Published on 14 May 2020.
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 MTN Programme (2016/2031) and RM300 mil Islamic CP Programme (2016/2022). The reaffirmation is premised on the Company’s stable operating performance, underpinned by the steady improvement in its retail operations that had helped offset some margin compression in its property-management operations. While we expect the Company’s credit metrics to weaken this year due to the COVID-19 pandemic and the Movement Control Order (MCO), we anticipate its operations to recover in fiscal 2021, supported by its strong business position.
Based on our stressed scenario, AEON (M)’s operating profit before depreciation, interest and tax (OPBDIT) in FY Dec 2020 could suffer a decline of up to 55%. Consequently, its adjusted debt-to-OPBDIT ratio and funds for operations debt coverage (FFODC) are envisaged to deteriorate to a respective 5.02 and 0.19 times. The downward rating thresholds for these two ratios currently stand at a respective 4.0 and 0.2 times. Although we do not expect a full recovery to take place in 2021 given the subdued economic climate and consumer sentiment, the Company’s credit metrics are anticipated to gradually normalise next year.
In FY Dec 2019, AEON (M)’s OPBDIT increased 3.2%, underpinned by the healthy performance of its newly opened stores, i.e. AEON Kuching (opened in 2Q 2018) and AEON Nilai (opened in 1Q 2019), as well as the narrower losses of unprofitable stores. At the same time, the more challenging operating environment had strained its property-management segment, as highlighted by the thinning of this segment’s adjusted OPBDIT margin in the last few years (from 63.0% in FY Dec 2014 to 53.8% in FY Dec 2019). However, this segment remains the key profit contributor for the Company.
AEON (M) adopted the MFRS 16 accounting policy in 2019, under which nearly all of the Company’s operating leases must be recorded on its balance sheet as lease assets and liabilities. Given the Company’s lease-intensive operations, its post-MFRS 16 adjusted gearing ratio spiked up to 1.47 times as at end-December 2019 (end-December 2018: 0.97 times). Despite this, we draw comfort that its adjusted debt-to-OPBDIT ratio (i.e. a supplementary ratio to gauge leverage) stayed healthy at 2.94 times, and supportive of its ratings. As AEON (M) is scaling down its expansion amid the weaker economy, its debt load is less likely to increase to any significant extent. While its adjusted FFODC weakened slightly to 0.31 times in 2019 (FY December 2018: 0.34 times), it is still well-within the rating thresholds.
Besides AEON (M)’s geared balance sheet, the ratings are also moderated by the highly competitive retail industry and rapidly changing consumer preferences, which will affect its retail operations over the longer term, particularly its departmental stores. Apart from the feeble economic conditions amid the COVID-19 pandemic, the influx of retail space and heightening competition from online platforms will also exert pressure on AEON (M)’s mall business.
Meanwhile, the ratings remain supported by AEON (M)’s strong market position as Malaysia’s biggest mall owner and operator by net lettable area, complemented by its established position within the retail industry. The ratings are further anchored by the recurring rental income from AEON (M)’s mall operations. 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 forthcoming, in the event of financial distress.
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