10 things I learned from the 2017 AEON AGM

AEON has been my family’s favourite retail chain for the last couple of years as an all-in-one stop where we can purchase almost anything under one roof, even furniture! (Under its trademark Index Living Mall.)

AEON runs departmental stores and supermarkets within it its own premises or as an anchor tenant in other malls (like at Mid valley Megamall). As at 31 December 2016, AEON operates 33 department stores and supermarkets spread across Peninsular Malaysia. It also manages three Max Value stores, three Index Living Malls, 48 Wellness pharmacies, and 39 Daiso bargain stores.

I attended the AGM this year to gain a deeper insight into the company’s performance and operational issues as AEON is still in an expansionary phase and is likely to face margin pressure in the near term. Moreover, two directors resigned from the board – Ms. Nur Qamarina Chew bin Abdullah, the long-time serving managing director and Mr. Mitsuru Nakata, an non-independent non-executive director.

Here are some valuable insights I gained from the 2017 AEON AGM:

1. AEON registered a record-breaking revenue of RM4.039 billion, passing the RM4.0 billion mark for the first time since its listing in 1996. This record-breaking figure was mainly due to the introduction of new shopping malls and stores. However, despite registering a 5.3% growth in revenue for FY2016, AEON’s profit before tax decreased 30.0% to RM147.1 million. Its profit after tax was only RM75 million, a 43.0% decrease from 2015. Hence, earnings per share fell from 9.5 sen in 2015 to 5.68 sen in FY2016. According to the management, the lower profit was mainly due to the initial costs from the opening of new malls, operational disruption costs during refurbishment for some stores, higher operational costs, a lower margin due to intense competitive pricing, and interest expenses.

2. Revenue from the retail segment increased 4.6% to RM3.439 billion in 2016 from RM3.288.8 billion in 2015. This growth was attributed to the opening of new outlets — two new supermarkets, nine new pharmacies, and three new Daiso stores in 2016. Foodline (supermarket, food & beverages) registered the highest growth rate at 4.8%, followed by the hardline (electrical & others) at 1.7%, and softline (apparel & others) recorded the lowest growth rate of 1.2%. Based on merchandising composition, foodline contributed the highest revenue of 49%, followed by softline and hardline at 33% and 18% respectively.

3. Revenue from the proper management segment increased 9.8% to RM599.5 million in 2016 from RM545.8 million in 2015. The significant increment was boosted by additional revenue from new malls — Shah Alam & Kota Bharu — and full year contributions from AEON mall Klebang which opened in October 2015. 65% of total revenue was derived from rental fees, followed by promotion/service fees (12%), sales commission (10%), temporary space (8%), and others (5%).

4. AEON recorded an average occupancy rate of more than 90% across its 26 shopping malls. It is worth noting that AEON Shah Alam and AEON Kota Baru (both opened in 2016) registered occupancy rates of over 93%. The management highlighted that some tenants switched their rents from a conventional fixed rate to a variable rate (i.e. fixed rate + percentage of sales) due to the vast supply of retail space in Malaysia. Even though the switch may help AEON maintain its high occupancy rates, it may lower its total rental income unless tenant sales are doing well.

5. AEON borrowings (via sukuk financing) increased from RM769.9 million in 2015 to RM965.4 million in 2016. This is to fund the construction of new malls/stores and refurbishment programmes in existing malls.  Hence, AEON’s net debt to equity ratio has increased substantially to 46.28% compared to 30.14% in 2015. A shareholder voiced her concerns over the high gearing ratio and lower cash flow in 2016, and asked if the management if they had plans to lower the gearing ratio. The management acknowledged her concerns and explained that they have already delayed some of their expansion plans due to the slow economy and weak consumer sentiment. The management also plans to dispose some non-profitable malls to interested buyers and the gains will be used to reduce the borrowings and capital expenditure (CAPEX). Recently, AEON announced that they entered into a sale and purchase agreement with Foremost Wealth Management (Purchaser) on 29 June 2017 to dispose a piece of freehold land in Cheras together with AEON Mahkota Cheras Shopping Centre at a consideration value of RM87.8 million. The gain from the proposed disposal will be used for working capital and to reduce borrowings.

6. Since 2013, AEON has been aggressively acquiring land to open new malls and spent over RM700 million in CAPEX to fund its expansion. This explains AEON’s net debt position of RM544.3 million in 2016 from a net cash position of RM313.6million in 2013. Moving forward, the management plans to its CAPEX to less than RM500 million for 2017 and 2018. The CAPEX will mainly be used to refurbish old stores and fund the opening of new malls in Kempas (2017) and Kuching (2018). They will allocate RM200-300 million in CAPEX for each mall.

7. One shareholder has raised his concerns about the falling dividend payout ratio since 2014. He asked about the management’s view for its dividend payout ratio for 2017 as AEON does not have a fixed dividend policy. The management highlighted that the dividend payout ratio over the last three years was between 25% to 35%, depending on the company’s financial performance. The management explained that the shareholder cannot use pre-2014 dividend payout ratios as the benchmark as there was a bonus issue and share split in 2014.

8. One shareholder asked the management’s views with regards to the impact of e-commerce platforms such as Lazada and Alibaba on AEON’s business. The management replied that AEON will continue its brick-and-mortar business model to generate income through physical retail stores and property management. The management shared that they do not see any major threat as e-commerce in Malaysia is still relatively young and Malaysians still enjoy spending their weekends at the mall. Nevertheless, AEON has already taken the initiative and launched its own e-commerce platform — www.shoppu.com.my — in 2016 to ride on the growing e-commerce trend. Revenue from Shoppu has shown healthy growth but its contribution is still very marginal (less than 1% of total revenue). However, the number of visitors to Shoppu has increased significantly from 101,266 in Jan 2016 to 146,235 in Dec 2016.

9. Out of AEON’s 33 stores, 10 registered positive growth from 2.3% (Cheras Selatan) to 17.8% (Taiping). However, 16 stores registered negative growth from -0.3% (Melaka) down to -11.8% (Klang). The malls located in the Northern region posted the highest growth of 7.0% followed by the Central region at 2.4%, and the Southern region at 1.8%. It was a year of mixed performance as each store/mall has its unique characteristics and local operating conditions. The management pointed out that sales performance of AEON malls/stores is dependent upon the purchasing power of the population nearby. For example, Shah Alam mall sales are higher than Kota Bharu mall given the demographics of their respective locations. The management aims to turn around the underperforming stores by organising more active marketing events and rearranging the malls’ interior layout to suit local consumer behaviour and preferences.

10. In 2016, AEON has opened its first shopping mall in Kota Bahru, Kelantan, which was a short five-minute drive from the town itself. The management reiterated its long-term expansion plan of opening stores across Malaysia but at a slower pace of one mall a year instead of two. AEON will focus on suburban locations to capitalise on the growing urban, middle class population in Malaysia. The company is scheduled to open an AEON Mall in Kempas, Johor Baru by third quarter of 2017 and its first mall in Kuching by the first quarter of 2018. AEON Kempas will be a three-level shopping mall with a net lettable space of 605,878 square feet with 150 tenants.

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Mitra Chen is a value investor since 2008. Prior to that, she had over 20 years experience in human resources in the recruitment industry. She strongly believes that everyone can achieve financial independence when they use the right financial methods and tools for their investments.

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