MR D.I.Y’s 1QFY23 results disappointed as both top line growth and margins came in weaker. It reiterated its guidance for a net addition of 180 stores in FY23. YTD, it has added 45 new stores. We cut our FY23-24F earnings by 6-13%, reduce our TP by 9% to RM1.67 (from RM1.85) and maintain our MARKET PERFORM call.

1QFY23 PATAMI disappointed, accounting for only 20% and 22% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from weaker-thanexpected top line growth and margins. A DPS of 0.6 sen was declared for the quarter, below our expectation of a full-year payout of 4.0 sen.

Results’ highlights. YoY, 1QFY23 top line grew 16% to RM1.05b benefiting from full reopening the economy, the full impact of the price hikes in FY22, and the increase in number of stores by 19% to 1,125 stores. Its average basket size was at RM27 (below our expectation of RM28). On the flipside due to the increase in number of stores, numberof transactions increased by 19% to 38m giving average transaction per store per day at 402 (from 408 in the same corresponding period). Same-store-sales growth (SSSG) fell by 4% to 1m (based on our estimation). EBIT grew by a stronger 27% thanks to margin recovery underpinned by price hikes in 3QFY22 and easing freight charges (which fell by more than 70% to RM2,600 per container from China).

QoQ, 1QFY23 revenue fell 2%, coming from a high base in 4QFY22 (due to annual year-end festive season and school holidays). EBIT fell by a larger magnitude of 7% due to higher advertising and promotion expenses.

The key takeaways from the results’ briefing are as follows:

1. It reiterated its guidance for a net addition of 180 stores in FY23(which is consistent with our assumption). YTD, it has added 45 new stores.

2. It is putting 14 more MR. D.I.Y Plus stores onto the market in FY23, in addition to 11 that are already in operation currently. A MR. D.I.Y Plus store is typically three times larger than a MR. D.I.Y store in terms of floor space and naturally carries many more SKUs. The new MR. D.I.Y Plus stores will be a combination of brand new stores or conversion from existing MR. D.I.Y, MR. Dollar and MR. Toy stores (including consolidation of existing MR. D.I.Y, MR. Dollar and MR. Toy stores that are near to each other).

3. It is also converting existing MR. Dollar to MR. Dollar One Plus –evolving from a fixed RM2 and RM5 price format to format of offering a wider range of products all under RM10. This will improve the gross margin by 3ppts-4ppts.

4. It is planning three outlets under a new concept, i.e. offering a wide range of high-quality hardware essentials (from China), to target hardware aficionados. The products could fetch a gross margin of c.50%. 

5. Since Dec 2022, the company had sold >500 Disney products under a licence agreement with Walt Disney. Total sales have reached RM10m with higher gross profit margin compared to MR D.I.Y products. The products range from electrical, household furnishing jewellery, stationery and toys. Future pipeline includesStar Wars merchandise.

We like MR D.I.Y for: (i) its leading position in the home improvement market in Malaysia; (ii) its strong gross margin (> 40% vs. peers of 32%) given its strong bargaining position vs. suppliers and economies of scale arising from its size, (iii) ability to introduce new SKUs quicker depending on consumers preference, and (iv) a strong balance sheet translating to war chest for expansion/higher dividends. However, with inflationary pressure coming and the reopening of business, sales will be challengingand the B40 consumers will have a wider and cheaper alternative for goods that MRDIY is selling while those from the M40 group with a healthier balance sheet will have a wider range of choices given the full reopening of the economy.

Post results, our FY23F/FY24F earnings are reduced by 6%/13% as we pencilled lower basket size (RM27 and RM26 respectively from RM28 for both years). No change to our other assumptions such as: (i) 180 new stores, and (ii) gross margin of 43%.

Correspondingly TP is lowered by 9% to RM1.67 rolling over to FY24E PER of 26x which is at a 5x multiple premium to the best forward PER of its regional peers of 21x (2x multiple lower previously on account of slower consumer spending as inflationary pressure creeps in). The 5x multiple premium is based on the relatively still under-penetrated home improvement market in Malaysia, with approximately 216 home improvement stores per million capita (2019) vs Thailand, Japan and Australiaat 231, 236 and 405 respectively according to Frost & Sullivan. The home improvement retail space in Malaysia is expected to chalk a CAGR of 22% (FY21-25) vs ASEAN’s CAGR of 9% according to certain market research reports. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Maintained at MARKET PERFORM.

Risks to our call include: (i) unfavourable forex trend, (ii) volatile supply and logistics, and (iii) high inflation denting consumer spending power.

Source: Kenanga Research - 12 May 2023