Mr DIY registered 9M22 core PAT of RM343.2m (+15.6% YoY) which missed our and consensus expectations at 60% and 66%, respectively. To date, Mr DIY has opened 138 new stores and we gathered that the group is set to exceed the target of 180 new stores opening for FY22. Despite healthy store expansion, the group is still experiencing pronounced increase in input costs mainly in freight charges and staff costs. We trimmed our FY22/23/24 forecasts by -11%/-6%/-6% respectively. Maintain BUY with lower TP of RM2.40 (from RM2.92) based on lower PE multiple of 35x pegged to FY23 EPS.

Missed expectations. Mr DIY’s 3Q22 core PAT of RM101.1m (-28.7% QoQ, +12.6% YoY) brought 9M22 sum to RM343.2m (+15.6% YoY). This missed expectations, accounting for 60% and 66% of our and consensus full year forecasts, respectively. The deviation was on the back of lower-than-expected margins. 9M22 core PAT was arrived after adjusting for forex gain (-RM237k), gain on disposal of PPE (-RM129k) and one-off tax expense and penalties (+RM6.7m) incurred in 2Q22.

Dividend. Declared DPS of 0.5 sen which goes ex on 25 Nov 2022 (3Q21: 0.65 sen). 9M22 dividend amounted to 1.8 sen (9M21: 2.05 sen).

QoQ. Revenue tapered down by -7.9% to RM966.2m on back of decrease in total transactions in the absence of festive period coupled with the lower inventory level at end of 2Q22 which impacted the sales for the current quarter. EBITDA margin shrank by -2.5ppt given higher input costs mainly on the freight charges. This in turn caused core PAT to decline further by -28.7% to RM101.1m.

YoY/YTD. Turnover increased by 25.8% YoY/ 21.8% YTD to RM2.9bn. This was thanks to (i) positive SSSG of 5.5%; (ii) increased in total number of stores by 23.4% to 1,038 stores; and (iii) 40.1% YoY increased in total transactions to 35.8m. Note that 3Q21 was also affected the lockdown measure that led to a temporary store closure and lower overall foot traffic. Despite that, core PAT grew softer by 12.6% YoY/ 15.6% YTD to RM343.2m owning to shrinking of EBITDA margin by -1.9ppt YTD as the group continued to incur higher administrative and operating expenses with increases in staff costs (from higher RM1,500 min wage implementation), utility expenses, marketing expenses and depreciation of right-of-use assets .

Outlook. To date, Mr DIY has opened 138 new stores (+45 in 3Q22) which majority constitute of Mr DIY and Mr DIY Express stores. We gathered that the group is set to exceed the target of 180 new stores opening for FY22. Despite the healthy store expansion, the group is still experiencing pronounced increase in input costs mainly in freight charges as well as staff costs. Opex rose by 2% YoY on the back of the hi gher wage costs by 1.2ppt with the implementation of RM1,500 min wage. To mitigate the impact, the group is exploring several key operating and strategic initiatives including pricing reviews of its product ranges, optimising the product mix as well as automation and simplification of operating processes.

Forecast. We trimmed our FY22/23/24 forecasts by -11%/-6%/-6%, respectively to account for the deviation mentioned above.

Maintain BUY, TP: RM2.40 (from RM2.92) based on 35x PE of FY23 EPS. In light of rising interest rate environment, we tweak our PE target to 35x (from 40x) which is in line with its historical average PE. We remain optimistic with the group strategy of store expansion to defend its market share as the leading home improvement retailer.

Source: Hong Leong Investment Bank Research - 9 Nov 2022