Aeon Co (M) Bhd
(Sept 6, RM1.54)
Maintain buy with an unchanged target price of RM2.20: After opening two malls in financial year 2016 (FY16) and Aeon Bandar Dato’ Onn in FY17, Aeon Kuching (FY18) and Aeon Nilai (FY19), Aeon Co (M) Bhd does not plan on opening anymore in FY20. We are positive about the group’s slowing its mall openings amid an overhang in available commercial retail spaces. According to the National Property Information Centre, shopping malls’ average occupancy in FY18 was just 79.3% versus 81.3% in FY17.

 
Instead of opening new malls in FY20, Aeon intends to refurbish existing stores to attract better foot traffic. Take note that Aeon has been refurbishing existing stores continuously, including Aeon Queensbay (Penang), Aeon Bandar Utama and Aeon Tebrau City recently, resulting in significantly better same-store sales growth figures. Currently, Aeon Taman Maluri is undergoing renovation and is expected to be completed in the fourth quarter of 2019 (4Q19). We expect newly renovated malls to command better rental yields in addition to better occupancies.

Aeon will still open small format stores under the Wellness (pharmacy) and Daiso (living ware) brands — profitable previously. Aeon expects to spend RM50 million on opening of small format outlets in FY20.

We expect seasonally weak earnings for Aeon in the third financial quarter from its retail and property management services divisions due to seasonality — many occupants pay a variable cost of sales in addition to a fixed cost as part of their rental agreement.

We expect Aeon’s retail division to drive growth in FY20, focusing on refurbishing select malls, as well as expanding its ready-to-eat food segment commanding higher margins. Additionally, the opening of small format stores is expected to add to the group’s profitability. — Hong Leong Investment Bank Research, Sept 6