and pricing strategies, merchandise assortment reformation, maintaining quality customer service and further expand its e-commerce presence. For property management services, they expect occupancy rate and rental rates to remain challenging. AEON will continue to leverage on its competitive strengths to draw customer traffic to its malls to maintain its position as a popular shopping destination. Note that, we expect the outbreak of Covid-19 could reduce mall footfalls in 1QFY20 which has also affected the general economy, including the retail sector; however, we expect a recovery starting 2QFY20 on pent-up demand caused by the outbreak.

Upgrade FY20E CNP by 4% to reflect stronger-than-expected margin from its on-going operational restructuring.

Reiterate OP with a higher TP of RM1.65 (from RM1.60) based on unchanged 21x FY20E EPS, at -1.0SD of its 5-year historical mean PER. We like AEON for its: (i) dual-income streams, which are less vulnerable to changes in consumer preferences, and (ii) on-going operational restructuring, improving retail margin, and sustained property income. Risks to our call include: (i) lower-than-expected sales, and (ii) higher-than-expected operating expenses.

Source: Kenanga Research - 25 Feb 2020