This article first appeared in The Edge Malaysia Weekly on September 11, 2023 - September 17, 2023

SHARES in Aeon Co (M) Bhd have lost a quarter of their value since early this year and are now trading at a 2½-year low, in line with the decline in its earnings. The drop in the share price far exceeds the Bursa Malaysia Consumer Product Index’s 4.8% fall over the same period.

The retail operator’s net profit for the first half of the financial year ending Dec 31, 2023 (1HFY2023) was down 9.3% to RM68.37 million from RM75.35 million in the same period a year ago, on the back of lower gross margins and higher operating costs.

Amid the downward trend in share price performance, the Employees Provident Fund (EPF) has been reducing its stake in Aeon to 9.718% as at Sept 1 from 11.364% as at end-May. Its parent company, Japan’s Aeon Co Ltd, is the largest shareholder with a 51.68% stake.

In an email reply to The Edge, Aeon says, “We closely monitor the market and are aware of the share price development. Share prices can fluctuate due to various factors, including market conditions and investors’ sentiments.

“Regarding the sale of Aeon shares by the EPF, it is important to note that shareholders, including institutional investors, make decisions based on their individual investment strategies. While we cannot comment specifically on the EPF’s actions, our focus remains on delivering long-term value to our shareholders, maintaining a strong and sustainable business and executing our strategic initiatives.”

TA Securities analyst Raymond Ng Ing Yeow is of the view that it is common for investors to switch to non-defensive stocks after the pandemic. “Investors bought more defensive stocks during the pandemic period. But after the retaliatory consumption effect in 2022, there has been normalisation in the buying behaviour this year. So, it could be the case where revenue will decline from the high-base effect. For the EPF, maybe they have a more risk-on strategy,” he tells The Edge.

Notwithstanding the current challenging business landscape as a result of intense market competition and weak consumer spending, Aeon says it has adopted a strategic approach that focuses on leveraging its ecosystem, namely Aeon Living Zone, by improving the shopping experience through store and mall rejuvenations, expanding product assortments of Aeon’s private brands, and expanding its softline (such as apparel and bedding) and hardline section (such as appliances and sports equipment) in its myAeon2go app.

Currently, the group has 28 Aeon malls, 34 Aeon stores, eight Maxvalu, 62 Wellness and 43 Daiso stores in operation. This year, it opened a new Aeon store in IOI City Mall, Putrajaya, as well as two Daiso stores in Setia City Mall, Setia Alam in Shah Alam, Selangor, and Aeon Seremban 2, Negeri Sembilan.

Aeon reveals that more Daiso and Wellness stores will be launched later this year.

“We are looking at new sites to open new GMS (general merchandise stores) and speciality stores next year in 2024, including a plan to open a new mall in 2025.”

Meanwhile, rejuvenation has started in two malls in Ayer Keroh, Melaka and Cheras Selatan, Balakong, Selangor, which are targeted to be completed by year end.

Bloomberg data shows that of the nine analysts covering the stock, seven have “buy” calls and two suggest a “hold”, with a consensus target price of RM1.46,  implying an upside potential of 40.4% based on its closing price of RM1.04 last Thursday. At its current price,  Aeon has a market value of RM1.46 billion.

The group is forecast to register a higher net profit of RM130.7 million for FY2023 and RM140.3 million for FY2024. In FY2022, it recorded a net profit of RM111.23 million compared with RM85.29 million in FY2021.

A four sen dividend per share was paid in FY2022, amounting to a payout ratio of 50.5%; its 12-month trailing gross dividend yield stands at 3.85%.

Valuation-wise, Aeon is trading at a price-earnings ratio of 11 times, lower than the average 20.4 times for consumer stocks on the local bourse. 

To enhance cost optimisation, Aeon highlights that it has been working closely with its suppliers to offer competitive pricing to consumers by focusing on high-impact marketing campaigns, optimising store productivity levels and supply chain logistics, while consistently reviewing the contractual rates with various trade/non-trade vendors. “We are also stringent in cost management to operate efficiently to maximise our operating profit by monitoring our energy consumption, upgrading our facility ...  with energy-efficient fittings and infrastructure while ensuring that maintenance and housekeeping costs are managed efficiently.”

Aeon offers a personal shopper service, drive-through service and delivery service via its myAeon2go e-commerce platform for fast, efficient, safe and low-contact shopping. The group also highlights its sustainability initiatives, which include installing solar panels and electric vehicle charging stations at its malls.

HLIB Research, which has one of the highest target prices of RM1.61 for Aeon, says it is encouraged by the performance of Aeon’s property management services that have charted growth given the improvement in occupancy rate and rental rate renewal.

“We are confident with the sales trajectory and reckon that Aeon’s strategy would enable it to weather challenges in an inflationary environment and softer consumer sentiment,” it says in an Aug 23 note.

TA’s Ng observes that the paradigm for department stores has been shifting again, back to the offline mode. “Footfall will still be there, but whether it will go back to pre-pandemic levels depends on some other factors, such as inflation and disposable income changes.”

While retail sales are expected to be lower in the second half of the year, he says the upcoming Budget 2024 will be the key event to look out for. “I expect the government to provide some catalysts to bolster the economy and increase the nation’s disposable income. If that really is the case, then I hope it will spur the demand for discretionary items.”

He recently cut Aeon’s FY2023/24 earnings projections by 10.8% and 2.9% respectively to reflect the impact of discontinued operations at the Aeon store in Sunway Pyramid mall in July.

Nonetheless, he kept a “buy” call on Aeon, with a lower target price of RM1.57 from RM1.69 previously.

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