• Upgrade to BUY from Neutral, new MYR1.75 TP from MYR1.35, 17% upside. AEON Co M’s 1H24 results exceeded expectations, driven by stronger-than-expected performance in the property management segment (PMS). Current below mean valuation is attractive, with AEON’s retail segment well-positioned to capitalise on positive sector developments. PMS is expected to remain resilient, supported by strong rental reversion, while the hybrid rental model is poised to benefit from improved tenant sales amid better consumer sentiment.

• 1H results above expectations. Core profit of MYR85.2m (+24.6% YoY) accounted for 62% and 60% of our and consensus full-year forecasts. The positive deviation was due to better-than-expected sales and margins from both retailing and PMS (Figure 2).

• Results review. YoY, 1H24 sales rose 2.3% to MYR2.2bn, driven mainly by the PMS segment (+10.9%) due to improved occupancy rates and effective rental renewals. 1H24 EBIT margin expanded 1.1ppts to 8.4%, likely due to higher sales enhancing operating leverage. QoQ, 2Q24 revenue fell 12.5% to MYR1bn, with declines in both retailing (-14.7%) and PMS (-1.5%) as festive spending was already captured in 1Q24. Consequently, 2Q24 core profit dropped 51.8% QoQ to MYR27.7m, primarily due to a sharp decline in retailing profits (-99.6%) from the absence of festive spending. This was partially offset by a 17.4% increase in PMS profit, driven by lower festive marketing costs.

• Outlook. We expect AEON to benefit from recent developments, ie civil servant salary hike and flexible EPF withdrawals. These should support near- term retail sales despite the lack of festive events – aligning well with its customer base. AEON is also streamlining staff costs and improving digitalisation to enhance margins, while strengthening marketing and promotional strategies to stimulate consumer spending. Meanwhile, PMS is experiencing strong rental reversion (FY24F target: high-single digit) due to ongoing rejuvenation and mall upgrades, attracting more tenant interest through improved competitiveness. Additionally, AEON’s hybrid rental model (FY23: 61% fixed vs 39% variable) positions it to capture improved tenant sales amid better consumer sentiment. Looking ahead, AEON plans to open 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.

• Forecast and ratings. Post results, we raise FY24-26F earnings by 14%, 16%, and 17% after revising our conservative rental reversion and margin forecast for PMS. Our DCF-derived TP is raised to MYR1.75 (inclusive of 6% ESG premium). Our TP implies a 14.5x FY25F P/E, close to its 5-year mean. Key downside risks: Weaker-than-expected consumer sentiment and higher- than-expected opex.

Source: RHB Research - 30 Aug 2024