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This article first appeared in The Edge Financial Daily on October 10, 2019

AEON Co (M) Bhd
(Oct 9, RM1.51)
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We came away from our recent meeting with AEON Co (M) Bhd’s management feeling more upbeat about the company’s prospects. We foresee stronger earnings expansion in 2020 to 2021, driven by: i) a turnaround in same-store sales growth (SSSG); ii) a slowdown in capital expenditure (capex) given a pause in new mall openings; and iii) signs of stability in the retail property space.

We foresee sluggish retailing sales growth in the third quarter of 2019 (3Q19) off a high base from the zero-rated goods and services tax (GST) period last year in addition to the recent haze outbreak which affected businesses in September. While 4Q19 is expected to post a stronger showing due to the resumption of festivities over the year end, we expect some margin pressure due to start-up costs from the reopening of AEON Taman Maluri with a twofold expansion in mall space.

Post-2019, the annual capex would be scaled back to RM300 million to RM400 million (from RM400 million to RM500 million) and used mainly for maintenance, refurbishments as well as the opening of smaller-format stores, with no new mall openings over the next two years.

Thus, we expect margins for the property management segment to stabilise as its expanded floor space gestates, allaying the pressure on rental reversions due to excess supply in retail rental spaces.

We expect Budget 2020 to be consumer-friendly to preserve the private consumption growth engine and unlock the value of AEON’s retailing business model once more, after a sustained store expansion drive in spite of the weak operating environment during 2015 to 2017 which saw various competitors downsize their footprint.

The ongoing recovery in same-store sales (six months in 2019: +2% to 3% year-on-year) is likely to continue to propel the segment’s earnings contribution under an elevated fixed cost base.

Recall that AEON’s retailing segment used to account for half of the group earnings before interest and tax margins were eroded by negative SSSG during the GST regime.

We trim estimated financial year 2019 (FY19E) earnings to reflect a slightly softer second half of 2019 performance, but raise that for FY20E to FY21E on account of a progressive margin recovery. — Affin Hwang Capital, Oct 9

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