AEON’s FY22 results disappointed due to higher-than-expected operating cost though top line met our expectation. Anecdotal observations suggested strong footfalls in shops and malls, prior to the recent Chinese New Year, and the same scene is likely to be repeated ahead of Aidil Fitri which augurs well for AEON. We cut our FY23F earnings by 11% (as we conservatively assume no margin recovery over the immediate term), reduce our TP by 8% to RM1.80 (from RM1.95) but maintain our OUTPERFORM call.

Below expectations. FY22 net profit missed our forecast and consensus estimate by 12% and 11%, respectively. The key variance against our forecast came from lower margins due to higher-thanexpected operating cost, particularly staff, while its top line met our expectation.

Results highlights. FY22 revenue rose by 14.1%, largely due to the strong sales contribution from its soft line and hard line on the reopening of the economy and festive spending, and (ii) higher rental income from an improvement in occupancy rate as consumers returned to physical malls. Net profit rose by a larger 30.4% driven by an improved product mix skewed towards higher-margin products.

Outlook. We believe AEON is bracing for a strong year ahead. Despite high inflation worries eroding spending power, anecdotal observations suggested strong footfalls in shops and malls, prior to the recent Chinese New Year, and the same scene is likely to be repeated ahead of Aidil Fitri in Apr 2023. This augurs well for AEON.

It has had presence in IOI City Mall, Putrajaya, since Jan 2023 with the opening of an AEON supermarket (carrying food line products). This will be followed by the opening of the departmental store (carrying soft line and hard line products) by Mar 2023. Also, we understand that AEON has already completed its digital transformation, particularly, the introduction of self-checkout terminals in all its 42 stores.

Forecasts. We cut our FY23F earnings by 11% to conservatively reflect no improvement in margins over the immediate term and introduce our FY24F numbers.

We reduce our TP by 8% to RM1.80 (from RM1.95) based on 18x FY24F PER, at a premium to the sector’s average forward PER of 16x to reflect AEON’s strong brand and digital initiatives. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like AEON for: (i) benefitting from the return of shopping-in-person (vs. online), resurgence of shopping in malls (vs. in neighbourhood grocers) and the return of office crowd (vs. working from home previously), (ii) its customer base that is skewed towards the M40 group whose spending power is less impacted by high inflation, and (iii) its digital transformation, particularly, the introduction of self-checkout for customers, that will result in cost savings and partially mitigate labour shortage issue. Maintain OUTPERFORM.

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

Source: Kenanga Research - 23 Feb 2023