• Still NEUTRAL, new DCF-derived MYR1.35 TP from MYR1.43, 8% upside. 1Q23 earnings met expectations, with the normalisation in business activities leading to improved performances. However, we remain wary of earnings downside risks moving forward stemming from softer consumer spending and potential margins pressure from higher opex. As such, we believe AEON Co M’s risk-reward profile is balanced at this point.

• Results met expectations. AEON reported a 1Q23 core profit of MYR38.2m (+35.9% YoY, +53.4% QoQ). Coming in at 32% and 28% of our and Street’s full-year projections, the results are deemed in line with expectations. This is in anticipation of softer quarters ahead amid slower consumer spending, in our view.

• Results review. 1Q23 revenue jumped 10.5% YoY (+4.2% QoQ) to MYR1.1bn thanks to better performances from both the retailing (+9.8% YoY, +4.2% QoQ) and property management (+14.5% YoY, + 4.6% QoQ) segments. This was due to higher festivities spending and normalisation of business activities, with improvements in occupancy rates from the property management unit. 1Q23 PBT surged 13.3% YoY (+36.2% QoQ) to MYR62.1m thanks to increases in revenue and lower net finance costs while partially offset by higher opex, with 1Q23 EBIT margin shrinking 0.7ppts YoY.

• Outlook. Looking ahead, we remain cautious on consumer spending and sentiment, as disposable income will be pressured by rising interest rates and high cost of living. Besides, current elevated inflationary pressure and potential electricity tariff increases in 2H23 could exert margins pressure on AEON. That said, management is looking to enhance its product assortments, fresh food, and private labels to drive stronger sales whilst the increase in tourist arrivals should also help alleviate margins pressure. With MYR250m allocated for capex purposes for FY23, management plans to rejuvenate older malls to attract consumer footfall whilst installing solar panels at its malls to reduce utilities costs.

• Forecasts and ratings. We make no changes to our FY23-25F earnings as results were in line. However, our DCF-derived TP is lowered slightly to MYR1.35 after updating our cost of equity assumptions (now at 7.9% from 9.4% with a renewed beta input post housekeeping) and includes a 5% ESG premium, considering its score of 3.25 that is above the country median. Our TP implies 15.1x FY24F P/E, which is around its 5-year mean. Key upside/downside risks include stronger-/weaker-than-expected consumer sentiment and higher-/lower-than-expected opex.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 19 May 2023