KEY INVESTMENT HIGHLIGHTS

• 1HFY20 earnings below expectation

• Recorded losses in the first six months due to the movement control order

• 2QFY20 turned into net losses of RM9.6m

• Recovery expected in 2HFY20

• Upgrade to TRADING BUY with a revised TP of RM1.07

1HFY20 earnings below expectation. Aeon Co. (M) Bhd (Aeon Co)’s 1QFY20 turned into a net loss of RM9.6m, which is worse than what we had anticipated earlier. Year-to-date, it recorded a net loss of RM2.1m. The losses include impairment loss from trade receivables amounting to RM6.8m for the first six months. The results surprised on the downside as we had anticipated full year profit at RM95.1m vs consensus’ RM78.8m. No dividend was announced during the quarter, which is within expectation.

Recorded losses in the first six months due to the movement control order. For the first half, Aeon Co recorded a net loss of RM2.1m as revenue dropped by -7.0%yoy to RM2.1b. Operating profit fell by 38.2%yoy to RM105.4m while pre-tax profit plunged by 72.6%yoy to RM26.2m. Results turned into a net loss due to lower sales and lower operating margin. On top of that interest charges doubled to RM37.5m while effective tax rate is higher than the statutory rate due to expenses that are not tax deductible.

2QFY20 turned into net losses of RM9.6m as revenue dropped by 13.2%yoy to RM954.3m. During the Movement Control Order (MCO), the general merchandise (GMS) segment, which was deemed non-essential was not allowed to operate, leading to a drop in income of -12.3%yoy and -20.7%qoq to RM810.7m. Operations for the segment had fully resumed from May 12 onwards. Meanwhile, revenue for the property management services declined by 18.0%yoy and 15.0%qoq to RM143.6m due to lower sales commission as its non-essential services tenants, making up about 60% of the company revenue, halted business activities during the MCO period.

Recovery expected in 2HFY20. We believe that the second quarter may be the weakest quarter and expect recovery in from 3Q onwards. This will be supported by the full operations of its retail business and tenants resuming their activities as well. We are more concerned about the rate of recovery for the property management services segment as the pandemic may result in permanent closures for some small and micro businesses, which might be Aeon Co’s tenants. On the other hand, we believe that the GMS segment may recover faster as consumers return to shopping malls.

There is also a possibility of pent up demand for the GMS segment. Supplementing its existing business, the company has also introduced improvised services to its customers such as home delivery and personal shopper.

Earnings revised by -39.0%/-10.3% for FY20E/FY21F due to the near-term headwinds. Although we opine that recovery is in sight, we believe that consumer sentiment may remain cautious. We think that the property management services segment might come under pressure should a fraction of its tenants close their shops for good. As such, we trim our FY20E/FY21F earnings by 39.0% and 10.3% respectively due to the said reasons.

Target price. We are revising our target price to RM1.07 (previously RM1.08) as we roll our base year to FY21F. Our new TP is pegged to 16.0x PER FY21F EPS of 6.7sen. 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 including shifting to shopping on digital platforms; and (iii) extended cautious consumer sentiment.

Upgrade to TRADING BUY from NEUTRAL. This is due to the sharp retracement in its share price over the past few months. We believe that most of the negatives have been priced in at this point. Looking beyond the lackluster year that 2020 has been, we expect that Aeon Co is likely able to weather through the situation due to its track record. Valuation also appears much more attractive now.

Source: MIDF Research - 28 Aug 2020