Briefing update

Maintain BUY with unchanged TP of MYR2.20

AEON’s outlook should remain positive into FY22 on the back of regular business operations as it is unlikely for additional lockdowns to be imposed since vaccination rates are high and health impacts from the newer virus variants are less severe. Hence, we keep our earnings estimates, BUY call and TP of MYR2.20 (25x FY22 PER, mean) unchanged.

Southern region sales were weaker YoY

During AEON’s 4Q21 results briefing, management shared that FY21 revenue fell 10% YoY mainly due to weaker Southern region sales contribution of -15% YoY as land borders between Johor and Singapore
remained closed until end-Dec 2021. Meanwhile, although AEON’s strategy to digitalise sales has seen positive growth momentum, it is still immaterial to overall revenue at this juncture.

Better product mix and cost savings

Taking a closer look at AEON’s operating margins, 4Q21 retail margins grew to 10% (+7 ppts YoY) due to improved contributions from hardline and softline sales which have higher gross profit (GP) margins of 27% and 31% respectively. Foodline GP margins are lower at 22%. Cumulatively, hardline and softline revenue accounted for 49% of 4Q21 group revenue (4Q20: 40%). We understand that higher cost savings from its trade & non-trade procurement shared services led to higher property management services margin where operational expense in 4Q21 was lowered by c.12% YoY.

Minimal impact from higher minimum wage

AEON’s target occupancy rate for FY22 is 92% (vs. 83% as at end-4Q21). It hopes to achieve this by driving more events and consumer engagement activities within its shopping malls to lift foot traffic. The group is also confident in maintaining its retail margins going forward in absence of additional lockdowns and resumption of regular business activities for both hardline and softline categories. Separately, AEON’s recent announcement to raise its minimum wage to MYR1,500/mth (from MYR1,200/mth) will lift
operating expenses by a marginal 0.5%. Hence, we keep our earnings estimates unchanged for now