AEON’s 1HFY22 results beat expectations, underpinned by a strong rebound in sales as pandemic restrictions were lifted and international borders reopened. We expect earnings momentum to sustain as consumers resumed shopping-in-person (vs. online) for the sound-and-sight experience that is unmatched by online shopping. On the other hand, we are mindful of high inflation that is eating into consumers’ spending power. We raise our FY22F/FY23F earnings forecasts by 24%/17% and increase our TP by 5% to RM1.95. Maintain OUTPERFORM.

Above expectations. AEON’S 1HFY22 net profit beat expectations at 67% and 71% of our and consensus full-year estimates, respectively. The variance against our forecast came largely from a strong-than-expected rebound in sales as pandemic restrictions were lifted and international borders reopened.

1HFY22 revenue grew by 11.1% driven by: (i) a strong rebound in sales (softline such clothing and shoes, and hardline such as appliances) as the economy and international borders reopened, coupled with strong spending by consumers ahead of festivities; and (ii) higher rental incomes arising from a better tenant mix and a slight improvement in occupancy rate (to 89.9%% in 2QFY22 vs. 88.4% pre-pandemic). Its net profit more than doubled thanks to a product mix skewed towards higher-margin products and cost cutting initiatives that started to pay off.

Outlook. We expect earnings momentum to sustain as consumers resumed shopping-in-person (vs. online) as it offers the sound-and-sight experience that is unmatched by online shopping. Retail sales in general will also be bumped up by the arrival of tourists. On the other hand, we are mindful of high inflation that is eating into consumers’ spending power. Zooming into AEON, it has five new stores in the pipeline in FY22-23 comprising four Komai-So stores (discount stores offering products at fixed prices of RM2.50, RM5 and RM10) and one full-fledged AEON store in IOI Putrajaya. It will also rejuvenate three existing AEON stores.

We raise our FY22F/FY23F earnings forecasts by 24%/17% to reflect better retail margins, cost savings and stronger rental incomes. We increase our TP by 5% to RM1.95 based on 19x FY23F PER (from RM1.85 based on 21x PER previously). We lower our multiple to reflect a higher earnings risk arising from high inflation that is eroding consumer spending power. The revised multiple is also more inline with the sector’s average forward PER. There is no adjustment to our TP based on its 3- star ESG rating as appraised by us.

Risks to our call include: (i) competition from existing and new players, (ii) high inflation eroding consumer spending power, and (iii) movement restrictions due to epidemic and pandemic occurrences.

Source: Kenanga Research - 24 Aug 2022