Aeon’s challenging outlook
Analysts are mixed on retailer’s prospects amid soft consumer market
AEON Co (M) Bhd had its reasons when it injected a huge some of money to expand and refurbish its malls. And that is to cater to the changing consumer landscape.
It has not been easy for the biggest listed retailer by market value in Malaysia to sustain growth after having incurred a heavy capital expenditure (capex) of RM600mil to RM700mil over the last three years.
Aeon pressed on with its plans in a time when the goods and services tax was implemented amidst stiff competition in the retail sector, the fall of the ringgit as well as the higher cost of living and doing business.
The expansion in a soft consumer market has not contributed to Aeon’s bottom line.
However, at least one research house has an optimistic view of the retail giant for this year.
RHB Research has a “buy” call on the stock with a higher target price of RM2.97, from RM2.35 previously.
“We upgraded Aeon to a buy after updating our market risk premium assumptions.
“Aeon fits into our strategy and preference for cyclical stocks, as it’s well positioned to benefit or capitalise from a recovery in the economy and sentiment, with its portfolio of 26 malls,” RHB noted in a recent research report.
The research house also points to the downside risks to Aeon. It says that the downside risks include higher-than-expected operating expenditure and weaker consumer sentiment.
RHB is among the few research houses that has a positive view on Aeon.
Most of the other research houses and real estate firms are generally not positive on the retail market due to oversupply in retail space.
A new mall is considered good only if it is able to open at 80% occupancy rate during the first month, according to reports.
Kenanga Research says that the near-term outlook for Aeon’s retail division is expected to be challenging.
The persistently weak consumer sentiment and subdued spending are not conducive for Aeon to hike the price of products.
“Aeon’s property management segment is expected to continue its solid run with more openings of new shopping malls and stores.
“However, since Aeon’s retail division made up more than 85% of the company’s revenue, the sluggish performance in the division could constrain earnings growth,” says Kenanga.
MIDF Research has upgraded the stock to a “neutral” from a “sell” previously with a target price of RM2.21.
The house says 2017 will remain challenging for Aeon as the rising cost of living will continue to erode disposable income for discretionary spending.
“We expect Aeon’s retail segment performance to remain subdued in FY17,” it said, adding that Aeon will continue to employ appropriate pricing, re-aligning merchandise mix and assortment and active promotional activities, among others.
Aeon’s business model involves the operations of the retailing business as an anchor departmental store cum supermarket. This is complemented by the shopping mall operations.
The retail firm’s parent company is Japan’s Aeon Co Ltd, which holds a 51.68% stake in it.
As at the end of December, Aeon operates a total of 33 departmental stores cum supermarkets. It also manages and operates 26 shopping malls.
Apart from the stores and malls, Aeon also runs three MaxValu standalone supermarkets, 48 Wellness pharmaceutical business, 29 Daiso and three furniture retail outlets.
This furniture retail arm is a joint venture with Index Living Mall Group, a leading furniture maker and retailer in Thailand.
According to its annual report, in light of the ever-changing consumer scene, Aeon feels it offers a valuable proposition with its expansion plans – to provide a shopping haven for customers with quality merchandise at affordable prices, good food, entertainment and services, all under one roof.
It introduced two new malls – Aeon Mall in Kota Baru, Kelantan and Shah Alam in 2016, which to date has an occupancy rate of about 90%.
The company is scheduled to open two more malls in Johor and Kuching by the second half of 2017.
Earnings wise, although Aeon’s revenue has been on an upward trend in the last five years, its net profit somehow is on a downward trajectory, indicating a narrowing of margins.
For the financial year ending 2016 (FY16), the retail giant’s net profit fell to RM80mil on revenue of RM4.04bil versus net profit of RM133mil on a RM3.84bil revenue in 2015.
The lower profits were mainly due to higher operating costs, initial costs linked with new stores and mall openings, disruption in operations during refurbishment and higher interest expenses.
In 2014, Aeon’s net profit was RM213mil against revenue of RM3.71bil, a margin of 5.7%, compared to less than 2% in 2016.
Although Aeon’s assets over the last five years have increased from RM2.68bil in FY12 to RM4.42bil in FY16 as a result of refurbishment and opening of new malls, the retailer’s earning per share dropped more than 10 times over the five-year period to 5.68 sen in FY16.
Aeon’s tepid earnings are reflective of its sliding stock price.
Since May 31, 2013, its share price has fallen by 45%.
Aeon’s earnings was currently supported by its stable property management services segment, which made up about 98% FY17 forecast operating profit, an analyst said.
Going forward, the broader ecnomy is likely to pick up.
As of the first quarter ended March 31, 2017, Malaysia’s economy grew at a faster pace of 5.6%, exceeding the consensus of 4.8% growth, supported by the manufacturing and services sectors.
The growth on the expenditure side, according to Bank Negara Malaysia, was underpinned by an increase in private consumption of 6.6%, investments at 12% and exports at 9.8%.
The services sector also grew rapidly at 5.8%, mainly led by wholesale and retail trade, which expanded to 6.3%, said the Statistics Department.
Private final consumption expenditure, meanwhile, grew 6.6%, from 6.1% in the fourth quarter of 2016, supported by the consumption on food and non-alcoholic beverages, communication and housing, water, electricity, gas and other fuels.
If the growth continues, everything points towards an improvement in consumer sentiments.
Whether Aeon would benefit and see an earnings recovery in the near term is still too early to predict.
There is a glut of malls in cities nationwide.
However, the mitigating point for Aeon is that it caters to the middle income, which gives it a wider consumer base.