Investment Highlights

• We maintain our BUY call with a lower DCF-based fair value of RM4.10 (from RM4.45) due to reduced earnings. No changes to WACC of 6.4% and terminal growth rate of 1.5% in our DCF valuation assumptions.

• MR D.I.Y. Group (M)’s (MR DIY) 1Q22 core net profit of RM101mil (-25% QoQ, -19% YoY) was below our and consensus’ expectations, accounting for 17% of our earlier FY22F earnings and 16% of consensus estimates. The negative variance is mainly attributed to the deterioration of gross margin and lower-than-expected sales. The company declared an interim dividend of 0.70 sen per share, which implies a payout ratio of 44%, in line with our expectation.

• Post-results, we trim our 2022F earnings by 17% to reflect the lower-than-expected 1QFY22 earnings with a reduction in gross margin assumption to 42% from 43.5% for FY22F and 43% from 44.5% for FY23F. We also cut 2023F earnings by 15% and 2024F by 7% after imputing more conservative sales growth assumptions.

• MR DIY’s revenue declined 7% QoQ due to lower number of transactions and basket size, in tandem with the rise in Covid- 19 cases in February and March (Exhibit 3). However, the company’s revenue grew 4% YoY despite same-store sales growth (SSSG) falling 11%, driven by the higher number of stores at 947 outlets vs. 788 in 1Q21.

• The company maintains its 180 new stores target for 2022 (vs. our forecast of 175 stores), which predominantly will be in MR DIY and MR DIY Express formats. MR DIY added 47 net new stores in 1Q22, and is on track to achieve its target. Notably, 1Q22 average capex per store is lower at RM555K compared to RM667K in 1Q21 due to the inclusion of the smaller MR DIY Express store format.

• 1Q22 gross margin dipped 1.2% points QoQ and 2.9% points YoY as a result of higher input and freight costs. Nevertheless, now that the “Price Lock” promotional campaign has ended, the company is revising product prices, taking rising costs into account. This is expected to result in a GP margin recovery by 1–2% points in the upcoming quarters.

• We continue to like the stock as an inflationary environment would benefit MR DIY as consumers gravitate towards cheaper options to shop for household essentials. The company’s future earnings will be driven by its growing store network and expanding its catchment area while the temporary deterioration in margin may be offset by the ASP revision.

• At 45x 2022F PE, the company is trading below its historical 2- year average of 50x (Exhibit 7).

Source: AmInvest Research - 17 May 2022