This article first appeared in The Edge Financial Daily on March 19, 2018

Consumer - retail sector
Maintain neutral: The overall Malaysian retail industry’s sales grew by +3.1% year-on-year (y-o-y) in the fourth quarter of calendar year 2017 (4QCY17) due to seasonality factor. The recent data compiled by Retail Group Malaysia (RGM) revealed that the Malaysian retail industry recorded a growth of 3.1% y-o-y in 4QCY17, mostly due to Christmas and year-end sales. This was an improvement from the -1.1% y-o-y growth recorded in the immediate previous quarter.

Nevertheless, the sales growth came in below the expected +4.5% y-o-y growth.

Dissecting further by retail sub-sectors, the departmental store with a supermarket and fashion and fashion accessories sub-sectors recorded performance growth above expectations at +2.3% y-o-y and +7.8% y-o-y respectively, while the pure departmental store sub-sector recorded a decline in sales of -0.4% y-o-y, in contrast with the estimated +9.3% y-o-y growth.

Despite the stronger overall industry sales growth, mixed earnings were recorded. Under our coverage universe, AEON Co (M) Bhd (buy; target price [TP]: RM2.04) and Padini Holdings Bhd (neutral; TP: RM4.77) recorded strong revenue growth in their retailing segment of +2.9% y-o-y and +7.9% y-o-y respectively, in accordance with the departmental store with a supermarket and fashion and fashion accessories sub-sectors’ strong performance. Due to a better net profit margin, AEON’s operating profit from the retail segment grew by +70.9% y-o-y, while Padini’s operating profit dropped by -8.4% y-o-y due to higher cost of goods and an increase in selling and distribution expenses due to its recent rapid expansion.

On pure departmental store players’ performance, Parkson Holdings Bhd (non-rated) recorded a decline of 45% y-o-y in its local retail segment, which was worse than the industry’s departmental store sub-sector performance.

As a shopping mall operator, AEON is in a better position to react to the latest consumer trend.

Despite operating in a similar retail sub-sector, AEON’s better performance was partly due to its competitive advantage as a shopping mall operator as opposed to a pure departmental store player like Parkson, enabling the group to react faster to the latest consumer shopping trend and spending behaviour as it has the ability to influence tenancy mix in its shopping mall. The group has been actively refurbishing, rezoning the layout and bringing in a fresh tenant mix for its older shopping malls, such as AEON Taman Maluri.

AEON also operates supermarkets, pharmacies (AEON Wellness), flat-price shops (Daiso) and premium supermarkets (AEON Maxvalu). These enhance its position as a community-centric and family-friendly shopping mall. Due to the aforementioned reason, AEON is our top pick for the retail sector. — MIDF Research, March 16