MST Golf’s earnings in the short term will be affected by the shortfall of wholesale revenue thus we revise our FY23 and FY24 earnings forecasts downwards by 12.9% and 10.1% to RM29.7 and RM35.8 respectively. Nonetheless, the company's fundamentals remain strong, with ongoing local and regional expansions. Despite the adjustments, the stock still offers a potential upside of 24.6% supported by double digit earnings growth. BUY with a TP of RM0.71 based on 16x PER (20% discount to its listed peers on Bursa Malaysia)

MST Golf witnessed a drop in whole sales order, due to changes in leadership and review of their internal procurement and inventory management policies by one of the wholesalers. It is noteworthy that golfing sales typically experience weaker demand during the Ramadan and Raya festive period in Malaysia, which falls in 2Q this year. However, we expect a resurgence in retail sales during 2HFY23, driven by increased sales of golf balls, gloves, golf footwear, and golf apparel. Further efforts via steady execution of indoor golf centre and aggressive sales promotion activities in 2HFY23 will improve profitability margins hence earnings growth.

Riding on the significant influx of new golfers, we believe MST Golf, which holds a dominant market position, will manage to sustain prevailing golf boom by leveraging on its regional and local expansion efforts. As of 1HFY23, MST Golf has already opened 3 retail stores, with another one (Johor Bahru) scheduled to commence operations by 4QFY23, bringing its total store count from 35 to 39. The 3 stores are located at Gurney Paragon (Penang), Seremban Gateway, and Plaza Shah Alam.

MST Golf's regional expansion plan is on track, with 2 new retail stores in Indonesia set to open over the next few months. By leveraging on its Indonesia JV Partner, PT Sinar Eka Selaras (listed on IDX), for its local expertise further demonstrates confidence in the incremental profitability of its regional expansion ventures. As rental agreements in Indonesia typically have a 5-year lock-in period, any increase in sales above the breakeven level will result in margin expansion.

MST Golf is targeting to pay a dividend of 30% from its net profit. Based on our estimates, the company is expecting to pay dividend of 1.1sen and 1.3sen per share for FY23 and FY24, translating into yield of 1.9% and 2.3%. Balance sheet remains manageable, with a gearing ratio stood at 0.59x as of 1HFY23.

Source: Rakuten Research - 7 Sept 2023

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