AEON expects a strong 4QFY22 driven by shopping spree ahead of festivities including Christmas and Chinese New Year, and the new school term in January 2023. We continue to like AEON for being a reopening play underpinned by the return of shopping in person (vs. online), shopping in malls (vs. neighbourhood grocers) and the office crowd (vs. work from home). We maintain our forecasts, TP of RM1.95 and OUTPERFORM call.

We came away from a recent engagement with the company feeling upbeat of its near-term outlook. The key takeaways are as follows:

1. AEON expects its 3QFY22 performance to soften sequentially, which is understandable after a bumper 2QFY22 (to recap, its 2QFY22 performance was buoyed by the full opening of the economy for the first time since the start of the pandemic in 2020, coupled with the Hari Raya Aidilfitri shopping spree). However, AEON expects a strong 4QFY22 driven by shopping spree ahead of festivities including Christmas and Chinese New Year (that comes early in January 2023) as well as the new school term in January 2023 (where the entire student population is going back to school concurrently for the first time since the pandemic in 2020).

2. AEON guided for the average occupancy rate at its malls to rise to 90-92% in 4QFY22 (vs. 89.9% in 1HFY22) as the unoccupied space is gradually taken up by new tenants such as F&B restaurants (Sushi Zanmai, llao llao, Taco Bell), fashion outlets (Uniqlo, H&M), service and entertainment stores and other businesses.

3. It also guided for rising rental incomes. Apart from a higher overall occupancy rate, rental incomes will be boosted by an improved tenant mix as we believe the contribution will stem from a rising number of high-yielding F&B, fashion and entertainment outlets vs. low-yielding hardware and book/stationery shops. AEON’s total quarterly rental incomes of RM157.2m in 2QFY22 were already at 90% of the RM175m in 2QFY19 prior to the pandemic.

4. An interesting point to note is that variable rental incomes (i.e. a cut from the tenant’s sales) made up 43% of total rental incomes in 1HFY22 (vs. 37% in 1HFY19 prior to the pandemic). First introduced during the pandemic to retain tenants, we sense that AEON intends to continue this rental structure that is skewed more towards the variable element, although the pandemic is now moving to an end. We believe AEON is highly conscious of its symbiotic relationship with the tenants.

5. There is no change to AEON’s FY22F capex plans of RM200m-300m, in which 80% is earmarked for the refurbishment of three malls (Alpha Angle Aeon completed in April 2022, while Cheras Selatan Aeon and Malacca Aeon are ongoing) and various stores, and 20% for IT, including self checkout terminals. It is introducing self-checkout terminals in 41 stores, and the terminals are already up and running in 26 of them. The self-checkout system can cut staff cost significantly as one staff member can now man six self-checkout terminals (vs. six cashiers for six normal checkout terminals previously).

We continue to like AEON for: (i) it being a reopening play underpinned by the return of shopping in person (vs. online), shopping in malls (vs. neighbourhood grocers) and the office crowd (vs. work from home); (ii) its customer base that is skewed towards the M40 group of which spending power is less impacted by high inflation; and (iii) its digital transformation, particularly, the introduction of self-checkout for customers. We maintain our forecasts and TP of RM1.95 based on 19x FY23F PER, in line 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 (see Page 4). Maintain OUTPERFORM.

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 - 13 Oct 2022