2MFY20 core net profit of RM41m (-62% YoY) missed both our/ consensus expectations due the resurgence of the Covid-19 pandemic in 4QFY20. We however reiterate an earnings recovery momentum ahead premised on the vaccine rollout, prompting a TP upgrade to RM1.30 from RM1.00 based on a higher FY21 PER of 24x. We continue to like the group for its currently undemanding 21.0x FY21E PER valuation, a household brand as well as anticipation of strong earnings rebound in FY21.

Missed Expectations. 12MFY20 earnings missed both our/market expectations accounting for 74%/75% of our/consensus full estimates. DPS declared was below at 1.5 sen (vs our expectation of 4.0 sen) implying a payout of 51% (vs FY20: 51%)

YoY, FY20 was impacted by the MCO and resurgence of the Covid-19 pandemic in 4QFY20, topline declined by 11%. Both revenue from the retailing segment and property management services contracted by 10% and 14% respectively to RM3.4b and RM0.7b respectively. Revenue from retail segment was impacted from lower non-essential category sales as a result from the impact of COVID-19 pandemic and Movement Control Order, whereby general merchandise (“GMS”) and specialty stores business were not allowed to operate for almost of 2 months during the period under review. However, it was being offset by slight increase of revenue generated from the foodline segment. The shortfall in property services revenue was mainly due to lower occupancy rates as tenants sought for non-renewal or early termination of tenancy agreements. Income from temporary space rental was also affected by the absence of events and activities as it was being prohibited by the Movement Control Order. The sharp (-62%) decline in net profit was also exacerbated by a higher tax rate by 15ppts to 59% due to deferred tax expense.

QoQ, turnover was lower than the preceding quarter by 7.4% due to reimplementation of CMCO in most states prompted by the surge of COVID-19 19 cases for the quarter under review. Despite the decline in topline, PBT improved by +11% achieved by improvement in merchandise gross margin, changes in marketing mechanics and stringent cost control measures.

Momentum building. We reiterate the earnings recovery momentum will gradually build into 2021 in tandem with the vaccine rollout, premised on the anticipated gradual normalisation in retail footfall for its retailing segment following the easing of movement restrictions, which is likely to be further boosted by the year-end festive promotions by the end of the year. With the recent partnership cemented with US-based Boxed, digital technology will spearhead AEON’s expansion into e- commerce targeting to contribute 15-20% of topline over the next five years. While we gathered that the mall occupancy rate remains lacklustre at c.80% (versus pre-pandemic of c.90%), the property management services segment should continue to be buoyed by gradual recovery in rental collections ahead, in our view, as businesses slowly recover post-lockdown.

Post-results, we tweaked our FY21E earnings downwards by 2% to account for more realistic recovery assumptions.

Reiterate OUTPERFORM with a revised TP of RM1.30 (from RM1.00) based on a FY21E 24x PER (0.5SD below mean from 1SD below) as recovery momentum builds up with the vaccination roll-out. We favour the group for: (i) its relatively undemanding valuations of 21x FY21E PER, well below from our consumer sector peers’ average of c.30x despite being a household brand, the anticipation for robust earnings recovery in FY21 banking on post-pandemic demand normalisation.

Risks to our call include: (i) lower-than-expected sales, and (ii) higher-than-expected operating expenses.

Source: Kenanga Research - 25 Feb 2021