KEY INVESTMENT HIGHLIGHTS

• Recovery expected in FY21 although it may take time to match pre-pandemic level

• New retail formats in store

• Expect new cost structure to provide better profitability in the long run

• Upgrade BUY with a revised TP of RM1.18

Recovery expected in FY21 although it may take time to match pre-pandemic level. We had a virtual meeting with Aeon Co’s management team recently and came back feeling upbeat over its longer-term prospects despite near-term challenges caused by the pandemic. Based on some of the pointers the management shared, we deduce that performance in FY21 is likely to be better than in FY20 although it may not be recovering to the pre-pandemic level yet. From there onwards, we expect a firmer recovery from FY22 onwards in view of some of the new growth plans the management is putting in place. We also understand that the impact on its business in different regions varies. For instance, its Johor business is adversely impacted by the closure of the Johor-Singapore border and the company is looking into cross-border delivery.

New retail formats in store. The management will focus on differentiating itself from its competitors and tap into its customers’ profile to customise its offerings. It has also identified a new flat-price model to be rolled out next year. The company plans to open up to 10 stores of such format. On top of that, it is reviewing the positioning of Aeon Wellness to avoid direct competition with other mass market pharmacies or wellness stores. It is looking to further refine its offering by bringing in new imported products from Japan. This will be with the help of data analytics to provide relevant offerings to customers. The company has also embarked on a membership consolidation exercise across its different businesses, which will see its member base increase to two million by end of the year.

Focus on digital initiative. The group plans to spend RM30m to RM40m on its digital initiative. It plans to launch its virtual mall platform by 2QFY21, which is expected to add value for its mall tenants. We think that it will be hard to quantify the benefits it can reap from its digital initiatives in the short-term but the digital development is required amid a competitive retail landscape.

Cautious and selective on expansion. We believe that the company will compete where it can win by opening new stores in locations and formats that will be able to bring in firm growth. Among others it will open one Max Value store and one general merchandise store next year. Some of its previous expansion plans are under review and more store openings are expected in 2022. It may also be looking to open a mall in 2024 or 2025 in the central region.

To be a more efficient mall manager. During 3QFY20, Aeon Co’s property management services segment saw its pretax profit margin climb 7.0ppt yoy and 9.2ppt qoq. The better performance of the segment can be attributed to cost savings from the reviewing of its recurring maintenance costs as well as lower utilities. Reviewing its rental structure to incorporate a higher component of turnover rent as compared to base rent. It also targets to differentiate itself from other malls by creating theming categories that suit the demography it serves. It will allocate 40% to 50% of its capex budget on asset enhancement initiative for its malls to stay relevant with more emphasis on the 14 malls that it owns. Since the pandemic, it has responded quickly to meet tenants’ needs on a case by case basis. Meanwhile, its sister company, Aeon Credit, could provide financial services to some of its tenants.

Expect new cost structure to provide better profitability in the long run. The management team shared that it will continue to be agile in its marketing plans. There will be much more emphasis on digital marketing as well as to make the online and offline shopping experience more seamless for customers. The group has also dispersed human resources from the headquarter to the revenue centers in order to reduce lead time as well as to adapt to consumer demand in order to improve performance at each locality. On the flipside, it will continue to consolidate its procurement and purchases at the group level to garner better scale and bargaining power when liaising with its suppliers. Some of the actions has already borne fruit as seen in its 3QFY20 results as operating profit improved by 2.1ppt yoy and 3.3ppt qoq. Notably, its retailing segment pre-tax profit margin recorded 3.5ppt improvement yoy and 3.4ppt increase qoq. These strategies are expected to continue to benefit the group in the long run.

Upgrade to BUY from TRADING BUY. We are revising our target price to RM1.18 (previously RM1.01) as we increase our PER valuation to 18.7x, which is -1.0SD of its 5-year historical mean compared to 16.0x previously, which is based on - 1.5SD below its three years historical average PER. Our new TP is based on 18.7x FY21F EPS of 6.3sen. Meanwhile, we keep our earnings unchanged. We think Aeon Co will be able to benefit from the recovery of the economy and consumer spending. On top of that, valuation appears much more attractive now. Although consumers increasingly shop online especially since the pandemic, we think that offline shopping will continue to have its place with an experiential offering that online shopping cannot displace. As such, we think that retailers such as Aeon Co that adapt to the changes in consumer behaviors will stand out in the long-term.

Source: MIDF Research - 8 Dec 2020