AEON expects sustained top line growth and stable occupancy, and hence rental incomes from its malls on resilient consumer spending, especially during festivities. It will continue to focus on:  (i) the refurbishment of two malls, (ii) beefing up its private brands targeting the affordable segment, and (iii) its digital transformation and sustainability efforts. We maintain our forecasts, TP of RM1.80 and OUTPERFORM call.

We came away from AEON’s post-results briefing last Friday feeling upbeat on its prospects. The key takeaways are as follows:

1. AEON expects its retail sales in 2QFY23 to sustain, underpinned by strong foot traffic during the recent Hari Raya Adifi shopping period.  It is also lining up events such as Fashion Preview, Animefest, and  AEON member day to boost sales.

2. AEON revealed that its overall occupancy rate sustained at c.91% in  1QFY23 and is confident that it will rise to 93%-95% by end-FY23  with new tenants coming onboard such as KOI The, Bananabro,  MiXue and others. AEON also guided for positive rental reversions in FY23 for tenants under fixed rental structure. The renewal rate in  FY23F will be comparable to the c.90% level in FY22. We believe  AEON is highly conscious of its symbiotic relationship with the tenants.

3. AEON has earmarked RM200m-RM300m for the refurbishment of two malls (in Cheras Selatan and Ayer Keroh, Melacca). Work will  start in 3QCY23 with completion expected by the end of the year.  This follows the launch of its first Glam Beautiquestore in IOI City  Mall, Putrajaya in Mar 2023 (which specialises in Japanese healthcare and beauty products).

4. AEON is beefing up its private brands targeting the affordable segment like Topvalu, Home Coordy and innercasual, which we believe is to position itself for down-trading by some customers whom want to stretch their dollar in times of high inflation.

5. It plans to introduce self-checkout terminals at Daiso and Wellness,  apart from AEON. It is also embarking on the installation of roof-top solar PV in its malls.

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 as: (i) It is 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 mitigate labour shortages.  Maintain OUTPERFORM.

Risks to our call include: (i) competition from existing and new players,  (ii) sustained high inflation eroding consumer spending power, and (iii)  the long-term trend towards online shopping from in-person shopping.

Source: Kenanga Research - 22 May 2023