• Still BUY and MYR1.75 TP, 14% upside and c.4% FY25F yield. AEON Co M is well-positioned to benefit from the resilient consumer spending and boost from higher civil servant salaries. Its property management segment (PMS) should continue to prosper on above-industry rental revision rates thanks to optimised tenant mix and successful brand reimaging. Falling interest rates and deleveraged balance sheet should reignite the expansion engine after its toned-down approach in recent years.

• Tenant mix optimisation. Tenant sales improved significantly in 1H24 (+8.8% YoY) as AEON continues to leverage data analytics to optimize its tenant mix, offering more relevant retail options tailored to the needs of different communities across its malls. Ongoing refurbishment and revitalisation efforts have also attracted popular tenants such as Hai Di Lao and Chagee, boosting foot traffic and contributing to stronger occupancy rates (FY24F: 95%) as well as higher rental reversions (FY24F target: high single digits, above the 3-5% average for other REITs under our coverage (M- REITs)).

• More conducive environment for asset acquisitions. PMS is set to benefit from lower borrowing costs due to global interest rate cuts, allowing the company to fund asset acquisitions, including mall expansions in high-traffic areas, to drive inorganic growth. Note that AEON's net gearing ratio has decreased to 7.8% (vs 52% pre-pandemic) following a pause in expansion, and remains well below the 31.8% average for M-REITs. Consequently, this reduced AEON’s interest expense by c.40%. The company is now resuming expansion, with plans to open a new mall at KL MidTown (+400k sq ft/+3% NLA) in FY25-26 and another at AEON Seremban 2 (+400k sq ft/+3% NLA) in FY27.

• Expanding retail margins. Moving forward, AEON plans to focus on expanding its private brand offerings (5% of retail sales across all categories), which yield higher margins, and are able to capture the domestic demand better. The company aims to open one new AEON store along with 4-5 specialty stores to drive sales growth in FY25. Additionally, AEON’s cost management strategies, including optimised workforce allocation and digital initiatives like self-checkout counters, are expected to continue yielding positive results (Recall 1H24 retail margin expanded by 0.8ppts YoY to 3%).

• Forecasts and ratings. We make no changes to our earnings forecasts and DCF-derived MYR1.75 TP (inclusive of a 6% ESG premium). Our TP implies 14.5x FY25F P/E (close to its 5-year mean), ie in line with the valuation ascribed to other consumer retail stocks under our coverage. Key risks: Weaker-than-expected consumer sentiment and higher-than-expected opex.

Source: RHB Research - 17 Oct 2024