Projected FY19-22 net profit CAGR of 22.4% will be underpinned by (i) rapid expansion of c.175 retail outlets per annum (100 MR DIY outlets, 50 MR DOLLAR and 25 MR TOY); and (ii) positive SSSG. We initiate coverage on MDGM with a BUY call and TP of RM3.33 based on 40x mid-FY22 earnings. While this PE implies a ~30% premium to MDGM’s regional home-improvement peers, note that MDGM’s PEG ratio of 2.7x is far lower than its peer average of 6.1x.

Background. MR DIY Group Malaysia’s (MDGM) principal activity involves the retail of home improvement products and mass merchandise in Malaysia and Brunei, primarily under the brand name MR DIY.

Home improvement market is far from oversaturation. While the number of home improvement stores per million people in Malaysia is comparable to developed markets (Figure #6), this is due to the disproportionally high number of stores in Malaysia being independently run in smaller format stores (Figure #7). Note that home improvement sales per capita in Malaysia is significantly lower than developed nations and even regional peers like Thailand, Vietnam and Singapore (Figure #8). We reckon MR DIY still have room for store expansions given (i) payback period per store opening is still short, at under 2 years (including inventory cost); (ii) revenue per store and average value of each transaction are still growing YoY (Figure #13 and #14); and (iv) store performance in rural areas appears to be stronger-than-anticipated.

Embarking on new retail formats. We are positive on MDGM’s newer retail formats MR DOLLAR (4 stores as of 3Q20) and MR TOY (28 stores as of 3Q20). Note that ~30% of sales from their existing retail format MR DIY can be classified as ‘lifestyle products’ (e.g. toys, food stuff, stationary, sports equipment) which is similar to the inventories we expect these new retail formats to carry. As such, we believe MDGM will be able to seamlessly transition into these new retail formats. We are particularly optimistic about MR DOLLAR given that the market is already receptive to the ‘dollar store’ concept, with existing players in the market ramping up store roll out plans. MDGM intends to open 50 MR DOLLAR and 25 MR TOY stores per annum in FY21 and FY22.

Entry into the FBMKLCI could spark a rerating. MDGM is currently the 26th largest listed company in Malaysia by market cap (Figure #26). MDGM will become eligible to be included in the FBMKLCI should it enter the top 25 or an existing member falls below the 35th position. The FBMKLCI is reviewed semi-annually, with the next review scheduled to occur in June 2021.

Forecast. We expect MDGM to record FY19-22 net profit CAGR of 22.4%. This projected growth will be driven by (i) the opening of 175 retail outlets per annum; and (ii) recovery in revenue/store post-MCO impact. While SSSG is forecasted to fall -11.5% in FY20 mainly due to MCO impact, we expect it to rebound +9.0% and 2.5% in FY21 and FY22; respectively.

Initiate with a BUY, TP: RM3.33. We initiate coverage on MDGM with a BUY call and TP of RM3.33 based on 40x mid-FY22 earnings. This PE(x) implies a ~30% premium to MDGM’s regional home-improvement peers. We reckon this premium is justified given its favourable earnings outlook vs. its peers. Note that MDGM’s FY19-22 net profit CAGR of 22.4% dwarfs its peers’ average of 8.9%. In fact, MDGM’s PEG ratio of 2.7x is far lower than its listed regional peers' average of 6.1x.

Source: Hong Leong Investment Bank Research - 20 Jan 2021