Coming from the official launch of MR DIY PLUS followed by a meeting with management, we are positive on MR DIY’s earnings for FY22 as supply issue is not a critical matter with GP margins expected to normalize with the passing of costs to consumers. Reiterate OUTPERFORM with unchanged TP of RM2.65.

We attended the official launch of MR DIY PLUS yesterday which was followed by a casual meeting with management. This latest concept store follows on the heels of MR DIY, Mr TOY, MR Dollar, with this store focused on a ‘LifeStyle’ Concept. The store located at Mid-Valley Megamall is MR DIY Group’s biggest outlet so far at 30k sq foot covering two levels.

Other key takeaways from the launch.

1. An outlet at 30k sq foot (vs the average MR DIY stores of 10k sq ft) covering 2 floors with 14 check-out counters of which 6 are self-service. Goods that are promoted in the store range from hardware, stationeries, toys, households and F&B. The store has a multi-purpose area solely for workshop/promotional activities by suppliers.

2. Opened since 19th May, it has chalked almost 200k visitors or an average 5k visitors/day. Being at Mid-Valley, the store has been well-received especially on weekends and public holidays. The store currently operates with extra shifts and manpower to cope with demand and stockpiling of fast-running inventory. The average MR DIY outlet has c.12 workers while DIY Plus is currently running with 40-50 workers.

3. We understand that capex for the store is at RM2.4m with inventories at an additional RM2.4m. The average MR DIY store has a capex of RM600k followed by an additional RM900k for inventories. Due to the traffic seen at Mid-Valley since reopening of the economy, we understand that payback for the DIY Plus store is likely at 12-18 months (vs the 24 months for other stores).

On track. We believe that the Group is on track to achieve its target of 180 stores for FY22 of which 83% will be MR DIY stores (which includes MR DIY Plus) with the remainder filled by Mr Dollar and Mr Toy. Management is looking at introducing another 9 MR DIY Plus stores within 2 to 3 years but depends on the availability of space especially in shopping malls. Despite increased ASPs since its ‘Price Lock’ campaign in 1QCY22, traffic has been robust corresponding to the endemic phase and we expect gross profit margins to improved 2 to 3ppt from 1QCY22 (c.39%). Inventory turnover days are still between 1.2 to 1.4 days with inventory stockpiling not needed indicating that the supply issue is over. Traffic at other outlets is encouraging with the reopened borders with the unfavorable Ringgit boosting its outlets in the southern region. Shortage of labor is another bane for the group with the Group expecting further influx of foreign workers into their workforce in the coming months ahead. While the Group has always adhered to the minimum wage, staff retention is supported by sales incentives and performance bonus.

Post update we make no changes to our FY22E/FY23E earnings of RM602m/RM743m.

Maintain OUTPERFORM call with a TP of RM2.65 on a FY23E PER of 34x (vs. regional peers of 29x). We believe the higher 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.

Source: Kenanga Research - 1 Jul 2022