• Maintain BUY, with new TP of MYR4.50 from MYR4.59, 27% upside. Mr DIY’s 1Q22 results disappointed on weak footfall and GPM pressure, but both factors are expected to wane going forward. We continue to like it as a major proxy to capture the recovery in consumer spending thanks to its entrenched network of stores and strong brand equity. The valuation gap vs large-cap peers should close, premised on the group’s superior earnings growth profile and higher trading liquidity, in our view.

• Mr DIY’s 1Q22 results were below expectations. Net profit of MYR101m (-20% YoY) met only 16-17% of our and consensus forecasts. The slower footfall as a result of a sharp pick up in COVID-19 new cases and GPM pressure were the two main factors causing the underperformance. Post- results, we trim FY22F earnings by 6% but leave FY23F-24F materially unchanged. Correspondingly, our DCF-derived TP is lowered to MYR4.50 (inclusive of a 4% ESG premium), which implies 42x FY23F P/E, or in line with the valuations we ascribed to other large-cap consumer peers.

• Results review. YoY, 1Q22 revenue only rose 4% to MYR905m despite the higher number of stores (947 vs 788 in 1Q21) as SSSG dipped 10.9% with footfall being affected by the higher COVID-19 infection rates (Figure 3). Meanwhile,1Q22 GPM slipped 2.9ppts to 39.2% on higher freight costs and unfavourable FX which the group did not pass on as it was embarking on a 3-month “Price Lock” promotional campaign. QoQ, 1Q22 revenue was 7% lower due to the weaker footfall and temporary closure of stores for disinfection and sanitisation. That, together with the continuous GPM pressure, led to a 25% QoQ decline in 2Q22 net profit.

• 1Q22 weakness should not persist. Essentially, the two main factors dragging 1Q22 performance are likely to dissipate in the upcoming quarters – considering the decline of COVID-19 infection rates and the end of the “Price Lock” campaign. Footfall is expected to normalise and the Aidil Fitri festivities should further spur consumer spending whereas price adjustments are estimated to lift GPM by 2-3 ppts, according to management guidance. Meanwhile, the higher minimum wage, effective May, will translate to higher wage costs for the group, with half of its >12,000 staff drawing salaries below the new minimum wage. On the flipside, the resultant higher disposable income should also lead to higher consumer spending and the retail industry could well be one of the biggest beneficiaries. As such, the net impact to Mr DIY could be positive taking into account its dominant market share in the home improvement retail industry.

• Risks to our recommendation include a critical supply chain disruption and the resurgence of COVID-19 infection rates.

Source: RHB Research - 17 May 2022