• Maintain BUY, with new TP of MYR2.62 from MYR2.90, 32% upside and c.2% FY23F yield. Mr DIY’s 9M22 results disappointed mainly on weaker- than-expected sales momentum and stalled GPM recovery. That said, we believe earnings are well poised for an immediate rebound in 4Q22 on seasonality and GPM normalisation, with its solid fundamentals remaining intact. We continue to like the stock as a proxy to capture the resilient consumer spending in Malaysia thanks to its entrenched network of stores and strong brand equity.

• 9M22 results were below expectations. Core net profit of MYR344m (+16% YoY) met only 64-66% of our and consensus forecasts on weaker- than-expected sales dragged by low stock inventory (Figure 2) on the back of labour shortage and supply chain disruptions. On top of that, GPM recovery was offset by the spike in internal freight costs (Figure 4). Post- results, we trim FY22F-24F earnings by 4-6%. Correspondingly, our DCF- derived TP drops to MYR2.62 (inclusive of a 4% ESG discount), which implies 40x FY23F P/E – in line with the valuations we ascribe to large-cap consumer peers.

• Results review. YoY, 9M22 sales rose 22% to MYR2.9bn, largely in tandem with the net store additions (+197 stores or 23%). However, 9M22 GPM slipped 1.2ppts to 40.4%, reflecting the higher input costs compounded by a hike in freight rates. On top of that, 9M22 opex (+25% YoY) outgrew topline growth – primarily a function of higher minimum wages. QoQ, 3Q22 sales slid 8% to MYR966m, affected by low stock inventory and seasonal swing with 2Q22 boosted by the first Aidil Fitri celebration in three years and EPF withdrawal. This, together with the flat GPM and higher opex on full effects of higher minimum wages, caused 3Q22 core net profit to fall by 29% QoQ to MYR101m.

• 3Q22 softness will not persist. We believe a strong immediate earnings rebound is on the cards – 4Q is seasonally the strongest quarter considering the festivities and lengthy year-end holidays. Meanwhile, GPM is also set to expand by an estimated 1.5-2.0ppts starting 4Q22 taking into account the latest round of price adjustments towards end-3Q22 and the fall in freight rates (Figures 3 & 4). Beyond the immediate term, management is committed to 180 new store openings (125 Mr DIY, 35 Mr DIY Express and 20 Mr Toy and Mr Dollar) for FY23, as it believes its business model will be able to thrive at the greater degree of density and Mr DIY Express is expected to capture more growth opportunities.

• Risks to our recommendation include a critical supply chain disruption and sharp rise in input costs.

Source: RHB Research - 9 Nov 2022