AEON: Retail and Property Group Faces Headwinds as Earnings Miss Forecasts

AEON Co M (AEON MK), a prominent retail and property management conglomerate, recently reported a first-half 2025 net profit that significantly fell short of both market and internal expectations. The disappointing financial performance has led to a re-evaluation of its investment outlook, highlighting weaker-than-expected sales and compressed margins across its core operating segments.

Performance Review

For the first half of 2025, AEON Co M recorded a net profit of MYR80.4 million, marking a 5.6% decline year-on-year. This figure represented only 47% of full-year consensus estimates, failing to meet the historical three-year average of 54%. The overall revenue for 1H25 saw a modest increase of 2.6% to MYR2.2 billion. This growth was primarily propelled by the property management segment (PMS), which experienced a 7.4% rise, driven by improved occupancy rates and solid rental renewals. In contrast, the retailing segment’s revenue remained largely flat, increasing by a mere 1.6%, primarily attributed to subdued consumer sentiment.

Margin Compression and Q2 Weakness

The company’s EBIT margin for 1H25 slipped by 0.6 percentage points to 7.8%. This compression was a direct result of higher operating expenses associated with ongoing expansion efforts and a less favorable product mix, particularly the dominance of lower-margin necessities and food items. The second quarter of 2025 (2Q25) witnessed a notable sequential decline, with sales falling 19.7% quarter-on-quarter to MYR999.6 million. Both the retailing (-22.6%) and PMS (-5%) segments contributed to this downturn, as festive spending had largely been captured in the preceding quarter. Consequently, 2Q25 core profit plummeted 81.9% QoQ to MYR12.3 million, primarily dragged down by the retailing segment, which recorded a loss of MYR28.3 million.

Challenges and Future Outlook

Looking ahead, the investment bank highlights several challenges. These include potential downside to management’s high single-digit PMS rental reversion guidance, as the expanded Sales & Service Tax (SST) on rental may limit landlords’ ability to raise rents. Subdued consumer sentiment is expected to continue to weigh on retail sales, while operating expenses are poised to rise further due to the SST expansion on rental. The impact of electricity tariff changes remains uncertain, despite some July bill savings. On a positive note, management is actively focusing on ongoing rejuvenation works to enhance competitiveness and attract more tenants. Furthermore, expansion projects at KL MidTown and AEON Seremban 2, which will add approximately 400,000 square feet (3% of Net Lettable Area) by FY26-27, remain on track. Continued government cash handouts and a lower interest rate environment could provide some relief to consumer spending, potentially mitigating some of the headwinds.

Rating and Target Price Revision

Following these results, the investment bank has revised its FY25-27F earnings forecasts downwards by 14%, primarily due to lower rental reversion assumptions for PMS and reduced margin assumptions for both PMS and retailing segments. Consequently, the rating for AEON Co M has been downgraded to NEUTRAL from Buy. The discounted cash flow (DCF)-derived target price has been revised to MYR1.46 (from MYR1.75), which includes a 6% ESG premium and implies a 13.2x FY26F P/E, aligning closely with its five-year mean.