Investment Highlights

• We maintain our BUY call on MR D.I.Y. Group (M) (MR DIY) with a reduced fair value (FV) of RM4.06/share (previously RM4.48/share), using an unchanged PER of 38x on FY23F EPS. There is no ESG-related adjustment to FV based on our 3-star rating.

• MR DIY’s 1HFY21 net profit of RM207mil came in below expectations, making up 40% and 41% of our and consensus full year forecast respectively. We believe that continual store closures and poor footfall would dampen MR DIY’s performance for the rest of FY21E, as well as affect its expansion plans.

• Consequently, we cut our earnings forecasts for FY21/FY22/FY23 by 21%/11%/7% respectively. MR DIY has reduced its store opening target in FY21E. It has also temporarily sidelined the expansion of its higher-margin potential MR TOY and MR DOLLAR store formats in favour of generating more reliable income from its flagship MR DIY stores. Higher input and freight costs are expected to keep profitability margins suppressed in the coming quarters.

• Despite trading at a high PE ratio of 36.0 on FY22F EPS, we believe that the negative effects of pandemic disruption have already been priced in, following a 20% drop in share price from the peak of RM4.25 on 6 April 2021. We believe that the high PE is justified due to the Group’s status of being the sole large cap player providing exposure to Malaysia’s untapped home improvement market, stable and non-cyclical consumer product offerings in a period of volatility and the potential of becoming a consumer proxy similar to Nestle or F&N.

• In terms of future growth and earnings potential, we remain optimistic. The launch of the new “MR DIY Express” format, the profit generating capacity of its pre-existing stores in a post-pandemic scenario, proactive management team and optimisation of its product mix and SKU prices lead us to believe that the group is in very good shape for the long haul.

Financial Results

• MR DIY posted a revenue of RM760mil in 2QFY21 (-13% QoQ, +47% YoY). Store shutdowns, most notably during the FMCO period, have contributed to the steep QoQ decline in 2QFY21.

• The group’s weaker EBITDA margin of 24.0% in 2QFY21 (-3.2ppt QoQ, -2.3ppt YoY) was due to higher freight and input costs on a YoY basis. Additionally, the group was affected by closure of certain non-essential sections in stores, as well as the closure of all MR TOY stores during the FMCO.

• MR DIY has announced a 2nd interim dividend of 0.6 sen for the quarter, bringing the total to 1.4 sen in 1HFY21. This implies a payout of 42%.

• Excluding sales from periods with store closures in MCO 1.0 and FMCO for 2020 and 2021, Mr DIY posted a quarterly SSSG of -16.7% YoY in 2QFY21.

• Here are some key takeaways from the results briefing held yesterday:

1. Store opening target has been reduced to 175 from >200 for FY21E. Focus will be shifted toward generating a higher proportion of MR DIY stores. This is due to construction delays caused by pandemic restrictions, though this has improved in 3QFY21. The group will also be sidelining the expansion of their higher-margin MR TOY and MR DOLLAR outlets in favour of setting up MR DIY outlets, which have more stable income generating capabilities.

MR TOY and MR DOLLAR are underperforming. With families refraining from leisurely activities, the group has temporarily shut down the operations of all their MR TOY outlets until further notice. MR DOLLAR is producing lacklustre earnings. An issue, which requires immediate attention is merchandise offerings. Unfortunately due to Covid-19 induced variability, the group is unable to leverage on the necessary economies of scale to boost its margins or gather enough data to optimise its supply chain and offerings. Post-pandemic however, we expect these store formats to perform exceedingly well.

2. New format MR DIY Express stores are being rolled out. The group opened four of these stores in 2QFY21. Five stores are currently in operation. The stores are sized at a smaller 3-4k sq ft instead of the usual 10k sq ft. While the group feels that the project is still in its early stages, they are optimistic on its potential and predict a payback period of two years (similar to ordinary MR DIY outlets).

Location wise, MR DIY intends to position the outlets in rural areas, townships, petrol stations and super urban spaces. We are optimistic on the outlook for this endeavour due to the proximity it offers, cost-saving ability to stave off nearby competition and penetrative capability even in highly saturated areas. Rental costs will vary depending on location, although MR DIY believes that it will be slightly pricier per sq ft than their MR DIY stores.

3. Adjustments in SKU offerings expected to benefit in the medium term. MR DIY has recently provided a new range of SKU offerings, reduced items that did not perform and re-priced some of the items to compensate for higher input and freights costs. These initiatives affected gross profit margins in 2QFY21. Nevertheless, MR DIY is confident that the benefits of the initiatives will come on-stream in the coming months.

Most notably, the group has increased its higher-margin private label contribution. It currently accounts for 38% of total product contribution vs. 14% to 16% a year ago.

Source: AmInvest Research - 6 Aug 2021