[RAM] RAM Ratings reaffirms AEON (M)'s AA2/P1 ratings
RAM Ratings has reaffirmed the respective AA2/Stable and P1 ratings of AEON Co (M) Bhd’s (AEON (M) or the Company) RM1 bil Islamic Medium-Term Notes Programme (2016/2031) and RM300 mil Islamic Commercial Papers Programme (2016/2023). The reaffirmation is premised on the Company’s ability to maintain credit metrics which are commensurate with its ratings, despite the pandemic-ravaged operating environment.
That said, AEON (M)’s performance remains susceptible to changes in consumer spending habits and disruptions arising from the various stages of the Movement Control Order (MCO). Notably, the Company has so far been able to minimise the impact by quickly adapting to a lower cost structure, improving merchandise assortment and gross margins as well as refining its marketing mechanics.
In FY Dec 2020, AEON (M)’s revenue and operating profit before interest, tax and depreciation (OPBDIT) fell a respective 10.7% and 12.0%. Notwithstanding the decline, its performance exceeded our expectations, thanks to the Company’s ability to adapt to a new cost structure. The most significant development was the restructuring of the management of AEON (M) and its sister company, AEON Big (M) Sdn Bhd, under a common management in September 2020. A shared services platform that consolidates the back-office and procurement operations of the two entities allows the Company to benefit from lower operating overheads and to have stronger bargaining power on the pricing for goods and services.
The Company is reviewing all its contracts including those with landlords, housekeeping and security vendors as well as marketing and promotional expenditure. This is expected to translate into RM200 mil-RM300 mil of annual cost savings. In 1Q FY Dec 2021, the Company’s top line declined 15% y-o-y due to the implementation of MCO 2.0 in January. Thanks to its aforementioned initiatives, however, it managed to keep its OPBDIT fairly stable at RM188.9 mil, resulting in a healthier OPBDIT margin of 18.6% (1Q FY Dec 2020: 15.6%).
Given its weaker operating profit, AEON (M)’s adjusted debt-to-OPBDIT and funds from operations debt coverage (FFODC) ratios deteriorated to a respective 3.36 and 0.28 times in FY Dec 2020 (FY Dec 2019: 3.01 and 0.30 times). After it trimmed its debts, however, the indicators improved to a respective 2.87 and 0.32 times in 1Q FY Dec 2021. Supported by improved cost efficiencies, these ratios are projected to hover around 3.0 and 0.30 times over the next two years amid the effects of the pandemic and ongoing movement restrictions. The property management business is the key profit contributor of AEON (M). Should the pandemic be prolonged, we envisage business closures and suppressed demand for retail space to further suppress malls’ occupancy rates and profitability.
Besides AEON (M)’s geared balance sheet, the ratings are also moderated by the keenly competitive retail industry and rapidly changing consumer preferences, which will affect its retail business. The robust supply of retail space amid soft demand arising from the pandemic is expected to test AEON (M)’s mall operations.
Meanwhile, the ratings remain supported by AEON (M)’s strong market position as Malaysia’s largest mall owner and established retail-chain operator. Furthermore, the Company is deemed strategically important to its Japan-based parent, AEON Co. Ltd, as the latter’s largest revenue contributor in South-east Asia. As such, we expect parental support to be readily available if needed.
Wong Ee Loo
(603) 3385 2521
Thong Mun Wai
(603) 3385 2522
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.