MRDIY (5296) - Usually I prefer to write about undervalued shares, because its more useful and interesting for potential investors and mostly you will not create so many new enemies. If some stock is heavily overpriced, there must be a strong and huge crowd of die-hard supporters. If you are one of them, you hate me already just for the title. MR D.I.Y GROUP (M) BERHAD, lets have a look at you.

I admit I also used to like MRDIY and until now sometimes I go shop there if I need something cheap and the low quality doesn’t matter for the needed product. Long time ago I stay at USJ19 where one of their first shops was located and at that time I love it, so much of savings (and I love saving). When the shop just opened, not many people visiting there, but it changed very, very fast, with long queues and people pushing each other with their elbows.

And as many famous investors (Buffet, Lynch etc.) say, this is a very important factor, but they also consider valuations and the future growth potential.

Situation today? Growth potential? Well this is where we will probably disagree.

From my experience MRDIY has already at least 3 shops in every kampong, these days long queues no more, and their merchandise is of a lower quality than used to be – my impression only, of course.

Another very interesting fact is, professional analysts fighting with each other, who gives a higher price target, sacrificing their dignity just to get plus points from their fanatic MRDIY followers.

I knew about MRDIY crazy valuations for a long time, because I like the brand somehow so I thought it will be a great long term investment, but when I saw their financials I run and for a long time ignored to even check back their progress. Until tomorrow night. When I saw it, I wrote a short message to i3 forum:

“funny counter, P/NAPS around 23, similar to TESLA of P/NAPS around 25, but you know what? Elon Musk can LITERALLY go to the moon, where mr diy can go?”

Now I am awaiting death threats. You know – fanatics...

First lets see how professionals predicting future price targets and giving a fair valuation.

Market price 11. June 2021: 3.72 RM    P/E: 57.66   P/NAPS: 23.28

Explanation of basic ratios HERE (for newbies).

HLG so far winner: “… our FY21/22 forecasts … higher TP of RM4.79 based on higher PE multiple of 50x pegged to FY22 EPS”

- they are predicting target price based on the future predicted EPS, based on a crazy high P/E ratio of 50.

AmInvest: “fair value (FV) of RM4.48/share, using an unchanged PER of 38x on FY23F EPS”

- AmInvest is probably aware they cant use so crazy P/E so they try different tricks how to give a high target price, they calculate it on a future predicted EPS for the FY 2023, but still P/E needs to be 38.

First lets talk about P/E Ratio, its truth high growth companies deserve higher P/E because the target price is based on a future EPS which they are expecting will be much, much higher, so at that time, thanks to high EPS, the P/E will be in an acceptable range in the future, but high for today price.

What is "acceptable P/E range" here?

International Average Retail P/E Ratio is around 20, but it is because of the covid situation and many shops around the world are still closed or were operating under less than optimal conditions. If you see for example International Average Hypermarkets P/E Ratio its just above 10. Why? Hypermarkets are open and doing business like nothing is happening (MRDIY too). In the past, retail P/E was between 12 – 18.

So which number for P/E to use? For future target price prediction I will try to use more realistic P/E, but will discount for “an extreme growth potential” which many people are expecting, realistic or not.

The ceiling level of P/E in this sector is around 18, since many people think, MRDIY is a revolution in the retail industry we can go even higher, 20 – which is number I will normally never, ever use for anything. NAPS? Better don’t even think about it, pretend it doesn’t exists.

EPS prediction will be based on FY21, because prediction (almost) 1 year into the future is already enough, no one know what will happen in 2 years time, and even if yes, who wants to wait 2 years for the share price get just to the “fair value”. Lets say, MRDIY will DOUBLE EPS at the end of this year, and total EPS will be, lets be optimistic – 11 sen, it is really high already.

Target EPS: 11 sen

Target P/E Ratio: 20

Target Price: 2.2 RM

Note I myself don’t agree with this valuation for MRDIY, as P/E of 20 should be used on the current trailing EPS, with future EPS should be based more likely on P/E of 15, so even my target price is way too high.

Want to buy overpriced shares? Go for Tesla, they make really nice cars.

Interested in undervalued shares? See for example PPHB or TOMEI.

My blog: http://miloshtrading.blogspot.com

Disclosure: Im not holding MRDIY

Disclaimer: Im not a professional financial advisor, analyst, economist or an  accounter.
This is not a trading recommendation / advise, just my personal view.