We came away from a recent engagement with AEON management with following key takeaways:

1. 2HFY23 earnings will be subdued due to reduced contribution from affected malls undergoing refurbishment and renovation;
2. Strategic Expansion of Specialty Stores in the Pipeline;
3. Counting on Growing Singaporean Tourists as New Catalyst.

We cut our FY23F earnings forecast by 9.4% as reflective of lower contribution from AEON Melaka (Ayer Keroh) and AEON Cheras Selatan malls due to rejuvenation. Maintain Buy with target price of RM1.57/share unchanged based on DDM valuation (k: 7.1%; g: 3.0%).

2HFY23 Earnings Will be Subdued

The 2HFY23 earnings will be affected by the ongoing rejuvenation of two AEON malls, Ayer Keroh in Melaka and Cheras Selatan in Selangor. These renovations aim to boost footfall in the future, albeit the company anticipates a sales dip during this period due to traffic disruptions as a result of fragmental closedown. Nevertheless, the malls are expected to maintain a solid average occupancy rate of approximately 80% as the company has fully secured tenancy renewals for the next three years. We also gather that the affected tenants were required to repay the maintenance and renovation fees which amounting similar to its rental during the closure.

Starting in June 2023, the renovations are expected to complete by the end of October 2023, allowing the malls to resume full operations in time for the lucrative Christmas and Chinese New Year sales. While the exact earnings impact remains undisclosed, we estimate that the temporary closure for up to 5 months of these two malls may result in a c.2% decrease each in retail segment revenue.

Strategic Expansion of Specialty Stores in the Pipeline

AEON is strategically readjusting its specialty store expansion, particularly with a focus on cultivating premium markets. AEON currently operates 28 Aeon malls, 34 Aeon stores, 8 Maxvalu stores, 62 Wellness outlets, and 43 Daiso stores. To note, AEON's first Wellness store was established at Midvalley Megamall in 2006, which has since expanded to a total of 62 stores. Recently, AEON has realigned its focus in AEON Wellness, transitioning from a personal care store to a more lifestyle-oriented wellness chain, featuring an array of imported Japanese products. Elsewhere, the company also guided that substantial growth in Daiso's foot traffic after the pandemic and was set to launch a new store in USJ on 10 October 2023. Looking ahead, AEON is in the process of identifying and securing new locations, with plans to establish an additional combined of 6 to 8 Daiso and Wellness stores in 2024.

Counting on Growing Singaporean Tourists as New Catalyst

In line with the company's expansion plans for its specialty stores, AEON would stand to benefit from an influx of Singaporean tourists. According to the Ministry of Tourism, Arts and Culture (MOTAC), it is anticipated that approximately 7.8mn Singaporean tourists will have visited Malaysia by the endCY23, after it surpassed the benchmark of 4.5mn tourist arrivals as of July 2023. Against the backdrop of strengthening Singaporean dollar against Malaysian ringgit, it is expected that Singaporean tourists will show a robust interest in visiting AEON's Wellness and Daiso specialty stores more frequently to purchase Japanese imported goods. Hence, we anticipate that the new specialty stores set to debut from 2024 onwards will be strategically located in the Johor region, aiming to capture the growing Singaporean footfall in alignment with their procurement strategy focused on Japanese-centric product offerings.

Post Budget 2024…

Budget 2024 introduced on 13 October 2023 is expected to benefit consumers due to increase in income of the B40 demographic and this will bode well for AEON. In specific, key measures of this budget include a cash aid increase to RM10bn (up from RM8bn) which would benefit over 9m recipients, one-time incentives of RM2000 for civil servants below Grade 56 and RM1000 for those above Grade 56, and also measures to upskill workers coupled with more job opportunities creation via NIMP initiatives. This budget would likely lead to higher income for B40 groups, resulting in resilience demand in the foodline and increased spending in grocery items.

Impact

We cut our FY23F earnings projections mildly by 9.4% as reflective of lower contribution from the AEON Melaka (Ayer Keroh) and AEON Cheras Selatan malls due to rejuvenation process.

Valuation

Maintain Buy with target price of RM1.57/share unchanged based on DDM valuation (k: 7.1%; g: 3.0%).

Source: TA Research - 16 Oct 2023