1QFY22 results came in below our/market estimates on account of lower margins and lower footfall, on account of the pandemic spike in Feb/March. YoY sales improved but margins eroded as management made a strategic effort to gain market share despite the elevated inputs costs. GP margin erosion was manageable (-2ppt) despite supply risks. Average selling prices (ASP) are expected to increase ahead as its 3-month ‘Price Lock’ campaign has ended with GP margins looking to rise by 1-2pts (from current level). TP maintained at RM4.00 as we moved forward our valuation base to FY23E. Rating is raised to OUTPERFORM.

Below expectations. 1QFY22 net profit of RM100m (-20% YoY, -25% QoQ) came in below expectations, accounting for 15%/16% of our consensus full year estimates. The negative deviant stems from: (i) dented sales as pandemic cases took a sharp rise in Feb 22, and (ii) sharp hike in inputs costs coupled with a price-lock campaign beginning 4QFY21. However, an interim DPS of 0.7 sen was declared (implying a 43% payout) which was in line.

YoY, Sales continued to improve (+4%) as its stores remained open under the National Recovery Plan. Average monthly revenue for the quarter surged to RM302m (+4%). 49 new stores (no stores were closed) were added for the quarter (vs. 180 targeted for CY22). GP margin (of 39% vs. 41% (assumption) were impacted by higher inputs and promotion of “Price Lock” campaign throughout 1QCY22. EBIT margin eroded 4ppt to 17% on higher D&A expenses and opex including higher inventory buffer to mitigate supply issues.

QoQ, Average monthly revenue fell 7% (from RM325m). Erosion of GP margin were minimal (-1ppt) but EBIT margin saw higher erosion (-3ppt) given the higher opex incurred.

Passing of rising costs to consumers. We do not see further risk from lower footfall entering into the endemic phase. ASP looks likely to increase as the’ ‘Price Lock’ campaign has ended; we are confident demand will be sustainable as historically in 2018, when the Group increased prices, demand was sustained. Given the inflationary pressure ahead, the Group’s “low prices and quality” products will remain an attractive proposition. We take note that 54% of its outlets are located in the Central and South region – a favourable position given the reopening economy and consumers looking for competitively-priced goods. Despite the elevated inputs costs, management guided for 40-41% GP margin for FY22 boosted by the passing of rising costs to consumers.

Post results, we tweak slightly (-11%/-6%) our FY22E/FY23E earnings to RM602m/RM743m as we revised our margins assumptions. We assumed: (i) basket size at RM30 (RM31 previously), (ii) average transaction/store/day at RM395 (unchanged), and iii) GP margin at 40% (from 41%).

OUTPERFORM call with a TP of RM4.00 as we moved our valuation base to FY23E PER of 34x (vs. regional peers of 29x). We believe the high PER is justified based on: (i) robust growth potential, driven by sustainable market demand for its products and stores expansion, (ii) its unchallenged position in the domestic space, (iii) strong GP margins (c.40% vs peers of 32%) with the absence of near- and long- term margin volatility thanks to its supply source China’s massive economies of scale, (iv) robust balance sheet providing ample cash for expansion, and (v) net cash position ahead, allowing MR D.I.Y. to deliver sustainable dividends.

Risks to our call include: (i) unfavourable forex trend and (ii) prolonged lockdowns.

Source: Kenanga Research - 17 May 2022