Investment Highlights

• We keep our BUY call on MR D.I.Y. Group (M) (MRDIY) with a higher fair value (FV) of RM3.80/share (RM2.94/share previously). Our RM3.80 FV is based on a PE of 36x on FY22F EPS of 10.6 sen, pegged to the market-cap weighted average of consumer stocks under our coverage (Exhibit 3). This is also at a 30% premium to its regional peers’ FY22F PEs (Exhibit 4) due to MRDIY’s strong future earnings growth and market leading position in Malaysia.

• Revenue rose 12.5% YoY to RM2.6bil from RM2.3bil in FY20. This came from the back of a strong performance in 2HFY20 coupled with positive contribution from new stores opened during the year. This is despite the fact that during the first iteration of the MCO in March 2020, MRDIY had to close all its stores temporarily.

• All in all, MRDIY opened 149 stores in FY20 (closed eight stores). MRDIY posted an adjusted SSSG of +4.4% in FY20. E-commerce sales contributed approximately RM22mil to total revenue, about 0.8%.

• MRDIY’s FY20 core net profit of RM349.9mil was above our and consensus estimates by 22% and 10% respectively due to a better-than-expected sales performance. The RM349.9mil core net profit was after excluding one-off listing expenses during FY20 of RM12.7mil. We have increased earnings estimates for FY21F/FY22F by 13%/11% to account for a lower-than-expected impact of the pandemic, higher store openings in FY22F and slightly higher SSSG. We also introduce FY23F earnings.

• MRDIY’s total stores is 734, higher than management’s earlier guidance of 725 stores by FY20. About 55% of its stores are located in malls, with 45% being standalone.

• MRDIY has also declared an interim dividend of 0.7sen/share amounting to RM43.9mil. This brings total dividends paid for FY20 to RM139.7mil, keeping in line with its dividend policy of at least 40% of net profit.

• MRDIY’s 4Q20 top line grew by 24.5% YoY to RM768.3mil as a result of higher sales contribution from the 141 net stores added, as well as an increase in the average monthly sales per store.

• However, GP margin shrank 1.4 ppts to 42.9% in 4QFY20 from 44.3% in 4QFY19 mainly due to the higher annual purchase incentives. Starting in FY20, annual purchase incentives are recognized monthly on an accrued basis, as compared to annually in December prior to 2020.

• 4QFY20 core net profit of RM117.2mil was 3% higher QoQ due to the increase in sales from its new store openings as well as the exclusion of one-off listing expenses fee paid during the quarter of RM8.9mil. Including the one-off listing expense, net profit would have fallen to RM108.2mil in 4QFY20, a 5% decrease QoQ.

• Moving forward, we believe that MRDIY’s sales growth would be driven largely by its store expansion plans in all three of its retail formats and improved SSSG. MRDIY plans to open 175 stores in FY21F. However, with the recent implementation of the MCO 2.0 in Malaysia starting 13 January, earnings may be slightly volatile due to reduced footfall and consumer spending. On a positive note, most of MRDIY stores are allowed to operate during the MCO 2.0. Management has said that only 1.2% of the group’s stores will be closed temporarily.

• As we have stated in our initiation report dated 30 Nov 2020, we believe that MRDIY would be re-rated, similar to other local large-cap consumer stocks such as Nestle (Malaysia) and QL Resources. This is due to MRDIY’s consistent revenue and net profit growth and a strong track record of having the payback period for its stores of less than two years. Nestle (Malaysia) and QL Resources are currently trading at FY22F PEs of 47x and 53x respectively, according to Bloomberg estimates.

• Also, the potential inclusion of MRDIY into the FBM KLCI would increase institutional demand for its shares as certain funds that track the index will automatically add MRDIY to their portfolios. MRDIY has a high probability of being included to the FBM KLCI if it rises to 25th or above in market capitalization ranking by the next semi-annual review, due in June. Currently, MRDIY is the 23rd largest company by market capitalization (Exhibit 2).

Source: AmInvest Research - 18 Feb 2021