"...the gap between its valuation and that of other large-cap consumer peers is unwarranted, as we take in its solid earnings delivery and consistent dividend payout since listing.” — RHB Research.

KUALA LUMPUR (Nov 21): Analysts continue to recommend a “buy” call on MR DIY Group (M) Bhd as they anticipate a seasonal uptick in the home improvement retailer’s earnings for the fourth quarter ending Dec 31, 2023 (4QFY2023), driven by better sales momentum during the year-end festive season.

However, consumers’ propensity to spend may be partially hindered by ongoing inflationary pressures, said Maybank Investment Bank (Maybank IB) Research.

“...Our target price (TP) is maintained at RM2.40 on a revised PER (price-earnings-ratio) of 35x (-0.5SD to mean, 40x previously) to impute for overall weaker consumer spending trends in the medium term,” the research house wrote in a note. Maybank IB also lowered the group’s earnings projection by 5% to 6% for FY2023 to FY2025.

For the third quarter ended Sept 30, 2023 (3QFY2023), MR DIY’s net profit rose 22.5% to RM123.95 million from RM101.18 million in 3QFY2022, as revenue increased by 10.4% to RM1.07 billion from RM966.17 million.

The higher earnings were also driven by a stronger gross profit margin, from 41.1% to 45%.

Net profit for the cumulative nine months ended Sept 30, (9MFY2023) rose to RM402.04 million, 19.3% higher than the RM336.87 million recorded a year earlier. Nine-month revenue expanded 10% to RM3.21 billion from RM2.92 billion.

Despite the backdrop of soft consumer sentiment, MR DIY will be able to offer resilient growth, due to its value-for-money product offerings, RHB Research wrote in a separate note.

“Hence, the gap between its valuation and that of other large-cap consumer peers is unwarranted, as we take in its solid earnings delivery and consistent dividend payout since listing.

“Core net profit of RM402 million met 71% of our and consensus full-year forecasts and we anticipate a stronger 4Q2023F ahead, in line with the historical seasonal patterns.

“We make no changes to our earnings forecasts and discounted cash flow-derived TP of RM2.29 (inclusive of a 4% ESG premium), which implies 34x P/E FY24F which is on par with the stock’s 3-year mean,” said RHB.

Kenanga Research opted to maintain its earnings forecast for FY2023 but raised its projection for FY2024 by 11%, attributed to MR DIY’s increased number of new store openings, a stronger profit margin and a higher average basket size.

Correspondingly, the research house lifted its target price for the stock to RM1.78 (from RM1.67 previously), based on a FY2024 PER of 25 times, representing a five times multiple premium to the average forward PER of its regional peers, which stands at 20 times.

“We like MR DIY for: (i) its dominant position in Malaysia's home improvement market, (ii) its impressive gross margins exceeding 40%, significantly outpacing its peers of 32%, a testament to its advantageous negotiation position with suppliers and benefits derived from economies of scale, (iii) a vigorous store expansion strategy aimed at broadening its national footprint, and (iv) the impending initiation of an automated inventory system in 1QFY2024, which could further enhance its operational efficiency,” Kenanga added.

According to Bloomberg data, MR DIY has 12 “buy”, two “hold” and one “sell” calls, with a 12-month TP of RM2.03. AmInvestment Bank Research has the highest TP of RM2.60 and Macquarie the lowest of RM1.20.

At the time of writing, shares of MR DIY were down six sen or 3.73% at RM1.55, valuing it at RM14.63 billion. Year to date, the stock has fallen over 22%.