Review

• Aeon Co. (M) Bhd’s (AEON) 1HFY23 core net profit of RM70.8mn (- 2.7% YoY) came in within expectations, making up 50% and 52% of ours and consensus’ full-year estimates respectively.

• No dividend was declared for the quarter under review as the group mostly pays once in a year.

• YoY, the group’s 1HFY23 revenue rose 2.0% to RM2,139.8mn, mainly attributed to significant improvement in its property segment. That said, EBIT declined by 23.6% to RM156.4mn due to rising OpEx across the board. To note, the effective tax rate has dropped by 10.3ppt to 38.5%, given the absence of prosperity tax.

• QoQ, 2QFY23’s revenue slid to RM1,033mn (-6.7% QoQ), underpinned by weaker sales in the retail segment that offset the growth in the property segment. In line with the decline in revenue, the group’s core earnings logged at RM31.0mn (-22.1% QoQ).

• Retail Segment. Despite the 0.5% YoY growth in 1HFY23 topline to RM1,805.4mn driven by the opening of new stores in IOI Putrajaya and the Southern region, the segment's 2QFY23 revenue was in fact declined by 7.8% QoQ, owing to a low seasonal effect. Consequently, 1HFY23 EBIT contracted significantly by 62% YoY to RM41.9mn, primarily due to elevated operating expenses. We believe that the substantial drop in EBIT margin to 7.3% in 1HFY23 (compared to 9.8% in 1HFY22) can be largely attributed to the extended payback period and additional CapEx as well as OpEx required associated with the new stores.

• Property Management Segment. 1HFY23 revenue was up by 10.9% YoY to RM334.4mn, thanks to improved occupancy rate and higher rental rate conversion. Sequentially, the segmental operating profit leapt 15.8% to RM126.6mn driven by positive rental rate reversion.

Impact

• We maintain our forecast while pending an analyst briefing today.

Outlook

• The company opines that future growth will primarily hinge on domestic recovery and the resilience of international tourism. This outlook is set against the backdrop of a challenging macroeconomic environment, marked by persistent inflationary pressures that are expected to weigh on discretionary spending.

• That said, we maintain a cautious optimism regarding the prospects of the consumer discretionary sector based on the recent improvement in the unemployment rate, which stood at 3.4% as of June 2023 (versus 3.8% in June 2022). This improvement is expected to boost disposable income at the national level, particularly among the M40 group. Furthermore, both our in-house analysis and consensus forecasts suggest that the BNM's OPR will remain at 3% for the rest of 2023. The stabilized interest rate is anticipated to help mitigate inflationary pressures and, consequently, bolster domestic spending. As a result, we anticipate that the consumer discretionary sector's outlook is likely to be supported by the stabilized economic conditions following the conclusion of the 2023 state elections.

Valuation

• Reiterate Buy on AEON with an unchanged target price of RM1.69/share based on the DDM valuation approach (k: 7.1%; g: 3.0%).

Source: TA Research - 23 Aug 2023