MRDIY’s 1HFY23 results met expectations. While its top line moderated, its margins recovered. It reiterated its guidance for a net addition of 180 stores in FY23 (YTD, it has added 88) and improved margins as freight charges normalise. We maintain our forecasts and TP of RM1.67 but upgrade our call to OUTPERFORM from MARKET PERFORM as value has emerged after the recent weakness in its share price.

MRDIY’s 1HFY23 net profit met expectations, accounting for 47% and 49% of our full-year forecast and the full-year consensus estimate, respectively. It declared a dividend per share of 0.8 sen for 2Q23, cumulating to 1.4 sen (or 47% payout) for 1HFY23, on track to meet its targeted payout of 50% for the full year.

Results highlights. YoY, its 1HFY23 top line grew 10% to RM2.15b benefiting from the full reopening of the economy, the full impact of the price hikes in FY22, and the 17% increase in the number of stores to 1,168 stores. Average basket size was RM27 (within expectations). Due to the increase in the number of stores, the volume of transactions rose by 15% to 79m although average transaction per store per day fell 2% to 381. Same-store sales growth (SSSG) fell by 8% to 2m (based on our estimation). Gross profit grew by a stronger 24% thanks to easing of freight charges and price hikes in FY22 but EBIT increased by a slower rate (17%) due to higher staff cost arising from the higher minimum wage.

QoQ, its 2QFY23 revenue improved 5%, underpinned by higher transactions (+5% to 41m), giving an SSSG of 1%. EBIT surged 14% on account of the normalization of freight charges (especially to East Malaysia.

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

1. It revised up its guidance for gross profit margin to 45% for FY23 (from 43-44% previously) due to the normalization of freight charges.

2. It reiterated its guidance for a net addition of 180 stores in FY23 (which is consistent with our assumption). YTD, it has added 88 new stores. These 180 net stores will be mainly MR. D.I.Y stores.

3. It is on track to add 14 new MR. D.I.Y Plus stores for FY23 having already opened 12 (4 new and 8 conversions). YTD it has added 31 stores of which 80% are conversions.

4. The number of MR DIY Express stores now stands at 81 of which 45% are in the urban areas. In 1HFY23, it opened seven new stores.

5. All 44 Mr Dollar stores have been converted to Mr Dollar One PLUS. These stores carry multiple price points of between RM1 and RM20 (higher than in 1QFY23 when the higher price point was RM10). This is due to the addition of 2k new SKUs. Sales are improving.

6. Its MR TOY stores have been profitable since 4QFY21 but they represent only 2% of total sales. YTD it has 54 stores with only two new stores opened in 1HFY23 with an additional six stores expected in 2HFY23.

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 the impending inflationary pressure and the reopening of businesses, sales will be challenging as B40 consumers will have wider and cheaper alternatives for goods that MRDIY is selling while those from the M40 group with a healthier balance sheet will have a better range of choices given the full reopening of the economy.

Forecasts. Maintained as an upward revision in gross margin assumption by 2 ppts to 45% for FY23−24F is offset by a cut in our SSSG assumption in FY23F to -7% (from -2% previously). We keep other assumptions such as: (i) 180 new stores for both years, (ii) basket size of RM27 and RM26; and (iii) SSSG of -4% for FY24F.

Correspondingly, our TP is maintained at RM1.67 on FY24E PER of 26x which is at a 5x multiple premium to the best forward PER of its regional peers of 21x to reflect a relatively underpenetrated home improvement market in Malaysia, with approximately 216 home improvement stores per million capita (2019) vs. Thailand, Japan and Australia at 231, 236 and 405 respectively according to Frost & Sullivan. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4). Upgrade to OUTPERFORM from MARKET PERFORM as value has emerged after the recent weakness in its share price.

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 - 10 Aug 2023