This article first appeared in The Edge Financial Daily on March 15, 2019

Consumer sector
Maintain neutral on respective sectors: In the recently concluded earnings season, consumer discretionary companies under our coverage, namely Padini Holdings Bhd (neutral, target price [TP]: RM3.59) and AEON Co (M) Bhd (sell; TP: RM1.41)’s earnings improved strongly from the subdued performance recorded in the previous quarter. The recorded earnings for both companies tripled sequentially to RM53.2 million and RM53.5 for Padini and AEON Co respectively as average selling price (ASP) reverted upwards. To recall, in the third quarter of calendar year 2018 (3Q18), retailers revised down the ASP and executed an aggressive marketing campaign to remain competitive during the tax holiday period. Hence, the readjustment of retail pricing post-tax-holiday period coupled with strong spending during the Christmas season and year-end school holidays helped to lift earnings.

We gathered that the overall first half of financial year 2019 (1HFY19) same-store-sales growth (SSSG) for Padini improved by 2% year-on-year (y-o-y) (from -2% y-o-y in FY18) while AEON Co’s FY18 SSSG is estimated to increase by 1.8% y-o-y (from -3.4% y-o-y in FY17). This is supported by the tax holiday spending in 3Q18 and the closure of underperforming stores such as AEON Mahkota Cheras as well as 11 stores by Padini in FY18. The closure of these underperforming stores helped to lift the group’s overall earnings. Nonetheless, we expect SSSG to moderate to about 1% y-o-y in FY19 due to the absence of the aforementioned one-off factors.

The heightening competition among brick and mortars retailers compounded with the exponential sales growth of online shopping platforms has resulted in an increasingly challenging outlook for consumer discretionary players, particularly in the fashion industry. In view of the shift in preference of shopping platform, Padini and AEON Co have scaled down their store expansion plan as part of their rationalisation strategy. We understand that Padini has reduced new stores opening to four this year (from 10 stores opened in FY18) while AEON Co currently has no concrete plan to open new shopping malls beyond FY19.

As consumers are becoming more price-sensitive, we expect a minimal upward revision in ASPs moving forward. Coupled with the moderation of SSSG, we expect the retailers’ profit margin to continue to remain depressed. Hence, in our view, we expect that the recent addition of malls and stores are expected to have a longer breakeven period. We understand that for AEON Co, AEON Kota Baru (first in Kelantan) and AEON Kuching (first in Sarawak) will take approximately six years to break even due to the lower average spending among consumers in these states in comparison to the average four years break-even period for stores located on the west coast of Peninsular Malaysia.

The local retail market remains challenging as consumer sentiment weakens while retail players are facing ever-increasing competition as new local and foreign retailers are flooding into the local market. In the near term, retail sales will grow driven heavily by promotion and price discounting as consumers will look for value for money purchase as choices are ample. Hence, this will create an unconducive scenario to raise selling prices which will depress profit margins. — MIDF Research, March 14