MRDIY's 1HFY24 results met expectations. Its 1H net profit grew 8% fuelled by store expansion and the normalisation of supply chain. We are positive on its KKV venture, which offers a new store format to attract higher footfall and drive spending conversion. We kept our FY24F forecasts relatively unchanged but raised our FY25F earnings by 3% on improved margin. Our TP is raised to RM2.27 (from RM1.97), and upgraded our call to OUTPERFORM from MARKET PERFORM previously.

MRDIY's 1HFY24 net profit of RM300m met expectations, coming in at 45% and 46% of our and consensus full-year forecasts, respectively. It declared a 2QFY24 DPS of 1.2 sen (1HFY24: 2.2 sen), implying a dividend pay-out ratio of 73%, which exceeded its targeted 50%-65% range. Despite trailing its store opening guidance, MRDIY expects the generous pay-out to continue, reflecting its robust financial position.

YoY, its 1HFY24 top line grew 9% propelled by a net addition of 168 stores (bringing its total store count to 1,334) and a 13% growth in transactions to 46.2m, partially offset by a 5% reduction in average basket size to RM25.80. Its gross profit grew by 10% with its gross margin expanding to 45.7% (from 45.3%) thanks to the normalisation of supply chain. Correspondently, its net profit also improved by 8%.

QoQ, its top line improved by 5%, driven by the net addition of 42 stores and stronger sales during the festive season. Correspondingly, its PBT also rose, by 7%, due to the higher revenue, though partially offset by higher operating expenses related to business expansion activities.

The key takeaways from its results briefing are as follows:

1. The newly acquired 49% stake in KKV, a popular life style store from China, is expected to continue gaining traction. It recorded RM0.5m in equity earnings in June, a month after the venture. We view this acquisition to be accretive on an outlay of RM9.6m (see overleaf for details)
    
2. Its automated warehouse (designed to cater to 1,200 stores) has commenced operation in August 2024 and is expected to ramp up to full operations by 3QFY24. It had previously guided for earnings and cash flow accretion of approximately RM10m and RM20m, respectively, due to reduced labour and warehouse rental costs
    
3. It is still aiming to add 180 new stores in FY24, though only 79 new stores were added in 1H. The focus for store openings remains on East Malaysia and the East Coast.
    
4. The introduction of EPF’s Account 3 has had minimal impact on the company’s topline performance.

Forecasts: We largely maintained our FY24 estimates but raised our FY25F net profit forecast by 3% after adjusting margin assumptions on supply chain normalisation primarily and imputing KKV’s contributions.

Valuations. We also raised our TP upwards by 15% to RM2.27 (from RM1.97) based on higher targeted FY25F PER of 28x, which is at a 8x multiple (vs. 5x previously) premium to the average historical forward PER of its regional peers of 20x to reflect a relatively under-penetrated home improvement market in Malaysia as well as the introduction of the new KKV store format. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

KKV Venture. In May 2024, MRDIY acquired a 49% stake in KKV Supply Chain Sdn Bhd (KKV) for RM9.6m. KKV, one of China’s largest life style retailers, offers over 20,000 SKUs of trendy lifestyle products in its Malaysian stores. KKV currently operates three stores in Malaysia: one in Bukit Bintang and two in Penang, offering products in eight categories ranging from food and drinks to clothing and accessories.

MRDIY plans to open 10 additional KKV stores in the second half of 2024, bringing the total to 13. Each store is expected to require a capital expenditure of approximately RM2m-RM3m and about 15,000 square feet floor space. MRDIY anticipates a two-year gestation period for the investment, with the tipping point at 35 stores. We view KKV as a promising new store format for MRDIY, likely to attract higher footfall and drive spending conversion due to its wide range of products offered at competitive prices. Our FY24/FY25F earnings model assumes a total of 13/33 KKV stores. Assuming annualised the 1-month equity earnings contribution of RM0.5m, this implies a single-digit PE and an accretive acquisition compared to its outlay of RM9.6m.

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.

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 - 14 Aug 2024