AEON's 9MFY24 results met our expectation but disappointed the street's estimate. Its 9MFY24 net profit rose 27% driven by improved margins in the retail division, likely due to greater mix of higher-margin food-line and soft-line products, including textiles and footwear. We expect 4Q performance to be fuelled by the year-end shopping season and promotional efforts. The upcoming progressive civil servant salary hike in December 2024 should also provide some relief amidst subdued consumer spending. We maintain our forecasts, TP of RM1.35 and UNDERPERFORM call as the current share price has run ahead of its fundamentals.

AEON's 9MFY24 net profit of RM104.0m came in within our expectation at 84% of our full-year forecast, but below consensus at 68% of the street's estimate. As anticipated, no dividend was declared for the quarter. Nonetheless, we expect AEON to maintain a DPS of 4.0 sen for the full financial year, consistent with the previous year.

YoY, its 9MFY24 top line grew by 3%, driven by growth in both the retail segment (+2%) and property management services segment (+10%) - the retail business benefitted from higher customer spending while property management services saw improved occupancy rates and effective rental renewals supported by ongoing mall upgrades and renovation projects. Its net profit surged 27%, thanks to better margin in the retail division, which we believe resulted from higher contribution of higher-margin categories such as food-line and soft-line (e.g. textiles, footwear).

QoQ, its 3QFY24 revenue dipped 2%, primarily due to the seasonal factor, with the absence of major festivals impacting retail sales and property management commissions. However, its bottom line tumbled 32% due to lower turnover from festive items and poorer cost absorption especially in the retail division.

Outlook. While consumer spending still seems to remain soft in 3Q given the lingering subdued consumer sentiment and constrained purchasing power, we foresee sequential QoQ improvement for AEON, underpinned by the year-end shopping season and promotional activities. Additionally, the civil servant salary increase, effective December 2024, should at least partially restore consumer spending power.

Forecasts. Maintained, based on same-store sales growth (SSSG) assumptions of -3.4% and -1.3%, respectively.

Valuations. We also maintain our TP of RM1.35 based on 15x FY25F PER, in line with the departmental store/apparel sector's average historical forward PER. We keep our UNDERPERFORM call as its share price has run ahead of its fundamentals. There is no adjustment to our TP based on ESG given a 3.5-star rating as appraised by us (see Page 4).

Risks to our call include: (i) a strong recovery in consumer spending as inflation cools, (ii) industry consolidation keeping competition in check, and (iii) easing cost pressures.

Source: Kenanga Research - 22 Nov 2024