• Keep NEUTRAL and MYR1.15 TP, 3% upside, 4% yield. We had a meeting with AEON’s management to discuss the company’s outlook and strategies. Despite trading at -1SD valuation, we remain cautious due to subdued consumer spending amidst heightened inflationary pressures. Additionally, oversaturated retail space may intensify competition and result in reduced yields for the property management segment.

• Retail’s ongoing challenges. To recap, in FY23, AEON’s EBIT margin dipped to 2% from 4.1% in FY22, despite revenue remaining flat (-2% YoY), owing to higher operating cost from rental and staff expenses. Furthermore, management noted a shift in consumer behaviour towards increased price sensitivity, unlike during the pandemic period when consumers were less price-sensitive when stocking up on household items. That said, AEON plans to maintain its marketing efforts and offer promotional discounts to spur consumer spending. We anticipate that the retail margin will remain within this range, as the operating costs are unlikely to see significant relief, while consumer sentiment may not be robust enough to drive substantial spending increases that could lead to operating leverage.

• Property management. FY23 rental revisions were encouraging (+9% YoY) following the economy reopening. Looking ahead, we foresee rental reversion to normalise to 3% – in line with other REITs under RHB coverage. We highlight the potential upside to our rental reversion forecast, as the current average rental per sq ft has still yet to return to pre-pandemic levels (89% of FY19 levels). Management adopted a hybrid rental model (FY23: 61% fixed vs 39% variable) over the years, aimed at supporting tenants during challenging times. However, soft tenant sales amidst subdued consumer sentiment, on top of saturated retail market, could lead to a lacklustre collection of variable incomes.

• Strategies moving forward. Since the appointment of new CEO Naoya Okada in March, there has not been any significant deviation from the previous strategy. In the near term, the primary focus remains on rejuvenating malls to enhance the shopping experience and improve competitiveness. The company recently opened AEON Setia Alam store (see page 3) and plans to open several specialty stores in FY24. Further ahead, AEON plans to launch a new mall at KL MidTown in FY25/26 – expanding its net leasable area by 400k sq ft (+3%) with a focus on mid- to high-end customers and a slightly upscale concept. Our FY24 capex assumption of MYR250m (Figure 8) is broadly in line with management’s guidance, which would be sufficient for the abovementioned commitment.

• Forecast and ratings. We make no change to our earnings forecast and DCF- derived TP of MYR1.15 (inclusive of 6% ESG premium), implying 13.3x FY24F P/E, which is -1SD from its 5-year mean. Key upside/downside risks: Stronger/weaker-than-expected consumer sentiment and higher/lower- than-expected opex.

Source: RHB Research - 8 Apr 2024