Maintain ‘Buy’ on AEON after earnings meet market expectations

AEON’s CNP turnaround helps boost Ebitda margin by 3.3% and lower effective tax rate by 47.3%


AEON Co (M) Bhd’s earnings for the first quarter ended March 31, 2021 (1Q21), met analysts’ expectations, having been cushioned by improvement in merchandise gross margin, changes in marketing mechanics, cost-control measures and lower effective tax rate.

Hong Leong Investment Bank Bhd (HLIB Research) analyst Syifaa’ Mahsuri Ismail stated that AEON’s 1Q core net profit (CNP) of RM22.03 million was in line with the research house and consensus expectations.

“Year-on-year (YoY), the sales decreased in both retailing and property management services (PMSs).

“PMSs revenue continues to be derailed from the subdued footfall which resulted in lower tenant renewal rate and early termination of tenancy agreements,” she noted in a research note on the retailer yesterday.

Despite muted sales, AEON’s CNP staged an impressive turnaround (2.9 times YoY) on the back of improvement in merchandise gross margin, changes in marketing mechanics and stringent cost-control measure that help boost Ebitda margin by 3.3% and lower effective tax rate by 47.3% versus the previous year’s 70.5%.

On a quarter-on-quarter basis, AEON’s top-line improvement of 10.6% was due to the boost in sales during Chinese New Year despite the implementation of Movement Control Order (MCO) 2.0 in the middle of January 2021.

“Revenue from retailing recorded an increase of 13.3% while PMSs remained weak, decreasing by 4.4%.

“Despite a higher top line, CNP weakened by 18.9% to RM22.03 million,” she stated.

This was on the back of lower Ebitda margin recorded, coupled with higher effective tax rate for the quarter.

She expects AEON’s first-half (1H) financial performance will likely be better YoY as MCO 2.0 was less stringent than its predecessor last year.

“Going into the 2H of 2021, we believe retail sales are poised for a strong rebound as we expect loosening of travel restrictions going forward as vaccine rollouts pick up at an urgent pace.

“We remain confident in the group’s long-term outlook with its strategic plans in refurbishing existing malls to attract better foot traffic; expanding presence in online platforms; and introduction of specialist concept stores to drive better margin,” she said.

HLIB maintained its ‘Buy’ rating for AEON with a target price (TP) of RM1.32, adding that the retailer’s stringent cost-control measures will be sustained, providing support to margins moving forward.

“We are confident in the group’s agile approach in adapting through changes in marketing mechanics and sustainable cost-reduction structures,” she said.

Echoing the same sentiment, MIDF Amanah Investment Bank (MIDF Research) analyst Ng Bei Shan kept her TP for AEON at RM1.64, pegged to financial year 2022 (FY22) earnings per share of 8.8 sen.

“We think AEON’s outlook is likely to improve further in FY22 compared to FY21. We believe management’s prudence in cost management will continue to yield positive outcomes when the business environment improves,” she wrote in a report yesterday.

Ng added that the recent weakness in AEON’s share price presents an opportunity to buy.

“We think AEON is in a good position to overcome the near-term circumstances. Its operating cashflow is strong at RM282.1 million compared to negative cashflow of RM41.1 million a year ago, while gearing level is at 0.4 times,” she said, adding this is supported by its agile business strategies to stay relevant.

This includes offering new services and digitalisation initiatives to its customers and tenants, she noted.