AEON’s 1HFY23 results disappointed. However. we expect better numbers ahead during the year-end festive/shopping period, as well as improved consumer sentiment as “anxiety” over state elections dissipates. We cut our FY23F and FY24F earnings by 5% and 11%, respectively, reduce our TP by 26% to RM1.33 (from RM1.80) but maintain our OUTPERFORM call.

Below expectations. 1HFY23 net profit missed expectations at only 53% and 50% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from retail sales which softened more than expected in 2Q—after the bumper pre-Aidil Fitri shopping period in 1Q — we believe, due to sustained high inflation and to a certain extent, the “anxiety” ahead of the state elections that hurt consumer sentiment.

YoY, 1HFY23 turnover increased by 2%, driven by an 11% growth in the property management services, thanks to improved occupancy and rental rates. The retail business saw a marginal 0.5% growth, primarily from new store openings. However, EBIT plunged 24% due to elevated operating expenditure.

QoQ, 2QFY23 turnover declined by 7%, with retail business down 8% due to the lack of festivities spending. This, however, was partially offset by higher contributions from the property management services segment, resulting from rental rate renewal. EBIT fell by a larger 13% as a result of thinner margin that was likely led by higher material and operating expenditures.

Outlook. We expect a pick-up in sales for AEON towards the later part of the year during the year-end festive/shopping period, as well as stronger consumer sentiment underpinned by acceleration in the roll out of various policy initiatives by the government post the recent state elections. We also take comfort in a stable job market and inflation that has seemingly peaked.

On a separate note, AEON was sued by Betanaz Properties for breaching a rental agreement and is seeking rental and other costs (c.RM78.2m). Filing a counterclaim, AEON is demanding RM30.7m from Betanaz and AZRB (Ahmad Zaki Resources Berhad) for unmet obligations related to consultation fees and bridge construction. The trial, which began in July 2023, will continue until January 2024. AEON’s legal team believes that Betanaz’s claims don’t align with legal rules, thus no provisions for payment have been set aside.

Forecasts. We cut our FY23F and FY24F net profit forecasts by 5% and 11%, respectively, on reduced turnover and margin assumptions.

Consequently, we reduce our TP to RM1.33 (from RM1.80 previously), based on 15x FY24F PER, in-line with the average historical forward PER of personal goods/apparel segment. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) increased competition from both existing and emerging players, (ii) prolonged high inflation that may erode consumer spending power, and (iii) the ongoing shift towards online shopping, moving away from traditional in-person shopping.

Source: Kenanga Research - 23 Aug 2023