International Challenges Will Impact Performance, But Domestic Strategies Will Improve Future Prospects

Key Takeaways

• AEON Mall faces challenges in China with declining customer spending and significant restructuring losses impacting short-term earnings.
  
• Expansion into high-growth markets like Vietnam and Indonesia presents opportunities but risks increased capital expenditures impacting cash flow and earnings.
  
• Strong domestic and international growth, effective marketing, and strategic renovations contribute to AEON Mall's robust revenue and profit growth potential.

Catalysts

Develops, operates, and manages shopping malls in Japan, China, Vietnam, Cambodia, Indonesia, and internationally.

• AEON Mall is facing a challenging economic environment in China, with a decline in customer confidence due to a prolonged slump in the property market and a tight employment environment. This has led to a decline in average spending per customer, which could negatively impact future revenue growth.
  
• The company has incurred significant extraordinary losses due to restructuring efforts aimed at improving long-term profitability, with a ¥6 billion loss expected for the current fiscal year. While these efforts may enhance operating income by ¥3.0 billion by fiscal year 2030, the immediate financial impact could suppress short-term earnings.
  
• The company is experiencing diverse performance in international markets, with decreased operating income in China and Cambodia. The mixed performance in these regions could lead to volatility in AEON Mall's overall revenue, especially if economic challenges persist.
  
• AEON Mall's reliance on major sales events like Black Friday and National Day promotions to boost sales indicates potential vulnerability to fluctuations in consumer spending patterns, which may impact revenue and margins if consumer confidence wanes or if these events fail to deliver expected sales growth.
  
• The company's strategy to expand into new markets in Vietnam and Indonesia involves investing in regions with high economic growth potential but also carries inherent risks associated with entering new markets. These expansion plans could lead to increased capital expenditures, affecting cash flow and potentially diluting earnings until these investments yield returns.

AEON Mall Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AEON Mall's revenue will grow by 4.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 6.6% in 3 years time.
• Analysts expect earnings to reach ¥33.6 billion (and earnings per share of ¥147.55) by about March 2028, up from ¥18.0 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ¥26.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.0x on those 2028 earnings, down from 29.7x today. This future PE is greater than the current PE for the JP Real Estate industry at 10.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

AEON Mall Future Earnings Per Share Growth

Risks

• AEON Mall has seen record high operating revenue and an 11.9% increase in operating income year-on-year, showcasing its ability to grow earnings despite challenges. Revenue, earnings.
  
• Japan's operating income increased significantly, with specialty store sales up 6% and a 3.1% increase in customer numbers at 92 existing malls, indicating strong domestic performance which could support profit growth. Operating income, net margins.
  
• The company’s focus on renovation and inbound customer measures has driven a 9.3% sales increase at renovated malls and doubled duty-free sales, highlighting potential for sustained revenue growth in Japan. Revenue, profit margins.
  
• Successful sales promotions such as AEON Black Friday and improvements in customer traffic have led to a 20.1% increase in specialty store sales during events, illustrating effective marketing strategies that could boost future revenues. Revenue, earnings.
  
• AEON Mall is actively pursuing international expansion with new malls in high-growth areas like Vietnam, combined with strategic land acquisitions, which can contribute to future revenue diversification and profit growth. Revenue, long-term earnings.

Valuation

• The analysts have a consensus price target of ¥1955.0 for AEON Mall based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ¥508.9 billion, earnings will come to ¥33.6 billion, and it would be trading on a PE ratio of 18.0x, assuming you use a discount rate of 10.9%.
• Given the current share price of ¥2347.5, the analyst price target of ¥1955.0 is 20.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.