Post Aeon’s 2Q24 investors briefing, we are maintaining our earnings estimates and Buy recommendation on the stock, with an unchanged target price of RM1.68/share, based on DDM valuation (k: 7.1%; g: 3.0%). We remain optimistic about the outlook for the 2H24, anticipating continued resilience in the property segment and improved profitability in the retail segment due to ongoing cost management initiatives. Key takeaways include:

1. Property Segment (PMS) Remains Resilient

2. Retail Segment Normalising over FY24

3. Focus on ESG Initiatives

Property Segment (PMS) Remains Resilient

The property segment demonstrated double digit growth, with revenue and EBIT increased by 8.9% and 16.8% to RM184.1mn and RM79.8mn, respectively. This strong performance pushed the EBIT margin higher to 43.4% in 2QFY24, compared to 40.4% in 2QFY23. Management indicated that occupancy rate for 1HFY24 was 92.5% (vs. 91.6% in 1HFY23). However, on a QoQ basis, 2Q24 occupancy rate decreased by 2.2%-pts to approximately 91.4%. The lower occupancy rate was attributed to Aeon's ongoing renovations and facelifts for some stores/malls following the festive seasons, which caused delays in rental renewals for some tenants.

Positively, the 1HFY24 results were strong, driven by i) a higher occupancy rate, ii) successful rental renewals, and iii) an 8.8% YoY increase in tenant sales. More importantly, the group expects occupancy rates to reach 95% (vs. 93% in FY23), driven by a positive rental reversion rate of 9% (in line with FY23’s reversion rate and a rental renewal rate of 95%). As a result, we are optimistic that PMS EBIT margin will sustain at 38% (vs. 37.9% in FY23) for FY24, which is consistent with management’s projection.

Retail Segment Normalising Over FY24

To recap, 1HFY24 segmental revenue rose marginally by 0.7% YoY to RM1.8bn, while EBIT surged by 29.4% YoY to RM54.2mn. The average basket size (ABS) in 1HFY24 improved by 0.9% YoY to RM64.2/transaction, benefiting from strong festive spending in 1QFY24 (early Ramadan sales and extended Chinese New Year sales).

In 1HFY24, the central region remained the largest contributor to the group’s revenue, accounting for 63%. Meanwhile, the southern region emerged as the second-largest contributor, accounting for 18.9% of the retail segment’s revenue. Management indicated that outlets in Johor experienced single-digit growth in both ABS and sales volume. Heading into 3QFY24, we expect sales to remain muted due to the absence of festive seasons. Overall, we forecast a higher EBIT margin of 2.5% in FY24 (vs. 2.0% in FY23). Additionally, Aeon has set a target ABS of RM63.0/transaction for FY24 (vs. FY23: RM61.9), in line with the guidance provided last quarter.

Focus on ESG Initiatives

Currently, Aeon has installed rooftop solar panels on 11 of its malls. Of these, 4 are already generating electricity, while the others are awaiting government approval. We anticipate utility cost savings of 5% to 8%, depending on the size of the malls. Additionally, 16 Aeon malls are equipped with electric vehicle (EV) charging stations, with 7 of them now operational. We believe that these EV charging facilities will attract more foot traffic and encourage customers to spend more time at the malls, indirectly stimulating consumer spending.

Impact

No change to earnings estimates.

Valuation

Maintain Buy with an unchanged target price of RM1.68/share, based on DDM valuation (k: 7.1%; g: 3.0%).

Source: TA Research - 2 Sept 2024