Investment Highlights

• Maintain BUY with a lowered DCF-based fair value (FV) of RM2.60 (from RM2.73) after updating our WACC assumption to 7.5% (from 6.4%), mainly to reflect the change in the risk-free rate to 4.2% from 3.4%. No change in our terminal growth rate assumption of 1.5% and earnings forecasts. Our FV implies PE of 43x based on FY23F EPS.

• MR D.I.Y. Group (M)’s (MR DIY) 2QFY22 results are expected to be better both QoQ and YoY. The group’s revenue is expected to recover from the previous quarter’s low base given that the number of Covid-19 Omicron variant cases has subsided. Gross margin recovery is also in the cards following the end of the “Price Lock” promotional campaign.

• The group’s revenue and earnings are projected to gradually improve in upcoming quarters with the remaining 2QFY22– 4QFY22 quarters expected to contribute 77% of our FY22F revenue and 79% of net profit.

• Concerns over inventory shortages due to supply chain disruptions may have been overplayed, in our view. At the end of 1QFY22, MR DIY’s inventory per store was at a healthy level of RM0.85mil vs. the RM0.88mil average over the past 6 quarters (Exhibit 1). Based on 1QFY22 days sales of inventory of 140 (vs. 138 days in 2021), the current level should be sufficient to cover more than one quarter of sales.

• Ruling out potential supply-demand mismatch concerns, the company’s historical sales trend (Exhibit 3) showed that there was no significant and sudden shift in consumer spending patterns which could lead to a material change in MR DIY’s inventory composition.

• The recent addition of the larger and more upscale format of MR DIY Plus would bolster MR DIY’s brand stature and further widen its exposure. The initial reception by the market is encouraging as the store reported more than 100,000 transactions in its first month of operation.

• The group is targeting to open 10 stores of similar size in the next 2–3 years. Expected to be located in high-traffic areas, this payback period of 2 years is likely to mirror the smaller sized stores despite heavier capex requirement.
   
• We like the company for its strong economies of scale, backed by a more than 900-strong store network. This gives MR DIY strong bargaining power with suppliers while providing great value to customers. Ranked high in consumers’ pecking order for spending, demand for household essentials is expected to be less affected by inflation.
   
• At 34x FY23F PE, the Company Is Trading Below Its Historical 2- Year Average of 50x.

Source: AmInvest Research - 6 Jul 2022