AEON hopes to maintain its margins amidst subdued consumer spending. Its key focus will be on store rejuvenation and expansion, digital transformation (to improve its operational efficiency) and the development of private brands (to tap into the value-for-money segment). We maintain our forecasts, TP of RM1.00 and UNDERPERFORM rating.

We came away from AEON’s post-4QFY23 results briefing yesterday feeling neutral on its prospects. The key takeaways are as follows:

1. Flattish margins. AEON hopes to maintain its margins amidst subdued consumer spending on the back of sustained high inflation, tax increases and the pending subsidy rationalisation. It does not expect its 40th anniversary celebration promotions to have significant bearing on its retail business and property management margins, which were at 2% -2.5% and 35%-37%, respectively, in FY23.

2. Store rejuvenation and expansion. AEON has announced plans for facelift projects at several locations, including AEON IOI Bandar Puchong, AEON Bukit Indah, and AEON Tebrau City. Additionally, the company is set to expand its retail presence with new store openings at Setia City Mall and KL Midtown near the Malaysia International Trade and Exhibition Centre (MTEC). To date, AEON has a total of 28 malls, 34 stores, 7 MaxValu, 64 AEON Wellness and 45 DAISO outlets across the country.

3. Embracing changes. AEON is committed to digital transformation to improve its operational efficiency, and the development of, private brands to tap in to the value-for-money segment. At present, private brands only contribute to<5% of its total sales.

4. More colours on its FY23 results. AEON elaborated that its retail sales dipped 2% in FY23 due to decline in average basket size to RM61.9, (from RM68.8 a year ago) as consumers cut back on spending, However, its property management segment (PMS) witnessed a notable 10% turnover surge with EBIT margin improving to 37.9%, up from 34.8% the previous year, driven by a robust 9% rental rate revision and higher occupancy rates (93.2% versus FY22's 91.4%). These positive trends are likely to sustain into FY24, supported by ongoing efforts to enhance and rejuvenate existing stores and malls.

Outlook. Over the immediate term, consumer spending sentiment is likely to remain subdued amidst sustained high inflation and the lack of clarity over subsidy rationalisation. Once subsidy rationalisation measures are revealed during the year, we believe consumers will gradually “come to terms” with them and resume spending within their means. A gradual pickup in the local economy and job market in-line with the recovery in the global economy in the later part of the year may also help.

Forecasts. Maintained.

Valuations. We also keep our TP of RM1.00 based on 12x FY24F PER, at a 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 5).

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 pressures to ease.

Source: Kenanga Research - 27 Feb 2024