AEON’s 9MFY23 results disappointed. Its 9MFY23 core net profit fell 5% YoY on flattish sales and higher costs. Sustained high inflation and the impending subsidy rationalisation are weighing on the consumer discretionary sector. We cut our FY23-24F earnings forecasts by 13% and 14%, respectively, reduce our TP by 16% to RM0.92 (from RM1.10) and downgrade our call to UNDERPERFORM from MARKET PERFORM.

Below expectations. Its 9MFY23 net profit missed expectations at only 67% and 66% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from lower-than-expected sales but higher-than-expected operating costs. Notably the group’s retail segment reported operating losses for a second consecutive quarter, amounting to RM5.7m in 3QFY23.

As anticipated, no dividend was declared for the quarter. For the full financial year, we expect AEON to distribute 4.0 sen DPS, implying a payout ratio of 53%, similar to the previous year.

YoY, its 9MFY23 turnover softened marginally by 0.5% as a 1% drop in the retail business to RM2.6b was counterbalanced by a 9% increase in property management services revenue. The decline in the retail sector primarily resulted from the high-base effect from the previous year and store closures for renovations in 3QFY23. Conversely, the improvement in the property management segment was largely driven by higher occupancy rates and positive rental renewals. The group EBIT dipped by 15.5%, largely due to lower gross margin and increased operating costs (especially staff and utilities). Its PAT, however, only saw a 5% reduction, as the impact of higher finance income and lower taxation rate helped mitigate some of the negative effects.

QoQ, its 3QFY23 turnover declined by 7.5%, with retail business and property management down by 8.6% and 1.8%, respectively. The decline was mainly due to the seasonality factor, particularly the absence of key festivals during the quarter. Correspondently, the group’s EBIT dipped by 23% due to the combination of lower sales and increased operating costs.

Outlook. While we anticipate an increase in sales for AEON towards the year’s end, coinciding with the festive shopping season, the persistent global tensions may disrupt the global supply chain. Over the immediate term, sustained high inflation and the impending subsidy rationalisation are weighing on the consumer discretionary sector. Not helping either, is lingering cost pressure.

Forecasts. We cut our FY23-24F net profit forecasts by 13% and 14%, respectively, on reduced turnover and margin assumptions.

Consequently, we reduce our TP to RM0.92 (from RM1.10 previously), based on an unchanged 12x FY24F PER, at 20% discount to the departmental store/apparel players’ average historical forward PER of 15x to reflect the eroded spending power of their target customers, i.e. the M40 group. 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) a strong recovery in consumer spending as inflation cools or the impending subsidy rationalisation turns out to be less painful to consumers, (ii) industry consolidation keeping competition in check, and (iii) cost pressure to ease.

Source: Kenanga Research - 27 Nov 2023