AEON expects robust retail performance in 1QFY23 taking cues from strong footfall seen during the recent Chinese New Year shopping period, and probably boosted by the back-to-school shopping in March. It will continue to refurbish its malls and stores, and strengthen its digitalisation efforts to enhance customer experience. We maintain our forecasts, TP of RM1.80 and OUTPERFORM call.

The key takeaways from AEON’s post-results briefing are as follows:

1. AEON expects a robust 1QFY23 retail performance with strong footfall seen in stores and malls during the recent Chinese New Year festive shopping period, and probably boosted by spending ahead of the new school term in March.

2. AEON guided for an average basket size of RM65-70 in FY23, very much in line with that of RM70 achieved in FY22 (which in turn was a 30% increase from the pre-pandemic level in FY19). Meanwhile, it sees margins at the retailing segment easing slightly to 4.5-6.0% in FY23 vs 6.4% realised in FY22 due to cost pressures.

3. AEON guided its average occupancy rate to rise to 93-95% in FY23 (vs. 91.4% in FY22) with the onboarding of new tenants (F&B, accessories and specialty stores) and temporary tenants during festive shopping periods. To attract and retain tenants, AEON will stick with its rental income mix that is skewed towards more tenants paying variable rentals vs. fixed rentals (which is subject to some adjustments in FY23). We believe AEON is highly conscious of its symbiotic relationship with the tenants.

4. There is no change to FY23-25 capex plans of RM200-300m per year with an estimate allocation of 80-90% for refurbishment and expansion of stores with the balance going to digitalisation. Refurbishment is currently focused on two malls, namely (Cheras Selatan Aeon and Malacca Aeon) and revamping stores layout (which will be similar as Alpha Angel Mall refurbishment) which is expected to be completed this year. AEON also plans to launch one Glam Beautique store in 1HFY23 which is a combination of Japanese and international beauty brands.

5. In terms of digital transformation, it has completed the introduction of self-checkout terminals in all its 42 stores garnering positive feedback from customers. To further save cost and mitigate the labour shortage issue, it plans to increase number of the terminals.

We maintain our forecasts and TP of RM1.80 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 its 3-star ESG 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. 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 - 24 Feb 2023