This article first appeared in Capital, The Edge Malaysia Weekly on September 13, 2021 - September 19, 2021

AS Malaysia gears up for a full reopening of its economy with a planned transition from treating Covid-19 as a pandemic to an endemic, consumer stocks — a proxy for the recovery theme — are in the limelight again.

The share prices of two prominent household brands — Aeon Co (M) Bhd and Padini Holdings Bhd — have gained 18.6% and 8.6% respectively in the past three months, beating the 0.4% decline in the broader consumer sector, as measured by Bursa Malaysia’s Consumer Products & Services Index. Aeon closed at RM1.53 last Wednesday while Padini settled at RM3.15.

Coincidentally, the two companies reported a similar net profit of close to RM11 million in their latest quarter ended June 30.

After staging a smaller share price gain, can Padini play catch-up considering that its forward 12-month price-earnings ratio (PER) of 21.6 times is lower than Aeon’s 26.2 times? But on a trailing 12-month basis, Padini is more expensive at 38.1 times versus Aeon’s 27.9 times.

An analyst who covers the consumer sector says that could only happen if Padini’s business is back to pre-pandemic levels. “This is in view of the unprecedented higher number of Covid-19 cases despite the massive vaccination rollout as well as stringent SOPs (standard operating procedures), which only entertain fully vaccinated customers. We still haven’t reached herd immunity. Thus, I believe it will be difficult [for Padini] to catch up [with Aeon] in terms of its share price gain under the current circumstances,” she tells The Edge.

Compared with Padini, which solely focuses on the retail garment business, the analyst prefers Aeon for its diversity in both the retail and food segments. “Its strong food segment is believed to be holding well at this stage and has boosted Aeon’s top line,” she says.

Hong Leong Investment Bank Research analyst Syifaa’ Mahsuri Ismail concurs, noting that Aeon is a more defensive stock with its supermarkets and Wellness Pharmacy outlets allowed to operate during the lockdown. “Additionally, we gather that despite the soft footfall, Aeon has experienced an increase of 20% in basket size compared with pre-pandemic levels, thanks to its effective product placement strategy coupled with consumers’ preference to reduce the frequency of visits,” she tells The Edge.

In contrast, Padini’s apparel business faces greater challenges owing to the limited operational hours due to the strict SOPs, she points out. All of its outlets were completely shut during the Full Movement Control Order (FMCO) or Phase 1 of the National Recovery Plan.

Her preference for Aeon is also driven by the company’s strategy to ramp up its online expansion via the myAeon2go-Boxed partnership, as well as to have a leaner cost structure by reducing its selling, general and administrative costs by 20%, which should be able to help defend its bottom line.

“We have a ‘hold’ call on Aeon, with a target price of RM1.39, as we think it may not fully recover to pre-pandemic levels. We forecast that a stronger recovery will only be seen with the successful containment of Covid-19,” says Syifaa’ Mahsuri.

“Also, with the still heightened number of coronavirus cases, we opine that its property management services segment will continue to face challenges as tenants shy away in view of the low footfall,” she adds, noting that its occupancy rate had fallen to 81% for 2Q2021 from 84% in 1Q2021.

Property management services contributed RM606.6 million in revenue, or 15% of Aeon’s total top line, in the financial year ended Dec 31, 2020 (FY2020).

While the country is gradually relaxing Covid-19 restrictions, Syifaa’ Mahsuri points out that the sustainability of the reopening would depend on the number of patients in intensive care units and the mortality rate. “We reckon that may happen soon as half of the total population has been fully vaccinated.”

Bloomberg data shows that analysts are generally positive on Aeon, with six “buy” calls and two “hold”. The consensus target price is RM1.62, representing an upside of 5.9% from last Wednesday’s closing price of RM1.53.

Of the 10 analysts covering Padini, four have a “buy” call while five are recommending “hold” and one “sell”, with a consensus target price of RM3.39. This works out to an upside of 7.6% from the closing price of RM3.15 last Wednesday.

Aeon turned in a net profit of RM10.94 million for the latest April to June quarter compared with a net loss of RM9.56 million for 2QFY2020, driven by improvements in merchandise gross margin and marketing mechanics. On a quarterly basis, its net earnings fell 50.33% from RM22.03 million in 1QFY2021.

Aeon’s annual net earnings were above RM100 million between FY2017 and FY2019 before plunging to RM41.42 million in FY2020 on the back of the pandemic. Analysts see its net profit rebounding to RM83.09 million in FY2021 and RM114.38 million in FY2022, Bloomberg estimates show.

It is worth noting that Aeon’s new digital platform is estimated to contribute about 15% to 20% to its retail revenue over the next five years. The group has 28 Aeon malls, 34 Aeon stores and nine Aeon MaxValu Prime outlets, along with 66 Aeon Wellness outlets and 44 Daiso outlets, bringing its total outlets in Malaysia to 181.

Meanwhile, fashion retailer Padini posted a net profit of RM10.49 million for its fourth quarter ended June 30 (4QFY2021), compared with a net loss of RM16.84 million a year ago. Quarterly net profit was 14% lower on a quarter-on-quarter basis, from RM12.19 million in 3QFY2021, mainly due to the closure of outlets that were running at full capacity, as a result of the FMCO.

Padini’s net profit has been consistently higher than that of Aeon in recent years, with a peak of RM178.17 million in FY2018. Its FY2022 and FY2023 net earnings are forecast to be RM99.03 million and RM130.31 million respectively. Its brand names include Vincci, Padini Authentics, PDI and Seed, and it has a presence in Malaysia, Thailand and Cambodia.

Dividend-wise, Aeon’s trailing 12-month dividend of 1.5 sen translates into a yield of 1%, while Padini’s 2.5 sen dividend for FY2021 represents a lower yield of 0.8%.

Padini had been relatively prudent and was in a net cash position of RM130.2 million at end-June. In contrast, Aeon incurred RM2.81 billion in net debt during the period.

Japan-based Aeon Co Ltd is the largest shareholder of Aeon with a 51.68% stake, while its second-largest shareholder — the Employees Provident Fund (EPF) — had pared its stake in the retailer to 10.34% on Sept 2 from 11.03% at end-July.

Padini is 45.7% controlled by Yong Pang Chaun Holdings Sdn Bhd, followed by Kumpulan Wang Persaraan (Diperbadankan) and EPF at 7.69% and 5.56% respectively.

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