Investment Highlights

• Reiterate our BUY call with a slight tweak to our fair value to RM4.15 (from RM4.17) after changing our valuation method to DCF. MR D.I.Y. Group (MR DIY) is our top pick for the consumer sector for its strong operating cash flow from its existing stores, proactive leadership of the management, and prospect of the new store format, MR D.I.Y. Express. We revise 2021–23F earnings by +1%, -1% and -3.2% respectively due to housekeeping purposes.

• Always-low prices provide relief to the rising cost of living. The eroding consumers’ purchasing power due to the inflationary environment would benefit MR DIY as consumers become more price sensitive and gravitate towards cheaper options, in our view. The Department of Statistics reported that Malaysia’s inflation rate rose by 3.2% to 124.5 in December 2021 (from 120.6 in December 2020) due to supply chain disruptions and rising energy costs.
  While headline inflation may potentially ease, the underlying inflation may persist as prices of consumer goods hardly come down after increasing and this may turn consumers’ bargain-hunting to be a more lasting trend.

• Rising operational costs due to inflation to be partially offset by product offering optimization. We expect an increase in the number of transactions from the shift in consumer shopping habits, We also believe the impact of rising operating costs would be partially offset by MR DIY's continuous effort to improvise its product offerings and maximize white label sales’ contribution. Leveraging its data analytics capability, the company is actively revising its product offerings based on customers’ demand while continuously assess its product pricing strategy.

• MR D.I.Y. Express to fill demand gap in smaller towns. Since the opening of its first MR D.I.Y. Express outlet in 2Q21, the company is seeing encouraging signs of the smaller store format’s potential. The existing MR DIY Express outlets are reporting higher revenue per square feet, compared to its traditional stores, due to its data-driven strategy of stocking up only fast-moving products. This new store format is also expected to have a better payback period given its lower capital expenditure requirement. It could fit into normal size shop lots and requires no major renovation. MR DIY Express store format allows the company to fill the demand gap in its catchment area, particularly in small rural towns or super urban areas.
  We believe the MR DIY brand will continue to be the company’s key earnings growth driver in the near term. Out of 180 new stores targeted for 2022, at least 100 outlets are expected to be MR DIY stores, including MR DIY Express outlets.

• We change our valuation method to discounted cash flow (DCF) (free cash flow-to-equity) method (Exhibit 3), from a relative valuation of 38x target PER of FY23F EPS previously. We believe the DCF method better captures the medium-to-long term prospect of the company and would allow us to incorporate any key changes in the business strategy into our valuation.

• MR TOY’s 4Q21 recovery looks encouraging. Being an unessential item, demand for toys was affected by the pandemic. Nevertheless, we believe there is a vacuum in the supply affordable toys in Malaysia with no prominent players. MR DIY would have a competitive advantage given its direct relationship with suppliers and existing extensive store network. MR TOY’s operation is showing positive sales recovery in 4Q21 since the reopening of the economy.

• MR DOLLAR’s operation is still facing some teething issues of getting the right products, outlets’ positioning, and product pricing. However, given the management’s track record and the team’s capabilities, we remain optimistic on MR DOLLAR’s medium-to-longer term prospects. The fast-growing incumbent Eco-Shop network is proof of the robust demand for dollar/discount stores here in Malaysia.

Source: AmInvest Research - 24 Jan 2022