MR DIY's FY23 results met expectations. Its FY23 net profit grew 16% driven by store expansion, price hikes and lower freight cost. It is planning for a net addition of 180 stores in FY24. We fine-tune down our FY24F net profit forecast by 2%, trim our TP also by 2% to RM1.75 (from RM1.78) but maintain our OUTPERFORM call.

MR DIY's FY23 net profit met expectations. The company declared a 1.0 sen DPS in 4Q, bringing its full-year DPS to 3.2 sen (54% payout), up from 2.4 sen in FY22 (43% payout), meeting our projections.

YoY, its FY23 top line grew 9% propelled by a net addition of 175 stores (bringing its total store count to 1,255) and a 16% growth in transactions to 165m, partially offset by a 5% reduction in average basket size to RM26.40 (from RM27.80).

Its monthly sales per sq ft eased 4% to RM35.60, vs. RM37.20 in FY21- 22, which could be attributable to the impact of carryover effect of previous price hikes, but still above RM34.50 in FY20.

Its gross profit rose by a steeper 20% as it gross margin expanded to 45.4% (from 41.3%) driven by lower freight costs and the price hikes. Its monthly gross profit per sq ft hit a record RM16.10 in FY23 (vs. RM15.00 to RM15.40 over the past three years) for the same reasons.

However, its net profit only grew 16% due to higher staff and other operating costs, primarily associated with an upwards revision in the minimum wage in May 2022 and store expansion.

QoQ, its top line grew 8% underpinned by store expansion and a seasonally strong period on the back of festivities and school holidays. Its net profit rose by a sharper 28% driven by margin expansion.

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

1. It is planning for a net addition of 180 stores in FY24. It believes that it will not be materially affected by the weak consumer spending sentiment amidst sustained high inflation at present given its value-for-money offerings of hardware and household products.

2. Its automated warehouse building has been completed, pending equipment installation by Apr 2024. The warehouse should fully come online by 3QFY24, which will bring about earnings and cash flows enhancement of about RM10m and RM20m, respectively, from reduced labour and warehouse rentals.

3. It intends to continue with quarterly dividend payouts at 50%-65% of its net profit backed by its strong financial standing and robust cash flows.

Forecasts: We fine-tune down our FY24F net profit forecast by 2% and introduce our FY25 numbers.

Valuations. Correspondingly, we also fine-tune down our TP by 2% to RM1.75 (from RM1.78) based on unchanged targeted FY24F PER of 25x, which is at a 5x multiple premium to the average forward PER of its regional peers of 20x to reflect a relatively under-penetrated home improvement market in Malaysia. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like MR DIY for: (i) its dominant position in Malaysia's home improvement market, (ii) its size that translates to strong bargaining position vs. its suppliers and economies of scale, (iii) its ample headroom for growth in terms of store count; and (iv) its continued efforts to improve operational efficiency such as the introduction of an automated inventory system. Maintain OUTPERFORM.

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

Source: Kenanga Research - 26 Feb 2024