This article first appeared in The Edge Financial Daily on April 21, 2020

AEON Co (M) Bhd
(April 20, RM1.08)
Maintain market perform with an unchanged target price (TP) of RM1.05: We maintain our cautious view after a conference call with AEON Co (M) Bhd’s management. We are positive on its efforts to alleviate the strain on sales with cost-saving measures, but overall, we expect financial year 2020 (FY20) to be weaker than last year (-26% year-on-year [y-o-y]) on weaker consumer sentiment. 

During the movement control order (MCO), only the group’s supermarket segment is operational with enhanced measures such as telemarketing, personal shoppers, drive-thrus, in-house delivery services and online sales through HappyFresh. Although AEON benefited from panic buying with a double-digit growth in retail sales up to March 17, after the MCO sales dropped 70% y-o-y, which averaged to about a 10% drop in March, translating into a negative same-store sales growth of 10% compared to a positive low-single-digit growth last year.

In terms of cost-saving measures, closures of some parts of its malls starting from March 18 helped to generate savings through: i) electricity costs; ii) lower maintenance works, including lower numbers of contract staff; iii) renegotiation with landlords over leasing agreements; iv) better terms with suppliers for inventory arrangement; and v) major capital expenditure being shelved, including renovation works.

AEON expects a surge in demand post-MCO with an immediate surge on Ramadan and seasonal Hari Raya demand. Nonetheless, AEON expects it will take some time for consumers to resume their daily spending pattern, projected to take up to at least six months.

AEON will introduce similar promotions which have been shelved before (101-day Ramadan and Aidilfitri campaigns) to entice consumer spending. Overall, we expect the first half of FY20 (1HFY20) to be weaker than last year, while 2HFY20 could offer some relief if consumer sentiment and spending recover.

Nevertheless, we expect the whole of FY20 to be weaker than last year (-26% y-o-y) on weaker consumer sentiment. There are no changes to our estimate as we have factored in the negative impact of the MCO into our forecasts. We have cut our earnings estimates for FY20/FY21 by 27%/20% respectively. 

We maintain our “market perform” call and TP of RM1.05, which is based on a trough valuation of 18 times price-earnings ratio (PER) (-2.0 standard deviations of the five-year historical mean PER). Risks to our call include: i) lower-than-expected sales; and ii) higher-than-expected operating expenses. — Kenanga Research, April 20