KEY INVESTMENT HIGHLIGHTS

• 1QFY20 earnings below expectation

• 1QFY20 earnings tumbled -77%yoy to RM7.5m

• Retail segment profit down -40%yoy to RM20.2m due to closing of the GMS during MCO

• Lower sales commission receivable negatively impacted property management services

• Maintain NEUTRAL with a revised TP of RM1.08

1QFY20 earnings below expectation. Aeon Co. (M) Bhd (Aeon Co)’s 1QFY20 earnings of RM7.5m only made up 7% of ours and consensus’ full year estimates. The negative deviation is mainly due to the challenging business environment due to Covid-19.

1QFY20 earnings tumbled -77%yoy to RM7.5m as revenue dipped by -1.3%yoy to RM1.2b. Profit fell drastically on-year mainly due to lower operating margins, which fell 2.3ppt to 5.4%. This is also coupled with interest income that plunged 39%yoy and higher effective tax rate of 70.5% vs 41.4% a year ago. High tax rate also contributed to lower net profit as certain expenses are not tax deductible.

Retail segment profit down 40%yoy to RM20.2m due to closing of the GMS during MCO. Lower general merchandise (GMS) sales recorded during the quarter was one of the main reasons that lead to the decline in retail segment profit. During the Movement Control Order (MCO), GMS which was deemed non-essential and was not allowed to operate, leading to a drop in income. Subsequently, retail revenue dipped by 0.9%yoy to RM1.02b.

Lower sales commission receivable negatively impacted property management services. Profit for the property management services segment fell by 16.9%yoy to RM55.7m as revenue declined by 3.5%yoy to RM169.0m. Income from this segment fell short because its non-essential services tenants were not allowed to operate during the MCO, resulting in lower sales commission received.

Our view. Looking ahead, we expect 2Q to be softer as the impact of MCO may be deeper in April. In-line with the industry trend of providing rental support, we think that its property management services segment may continue to come under pressure until consumer spending at its premises normalises. On top of that we think that rental rates may be suppressed due to the challenging business environment.

Impact to earnings. As we turn more cautious due to the changes in consumer behaviors such as less frequent trips to physical stores, focusing on buying necessities, cutting down on celebrations and social gathering, we are trimming our FY20 and FY21 forecast by -11.2% and -3.7% respectively. We have also taken into consideration of a more challenging environment for its property management segment.

Target price. We are revising our target price to RM1.08 (previously RM1.22) which is based on pegging FY20EPS of 6.8sen against a forward PER of 16.0x. Our valuation is premised on -1.5SD below its three years historical average PER. We attribute the discount to the: (i) saturated retail landscape in the country; (ii) impact of Covid-19 on the economy; and (iii) expectation of a further decline in consumer sentiment.

Maintain NEUTRAL. We expect increasing competition among brick and mortars retailers to lure customers back as they reopen for businesses. Pressure will also come from brand owners strengthening their e-commerce distribution as consumers have increasingly shop online during the MCO. Consumer sentiment is expected to be softer in face of job and economic uncertainties. We also think that the bottom line contribution from the property management segment may be softer due to the challenging retail businesses amid an oversupply in retail space. On a more positive note, its supermarkets may see better businesses as some wet markets were closed during the MCO and customers may prefer to buy fresh produce in a cleaner environment during the pandemic. All things considered, we are NEUTRAL on the stock.

Source: MIDF Research - 21 May 2020