AEON foresees a seasonally subdued 3Q, but sales are expected to hold up YoY as it steps up its promotional efforts, enhance its product range and optimise its tenant mix. It sees minimal impact from the closure of Sunway Pyramid AEON as the resulting 2% loss in sales could easily be made up by contributions from new stores. We maintain our forecasts, TP of RM1.33 and OUTPERFORM rating.

We walked away from AEON’s post-results briefing yesterday feeling cautiously optimistic on its prospects. The key takeaways are as follows:

1. A soft 3Q ahead, but no YOY decline. AEON foresees a seasonally subdued 3Q, but sales are expected to hold up YoY as it steps up its promotional efforts, enhance its product range and optimise its tenant mix. Meanwhile, it expects its basket size in 3Q to stay within a range of RM60 to RM65, consistent with the average spending of RM64 in 2Q.

2. Restated the retail segment profit. AEON has revised its 2QFY23 retail segment profit to RM3.7m, compared to the previously reported -RM2.6m in its latest quarterly result note. This adjustment primarily stems from the remapping of unallocated expenses and a shift in revenue mix. Following the restatement, the retail segment profit for 1HFY23 now stands at RM42m (-62% YoY) with lower margin of 2.3% as compared to 6.1% a year ago, mainly attributed to increased salary, marketing costs and utility bills. Looking ahead, it anticipates that the segment’s profit margins will likely fall within a range of 2.5%- 5.0%, depend on the future revenue mix.

3. Reopening and expansion. AEON revealed that its overall occupancy rate sustained at c.91.6% in 1HFY23 and is confident that it will rise to 93% by end-FY23 with new developments (i.e. expanding cinema fleet and specialty stores) and tenants coming onboard such as re-opening of Aeon Cheras Selatan and Aeon Ayer Keroh.

4. Closure of Sunway Pyramid AEON is not anticipated to impact Aeon’s overall performance. Although the closure represents a loss of c.2% of the retail business segment’s topline, this could be partially offset by the opening of new stores. Additionally, the company believes that shoppers will likely redirect their visit to nearby Aeon outlets, such as the one in Mid-Valley.

5. Embracing change. The group is pursuing a strategy that includes digital transformation, private branding, and community collaboration through AEON living zones. We believe, these initiatives aim to cater to customers seeking to maximize value during times of high inflation.

Outlook. We foresee a boost in sales for AEON as we approach the year end festive and shopping season. This positive trend is expected to be bolstered by stronger consumer sentiment, fuelled by the accelerated implementation of various government policy initiatives following recent state elections.

Forecasts. Maintained.

We also keep our TP of RM1.33 based on 15x FY24F PER, in-line with the average historical forward PER of departmental store/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 - 24 Aug 2023