• Maintain NEUTRAL with new MYR1.35 TP (DCF) from MYR1.26, 0% downside. We recently had a meeting with management to discuss AEON Co M’s outlook and strategies. We remain cautious about AEON’s prospects due to increasing competition from neighbourhood and niche grocery stores, and an oversupply of retail space. We foresee muted earnings growth ahead and choose not to stretch our valuation further.

• Key takeaways. The strategy for AEON’s retail segment includes: i) Expanding the private brand (currently <5% of retail sales; it comprises food items and household products that yield higher margins and attract customers with unique offerings), ii) implementing digital initiatives like self- checkout counters to enhance efficiency and reduce personnel costs (30% of opex) and a mobile app to improve convenience and customer engagement, iii) intensifying marketing and promotional efforts to increase foot traffic during non-festive periods, and iv) opening one new AEON store along with 4-5 specialty stores over the next year.

• Retail outlook. Our SSSG assumption of 3-4% is in line with Retail Group Malaysia’s FY24F-26F retail sales, which accounts for expected benefits from the Employees Provident Fund accounts restructuring and civil servants’ revised salary scheme, and impact of subdued consumer spending amidst inflationary pressures. We do not anticipate AEON to outperform the broader retail industry, particularly in the competitive grocery sector, amid rising competition from neighbourhood and niche grocery stores. Recall: It posted 4.2% YoY growth in 1Q24 retail revenue, underperforming Malaysia's 7.8% overall retail sales growth for the same period. Post 1Q24’s festive-driven boost (on the unusual timing of the Lunar New Year and Eid al- Fitr falling in 1Q), we estimate a retail sales decline (>20% QoQ).

• Limited catalysts for property management segment (PMS). While PMS remains a key earnings driver, we think further growth is limited by near-full occupancy rates and minimal mall expansions. Management is focused on rejuvenating malls to enhance the shopping experience and improve competitiveness. Post renovation, tenant interest has increased, and AEON aims to continue attracting brands that appeal to younger consumers. Despite management's expectation of high single-digit rental growth, we project a more conservative rental reversion of 3% for FY24, following strong rental reversion in FY23 (+9%) – in line with other REITs under our coverage, as we think the oversaturation of retail space intensifies competition.

• Forecast and ratings. Post meeting, we make no changes to our earnings forecasts but raise TP to MYR1.35 after rolling forward our DCF valuation base year to FY25F. Our TP implies 13x FY25F P/E (-0.5SD from its 5-year mean), ie in line with the valuation ascribed to other consumer retail stocks under our coverage. Key upside/downside risks: Stronger-/weaker-than- expected consumer sentiment and higher-/lower-than-expected opex.

Source: RHB Research - 18 Jul 2024