Aeon lacks positive catalysts — Analysts
KUCHING: Aeon Co ( Malaysia) Bhd (Aeon) still lacks favourable uptickst, analysts at Affin Hwang Investment Bank Bhd (Affin Hwang) observed following a meeting with Aeon’s management.
In a report, it highlighted: “To recap, Aeon’s first nine months of 2018 ( 9M18) results missed expectations after failing to benefit strongly from the zerorated GST period. Following our recent meeting with management, we turn less upbeat on Aeon’s prospects, foreseeing its business model to lose further favour.”
Affin Hwang opined that while Aeon’s same-store sales growth’s ( SSSG) improvement could persist, margins would likely suffer.
“Aeon’s retail sales grew at a decent 6.8 per cent y- o-y in 9M18 with contribution from new malls at Bandar Dato’ Onn (3Q17) and Kuching ( 2Q18), alongside a recovery in SSSG, which management has guided to have ranged between 1.5 to two per cent in FY18.
“The turnaround in SSSG, subsequent to the three consecutive years of decline previously, came on the back of non-profitable store closures (AEON Mahkota Cheras and Index Living Mall stores), the brief tax holiday sales boost, as well as strong recovery in consumer confidence.
“We believe SSSG would eventually normalise but remain positive, driven by the improved sentiment, alongside higher disposable income for the average consumer from supportive Budget 2019 measures. Yet, facing intensified competition in the retail space, Aeon will likely contain ASP hikes for hardline and soft-line goods, despite rising product costs seen from certain suppliers,” it opined.
It also noted that prices for foodline items, which are regulated, would also remain fixed. As a result, gross margins are expected to trend lower, it said.
Affin Hwang also observed mixed performance of its outlets across the nation.
“On Aeon’s new outlets, we gather that the performances have been rather mixed, where AEON Shah Alam has fared well, while AEON Bandar Dato’ Onn’s performance is only mediocre. On the other hand, AEON Kuching and AEON Kota Bahru have been underperforming and are consequently expected to take longer to breakeven (around six years compared to four years typically).
“For the existing stores, management’s rationalisation exercise is still ongoing but we do not expect further store closures,” it added.
Aside from that, the research team said, while Aeon’s property management segment continued to record occupancy rates above 90 per cent, the management is facing heavy pressure to maintain those occupancy levels under unfavourable market conditions.
“For selected malls, management has begun shifting towards a higher variable rental portion while lowering fixed rental rates.
“While this should support take- up of rental spaces as well as customer footfall, it would also lead to heightened exposure to tenants’ sales under stiff competition alongside higher earnings volatility, in our view,” it said, noting that its property management segment accounted for circa 90 per cent of EBIT in 9M18.
Overall, Affin Hwang maintained a ‘ hold’ call on the stock.
It said: “Given our view of stiffer competition in the retail space, as well as the revised rental structure towards revenue- sharing under challenging market conditions, we foresee more downside to Aeon’s earnings.”