• Maintain NEUTRAL with new DCF-derived MYR1.43 TP from MYR1.51 and 4% upside. FY22 results are below expectations due to a higher-than- expected Opex. However, AEON Co M registered a commendable YoY growth from a low base, thanks to the reopening of the economy. We trim our margins assumption, resulting in a lower earnings forecast as we remain cautious on price lock campaigns which could exert pressure on margins during the current inflationary environment.

• Below expectations. 4Q22 core profit of MYR24.9m (-64.9% YoY, +128.4% QoQ) led to FY22 earnings of MYR111.2m (+30.4% YoY). Standing at 84.9% of our projections and 88.9% of consensus, the results are deemed as below expectations. A final DPS of 4 sen was declared (4Q21: 3 sen) and the ex-date will be announced later.

• Results review. 4Q22 revenue saw robust QoQ and YoY growth, boosted by the retailing segment (+5.8% YoY, +9.4% QoQ). The better performance was mainly due to softline and hardline sales increases, thanks to the broader economic reopening and early festivities’ spending. Similarly, FY22 revenue was up 14.1% YoY, with both retailing (+13.8%) and property management (+15.9%) segments benefiting from the aforementioned factors. Nevertheless, 4Q22 core earnings drop 64.9% YoY as a result of EBIT margin shrinkage by 6.2 pts YoY to 6.8% – due to increased promotional activities, higher maintenance/utilities costs, and lower reversal of impairment of receivables.

• Outlook. We remain cautious on AEON’s price guarantee campaigns, which were launched recently to help customers cope with the rising cost of living. This could pose margin shrinkage during the current inflationary environment despite the intention for customer retention. We are, however, encouraged by the occupancy rate recovery for the property management services – 91.4% in FY22 from FY21’s 83.8%. The company renewed c.90% of the rental agreement as of FY22, with a rental reversion of c.6%. Moving forward, management aims to maintain the occupancy rate at c.93%. We believe the reopening of China’s borders and gradual pick-up in international travel will be silver linings.

• Forecasts and ratings. Given the earnings miss, we cut our FY23F-24F earnings by 12-9% after factoring in higher operating cost assumptions. Our DCF-derived TP was also adjusted to MYR1.43 with 6% ESG premium baked in – as AEON’s ESG score of 3.3 is above the country median. Our TP implies a 17x FY23F P/E (+0.5 SD from the mean) and is largely in line with the valuation for other discretionary names under our coverage.

• Key upside/downside risks: Stronger/weaker-than-expected consumer sentiment and higher/lower-than-expected Opex.

Source: RHB Research - 23 Feb 2023