KEY INVESTMENT HIGHLIGHTS

• 9MFY20 earnings missed expectation
• 3QFY20 rebounded strongly qoq but not enough to offset the weakness recorded earlier
• Takes time for new strategies to bear fruit
• Earnings trimmed by -41.0%/-5.8% for FY20E/FY21F
• Maintain TRADING BUY with a revised TP of RM1.01

9MFY20 earnings missed expectation. Aeon Co. (M) Bhd (Aeon Co)’s net profit of RM14.3m for the cumulative period missed our and consensus estimates, recording 24.7% and 18.1% of full year forecast respectively. No dividend is announced during the quarter, which is within expectation.

3QFY20 rebounded strongly quarter-on-quarter but not enough to offset the weakness recorded earlier. Net profit for the quarter more than doubled compared to a year ago at RM16.4m despite recording revenue that slid by -6.9%yoy to RM989.6m. The improvement in net profit can be attributed to operating expenses that reduced by -9.1% and interest expenses that are lower by - 15.6%yoy. Compared to the preceding quarter, the RM16.4m profit made is a stark contrast to the RM9.6m losses made in 2Q. Revenue had also improved by +3.7%qoq. This was mainly due to the Recovery Movement Control Order (RMCO) which spurred the return of shoppers to its premises. Net profit climbed faster than the growth in sales due to its adjustment in cost structure.

Margins improved following adoption of a more agile cost structure. Segment wise, property management services turnover fell by -11.8%yoy to RM153.39 million, mainly due to rental waivers and rebates to tenants, lower rental income and sales commission receivable. However, profit for the segment improved by +3.9%yoy to RM71.9m. As for the retailing segment, revenue in 3QFY20 dipped by -5.9%yoy to RM836.2m but segmental profit rose to RM31.3m from RM2.1m a year ago due to better merchandise gross margin, change in marketing mechanics and savings from cost cutting measures.

Takes time for new strategies to bear fruit. We notice that Aeon Co has changed its marketing strategy, which has helped it saved on marketing expenditure. Among others, it has stopped the publication of the “Pearl” magazine for its customers but has launched other initiatives such as the MyAeon platform which allows consumers to shop online. The platform also features merchandises of its tenants. It has also rolled out “Click and collect” services, drive-through and delivery services. On top of that, Aeon Co is working closely with its tenants and other SMEs within its ecosystem to drive sales in both the physical and digital space. We think that the margin improvement seen in 3Q may has also improved by 3.3ppt qoq. This is mainly due to the uplift in the movement control order (MCO), which spurred the return of shoppers to its premises during the Recovery MCO. Net profit climbed faster than the growth in sales due to its adjustment in cost structure.

Margins improved following adoption of a more agile cost structure. Segment wise, property management services turnover fell by 11.8%yoy to RM153.39 million, mainly due to rental waivers and rebates to tenants, lower rental income and sales commission receivable. However, profit for the segment improved by 3.9%yoy to RM71.9m. As for the retailing segment, revenue in 3QFY20 dipped by 5.9%yoy to RM836.2m but segmental profit rose to RM31.3m from RM2.1m a year ago due to better merchandise gross margin, change in marketing mechanics and benefits from cost cutting measures.

Takes time for new strategies to bear fruit. We notice that Aeon Co has changed its marketing strategy, which has helped it saved on marketing expenditure. Among others, it has stopped the publication of the “Pearl” magazine for its customers but has launched other initiatives such as the MyAeon platform which allows consumers to shop online. The platform also features merchandises of its tenants. It has also rolled out “Click and collect” services, drive-through and delivery services. It is also working closely with its tenants and other SMEs within its ecosystem to drive sales in both the physical and digital space. We think that the margin improvement seen in 3Q may serve as a pre-cursor for its future outlook. We believe that the integration of online and offline services will be crucial for the success of retailers in the longrun. Aeon Co’s presence in both spaces provides choices, convenience and added-value to customers.

Recovery expected ahead despite a cautious tone. We note that consumer confidence is still subdued as a result of the pandemic and uncertainties in recovery ahead. The surge in number of cases in Kuala Lumpur and Selangor may also dampen sentiment. However, Aeon Co’s presence in other cities and in residential areas may help it cushion the potential softness in certain areas that report high cases of Covid-19. We also expect a better sequential quarter that coincides with the holiday season and year-end sales.

Earnings adjusted by -41.0%/-5.8% for FY20E/FY21F in view of weaker-than-expected cumulative results. We trim our earnings estimates in view of the pro-longed uncertainties as a result of the resurgence in Covid-19 cases in the country and cautious consumer sentiment. We also trim our dividend estimates to 2.0sen for FY20E and 3.0 sen for FY21F from 4.0 sen previously.

Maintain TRADING BUY with revised target price of RM1.01. We adjust our TP in-line with the change in our earnings estimates. Our TP is based on 16.0x PER pegged to FY21F EPS of 6.3sen. 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. Looking beyond FY20E, we believe that Aeon Co may stage reasonable recovery in the medium to longer term. At current juncture, valuation also appears much more attractive now. It is trading below its net asset per share of RM1.17. Dividend yield is estimated at 3.9%.

Source: MIDF Research - 26 Nov 2020