KUCHING: Aeon Co (M) Bhd (Aeon) is the preferred pick in the retail space to ride on an earnings rebound, with analysts also noting that the group’s malls are situtated in suburbs, which will likely benefit from the work from home (WFH) trend.
Despite a challenging second quarter of 2020 (2Q20), earnings delivery by retailers under its coverage was not as bad as Affin Hwang Investment Bank Bhd (Affin Hwang Capital) had initially anticipated, with two above and one in line with expectations.
Affin Hwang Capital recapped that Bonia Corporation Bhd (Bonia) and Hai-O Enterprise Bhd’s (Hai-O) earnings tracked ahead of forecasts due to better cost containment while Aeon registered a core net loss in 2Q20, but this was in line with the research firm’s full-year forecast.
“According to Retail Group Malaysia (RGM), retail sales contracted 30.9 per cent year on year (y-o-y) in 2Q20 amid the movement control order (MCO) disruption,” the research firm said of the retail sub-sector in its Malaysia Consumer sector update.
“Save for supermarkets and hypermarkets, all other sub-sectors registered double-digit declines in sales.
“RGM projects a 9.3 per cent contraction for 2020E, revised down from the earlier projection of -8.7 per cent.”
Post the low base in 1H20, the research firm envisaged a better performance half on half (h-o-h) in the second half of 2020 (2H20), albeit still below pre-Covid levels, and a meaningful recovery in 2021 in the lead-up to the availability of a vaccine.
“In the retail space, we prefer stocks that can provide a relatively strong and visible earnings rebound. On a 12-month basis, we think Aeon Co fits the bill with likely sequential improvement off its low base in 2020.
“With the stock price having shed 42 per cent year to date (YTD), Aeon’s valuation looks fairly undemanding, in view of a projected earnings rebound underpinned by a recovery in its retail and property management segments.
“Looking into 2021, retail should benefit from a recovery off a low base, while the absence of rental waivers should alleviate the strain on the property management segment.
“We also like the fact that Aeon’s malls are largely ‘neighbourhood malls’ situated in suburbs, which will likely benefit from the work- from-home trend and is less vulnerable to tourist traffic.”
Elsewhere, Affin Hwang Capital sees limited upside for Bonia while Hai-O’s valuation looked stretched in view of the challenging operating landscape.