This article first appeared in The Edge Financial Daily on December 27, 2018
AEON Co (M) Bhd
(Dec 26, RM1.51)
Upgrade to hold with an unchanged target price of RM1.72: Management guided that year to date, AEON Co (M) Bhd’s same-store-sales growth (SSSG) for financial year 2018 (FY18) is between 1.5% and 2%. For FY17, AEON produced a negative SSSG and we believe the improvement is due to: i) higher consumer disposable income following generous Budget 2018 allocation for the bottom 40% and middle 40% income groups; ii) improving consumer confidence following the tax break period between June to August 2018 and re-subsidising of petrol for diesel and RON95; iii) stable occupancy rate of about 90% across AEON malls; and iv) attractive merchandise mix offered by AEON.
For FY19, the group has allocated a capital expenditure of between RM400 million and RM500 million for: i) reopening of Taman Maluri Cheras mall extension; ii) opening of Nilai mall, which is targeted for completion by the first quarter of FY19; and iii) refurbishment of stores in Bukit Indah as well as second phase of Bandar Utama.
We project FY19 sales growth to be softer at 4.6%, a tad lower than the FY18 forecast of an estimated 6.9%. Our growth assumptions have taken into account concerns over the high cost of living, rising job retrenchment in 2019 and retailers undergoing store consolidation to save on rental costs.
AEON employs about 9,000 staff, with 80% of them being retail-level staff. Considering the new minimum wage of RM1,100 per month, effective January 2019, management believes the impact is manageable as the minimum wage would only be applicable to outsourced staff, who are involved in the cleaning and maintenance of the stores and malls. Note that staff cost accounts for about 7% of AEON’s sales in FY17 and this is expected to increase to 8% in FY19, after assuming the increase in staff cost of 11.6% in FY19.
Following the implementation of the sales and service tax (SST) in September 2018, some of the product costs are expected to increase. Even though SST has a narrower coverage of products impacted (5,443 items declared exempted versus 544 items exempted for the goods and services tax [GST]), it also has a deeper cost impact due to the higher tax rate (5% to 10% sales tax versus 6% for GST).
Management guided that some product prices are expected to increase to reflect the increase in product costs as suppliers have also increased their prices. AEON noted that it has absorbed some of these costs in September to October 2018 while transitioning from the tax break period to SST implementation. However, moving forward, some of the costs are expected to be passed on to consumers. Nevertheless, we project costs of sales as a percentage of revenue to increase to 59.1% and 59% for FY19 and FY20 respectively from an estimated 58.2% in FY18.
We reduce our earnings forecasts by 1%, 6.6% and 9.6% for FY18, FY19 and FY20 respectively after increasing our cost assumptions to reflect the implementation of SST and higher staff costs.
AEON’s share price has declined by 19.6% since end-November 2018 after reporting lower-than-expected cumulative nine months of FY18 earnings results. However, we believe the selldown is excessive, thus we upgrade our AEON recommendation from a “sell” to a “hold” call. — TA Securities Research, Dec 21