1QFY20 CNP of RM7.5m (-77% YoY and -85% QoQ) came in below our/consensus expectations at 9%/7% of full-year estimates due to lower-than-expected earnings from both retailing and property segments especially during the MCO period. As such, we cut FY20E/FY21E CNP by 23%/12%. Downgrade to UP with a lower TP of RM1.00 (from MP and TP of RM1.05) which is based on 18x PER on roll-over FY21E EPS (from 18x FY20E EPS).

1QFY20 below expectations. 1QFY20 CNP of RM7.5m (-77% YoY and -85% QoQ) came in below our/consensus at 9%/7% of full-year estimates due to lower-than-expected profit from both retailing and property segments especially during the MCO period. No dividend was declared for the quarter, as AEON usually pays dividend in 4Q.

Results highlights, 1QFY20 CNP plunged 77% YoY and 85% QoQ mainly due to the lower General Merchandise Sales (GMS) recorded especially during the Movement Control Order (MCO) period with GMS considered non-essential services and was not allowed to operate. Furthermore, Property management services segment contributed lower revenue (-4% YoY) and significantly lower segmental profit (-54% YoY) mainly due to lower sales commission from tenants, especially during the MCO period with non-essential services tenants not allowed to operate during the MCO period. This was further worsened by the higher effective tax rate of 70.5% (1QFY19:41.4%, 4QFY19:42.9%) from non-deductible expenses.

Outlook. Management highlighted that only its supermarkets were operational during the MCO with enhanced services such as tele marketing, personal shoppers, drive-thru, in-house delivery services and online sales through Happy Fresh. Closures of some parts of its malls starting 18th March (c.70% of operational area closed) helped to generate cost savings through: (i) lower electricity costs, (ii) lower maintenance works including lower numbers of contract staff (cleaning services, etc), (iii) re-negotiation with landlords on leasing agreement, (iv) better terms with suppliers on inventory arrangement, and (v) major CAPEX being shelved including renovation works, with revised focus on maintenance works of less than RM100m (previously RM400m in total). Note that, pre-MCO, its supermarket segment accounted for 50% of total sales, while during MCO, its supermarket saw a 20% increase in basket size. Supply chain disruption was minimal affecting some items sourced from China and Australia, but AEON has re aligned such supply line from locals such as vegetables and fruits from Cameron Highlands.

Cut FY20E/FY21E CNP by 23%-12%. We cut FY20E/FY21E CNP by 23%/12% to reflect weaker profit contributions from both the retail and property segments during the MCO period which lasted up to 4th May 2020 which was followed by the conditional MCO.

Downgrade to UP with a lower TP of RM1.00 (from MP; TP: RM1.05) which is based on trough valuation of 18x PER (-2.0SD of its 5-year historical mean PER) on rolled over FY21E EPS, (from 18x FY20E EPS). Risks to our call include: (i) higher-than-expected sales, and (ii) lower-than-expected operating expenses.

Source: Kenanga Research - 21 May 2020