KEY INVESTMENT HIGHLIGHTS

• Higher tourist movement from neighboring countries
• Private label products have shown encouraging growth
• Higher occupancy rate of 95.1% in 9MFY24; remain committed to tenancy renewal
• Minimal impact on minimum wage hike
• Maintain BUY with an unchanged TP of RM1.67

We attended Aeon Co's 3QFY24 analyst briefing, and we remain positive on the outlook for the company. Key highlights of the briefing as below:

Retail segment:

Steady ABS with the foodline remains the key contributor. Retail revenue continues to be anchored by the foodline, which accounted for 55.7% of YTD sales, driven by sustained demand for essential goods. In contrast, discretionary categories such as softline (16.3%), hardline (13.4%), and health and beauty (HBC) (14.5%) faced softer demand as consumers remained cautious due to inflationary pressures. Despite this, AEON has managed to keep the average basket size (ABS) steady at RM62 for 9MFY24, with full-year expectations between RM60-65.

Higher tourist movement from neighboring countries. The Southern region (19.1%) outperformed the northern region (17.8%) mainly lifted by tourist traffic from Singapore. The central region (63.1%) remained strong as the biggest contributor. A standout observation is that the Southern region recorded an ABS 20% higher than other regions, highlighting the significance of tourism-driven spending.

Private label products have shown encouraging growth, with sales increasing by over +30%yoy, albeit contributing less than 5% to total retail sales. AEON aims to continue expanding its private-label offerings, focusing on increasing stock-keeping units (SKUs) rather than introducing new brands.

PMS segment:

Higher occupancy rate of 95.1% in 9MFY24, mainly supported by completed mall rejuvenation and optimized tenant mix. Management highlighted that the introduction of new brands and ongoing enhancements to the shopping experience contributed to a 7% YTD tenant sales growth.

Remain committed to tenancy renewal. Management remains committed to tenancy renewal, with 65% of tenant agreements renewed as of 3QFY24 and targeting a full-year renewal rate of 90%. Additionally, rental rates were revised upward during the year, ranging from 7-9%, benefiting from an improved tenant mix and mall upgrades.

Others:

Development Plans and ESG. AEON has made significant progress in store openings and renovations, further enhancing its retail and shopping experiences. AEON Bandar Puchong and AEON MaxValue Desa Park City were opened in August 2024.

More recently, AEON Bukit Indah and AEON Ipoh Station 18 completed its renovations, offering updated facilities to attract more footfall. AEON Tebrau City completed extensive rezoning and renovation work, introducing a new food and lifestyle area featuring 20 specialty stores, including restaurants, a lifestyle bookstore, and entertainment facilities to elevate customer shopping and dining experiences. Sustainability remains a key focus, with solar panel installations at 11 malls expected to reduce utility costs by 5-7%, alongside increased EV charging infrastructure and waste management initiatives.

Minimal impact on minimum wage hike. AEON anticipates minimal impact from Malaysia's revised minimum wage increase to RM1,700 in February 2025. Management expects this to affect less than 1% of total operating expenses.

Maintain BUY with an unchanged TP of RM1.67. We have made no changes to our earnings forecast post analyst briefing. Our TP is based on PER of 15.5x pegging to FY25F EPS of 10.8sen.

Outlook. We remain optimistic on AEON's outlook, supported by solid consumer spending, which is expected to continue.

This is bolstered by a stable job market, favorable income prospects, and government initiatives such as cash handouts and EPF Account 3 withdrawals, all of which are likely to drive demand for value-oriented products at AEON stores. Furthermore, AEON's strategic focus on expanding private-label offerings, driving digital transformation, and developing AEON Living Zones is set to enhance customer engagement and loyalty. Looking ahead, we anticipate a stronger retail performance in 4QFY24, particularly in December, due to preparations for Chinese New Year.

Source: MIDF Research - 25 Nov 2024