While 1QFY21 earnings came in line, we downgrade the stock to MARKET PERFORM given continued weakness in property management services coupled with its high debt which is likely to adversely impact dividend pay-out ahead.

In line. 1QFY21 earnings of RM22m is in line, accounting for 28%/24% of our/consensus estimates. No dividend declared as dividends are only declared in the final quarter.

YoY, given the ongoing pandemic and travel restrictions, revenue declined 15% to RM1.01b as both the retail and property management fell 14% and 20%, to RM897m and RM134m, respectively. Property management services are still weak as the prolonged effect from MCO 1.0 saw lower tenant renewal rate or early termination of tenancy agreements, and lower commission receivable. Bottomline saw massive improvement surging by 195% to RM22m thanks to improvements in merchandise gross margins, changes to marketing mechanics and stringent cost control measures which saw EBITDA margin improving 3ppt to 15% (boosted by 4ppt improvement in margin from the retail business). A lower tax rate (47% - almost similar to pre Covid levels) and reduction in borrowings (RM253m) contributed further to the impressive bottom-line as funding costs fell 14% to RM32m.

QoQ, despite the implementation of MCO 2.0 in Jan 21, revenue improved +11%. Property management services continued to be weak given the prolonged lockdowns as revenue fell 4%, offset by rebound in retail business revenue (+13%) to RM879m. Margin for the quarter was weak falling by 12ppt to 15%. Compounded by higher tax rate (47%) CNP fell 19%.

Property management a slow burner. We maintain our view of normalization in retail footfall in 2H 2021 premised on a successful vaccine roll-out. Currently, footfalls into its malls and stores nationwide have been restrictive due to the current pandemic and likely to recover upon a successful vaccine roll-out. Retail earnings in the 2H will be boosted with the recent partnership cemented with US-based Boxed, kicking its new retail offline to online approach (expected in 2H 2021) which will spearhead AEON’s expansion into e-commerce, targeting to contribute 15-20% of top-line over the next five years. However, earnings recovery might be dragged by the weakness in the property management services given the prolonged pandemic and lockdowns.

Post-results, we knocked our FY21E earnings downwards by 4% to account for the slow recovery in its property management services.

Downgrade to Market Perform with a revised TP of RM1.20 (from RM1.30) based on FY22E PER of 19x (previously FY21E PER of 24x) implying 1SD (from -0.5SD) below its 5-year mean. We feel this is justified given the weakness in its property management adding further woes to its earnings coupled with a high net debt (RM524m). This increase the downside risk for dividend payout.

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

Source: Kenanga Research - 20 May 2021