• Keep NEUTRAL, with new MYR1.15 TP from MYR1.29, 1% upside. We believe that the industry’s competitive nature and subdued consumer sentiment could weigh on AEON Co M's near-term retail performance. We raise our risk premium assumption to reflect the cautious outlook. That said, improved performance in its property management segment could cushion the softness in its retail division, while the selldown (YTD: 19%) of the stock may have largely priced in the aforementioned challenges.

• Retail. We gathered that 1H23 GPM was diluted by higher foodline sales contribution and more aggressive promotional discounts. Additionally, the closure of the AEON store in Sunway Pyramid mall, which accounted for 2% of total retail sales revenue, required accelerated depreciation expenses and initiatives to clear the remaining inventory. Looking ahead, we anticipate 3Q23F sales to remain soft given the absence of festive events to boost retail spending before a pick-up during the year-end festive season. Management intends to continue with its effective marketing strategies and offer promotional discounts to encourage consumer spending. It guided that FY23F retail margins will range from 2.5% to 5%, compared to 6.4% in FY22.

• Property management. The composition of fixed and variable income stands at 59% and 41%, with over half of AEON's tenants engaged in a hybrid rental model. Rental reversion was encouraging at 11% following the economic reopening, and management's FY23F occupancy rate target remains at 93%. We gathered that while the tenants from the F&B sector are holding steady, those from the fashion industry are seeing a slowdown due to a normalisation following a period of pent-up demand. Moving forward, AEON intends to bring in popular and trendy brands to attract larger crowds to its malls. It anticipates challenges from changes in the imbalance cost pass through or ICPT rate and recent introduction of the green electricity tariff in August. Management expects utility costs to spike by c.20%, while the installation of solar panels will only yield more sizeable savings over the longer term.

• Expansion plans. AEON has no plans to open new malls in the near term, and will focus on rejuvenating and refurbishing its existing malls to attract footfall. It also plans to expand its Daiso and AEON Wellness stores. Capex of MYR250-300m has been allocated for maintenance and rejuvenation.

• We cut our DCF-derived TP to MYR1.15, which now implies a lower 12.8x FY24F P/E (from 14.4x), as we raise our risk premium assumption to reflect the lower earnings visibility on the back of cautious sentiment – driven by the lackluster consumer income outlook and inflationary pressures. Our TP includes a 6% ESG premium based on an ESG score of 3.3 (above the country median). Key upside/downside risks: Stronger/weaker-thanexpected consumer sentiment and higher/lower-than-expected opex.

Source: RHB Securities Research - 21 Sept 2023