• Mr DIY registered a core net profit of RM113.5m (+54% yoy) for 3Q20, on the back of higher store count and a pent-up sales recovery post-lockdown.
• That said, earnings downside remains a risk in the subsequent quarters, considering: i) sporadic lockdown measures, ii) potential margin compression from accelerated store openings and iii) restocking activities trickling off.
• We retain our cautious stance given the potentially volatile earnings delivery amid a challenging retail environment. Maintain SELL and TP of RM1.21.

Commendable 3Q20 Lifted by Post-lockdown Recovery…

Mr DIY posted a 3Q20 revenue of RM740.2m (+31.8% yoy), on the back of pent-up sales recovery post an MCO-hit quarter, as well as a higher number of store count. Current store count stood at 688, an increase of +132 from 3Q19. In tandem, YTD revenue came in at RM1.8bn (+8.0% yoy), tracking the surge in 3Q20’s turnover. EBIT margins, however, saw a slight dip by -0.9ppt, largely owing to a weak 1H20, impacted by the lockdown and thus lower economies of scale. Overall, the group registered a core net profit of RM228.9m (+1.0% yoy), which we deem in-line with our forecasts, in anticipation of a softer 4Q amid reinstatement of targeted lockdown measures and also as post-lockdown restocking activities trickle off.

… But Maintaining Our Cautious Stance for the Subsequent Quarters

We note that the decent 3Q20 earnings delivery was also largely aided by an expansion in gross margin by 2ppt to 42.4%, in part due to a lower base in 3Q19 on the write-off of certain non-compliant products. The uplift is likely one-off, in our view, as we expect price competition intensity to remain elevated in the longer run. This, coupled with our projection of softer per store sales going forward, will likely further suppress margins as operational costs (such as rental & wages) start to outpace sales growth. To note, 9M20 revenue per store declined 13% yoy, averaging RM289k/month (9M19: RM331k/month). An accelerated store count, in our view, may be counterproductive in a softer SSSG environment. Elsewhere, the group declared a DPS of 0.73sen for the quarter, in line with the group 40% pay-out policy.

Maintain SELL With An Unchanged TP of RM1.21

We made no changes to our earnings forecasts. Looking ahead, in view of CMCO reinstatement and given risk of lockdowns potentially stretching into 2021, we are keeping our cautious stance. With 60% of its stores located in malls, this may pose a threat to earnings over the near term. As such, its premium valuations are unwarranted and hence we maintain our SELL rating with an unchanged 12-month TP of RM1.21 (21x 2021 PER)

Source: Affin Hwang Research - 9 Nov 2020