• Maintain BUY and TP of MYR2.48, 56% upside and 2% yield. Mr DIY’s 1Q23 results were deemed within expectations in view of the stronger quarters ahead. We expect FY23F earnings growth of 24% to be underpinned by GPM recovery and store expansions. Trading at 25x P/E, or a steep discount to the large-cap consumer peers, we believe its valuation is attractive considering the robust earnings growth, established fundamentals, and value-for-money offerings that should help to capture consumer spending in the inflationary environment.

• Mr DIY’s 1Q23 results were broadly within expectations as we anticipate a further pick-up in earnings ahead. Net profit of MYR128m (+27% YoY) accounted for 22% of our and consensus forecasts. Post- results, we make no material changes to our earnings forecasts. Correspondingly, our DCF-derived TP is unchanged at MYR2.48 (inclusive of a 4% ESG premium), which implies 40x FY23F P/E – in line with the valuation we ascribe to large-cap consumer peers.

• Results review. YoY, 1Q23 revenue jumped 16% to MYR1bn largely driven by the higher number of stores (additional 178 to 1,125 stores) as SSSG was flattish at 0.4%. Meanwhile, 1Q23 GPM expanded strongly by 5.1ppts to 44.3% thanks to the effect of price hikes implemented last year and cost savings from lower freight rates. With opex increasing in tandem with the store expansion and higher minimum wages, 1Q23 PBT surged 28% to MYR173m. QoQ, 1Q23 revenue was 2% lower as 4Q22 was a high base boosted by the stronger seasonality. As a result, 1Q23 PBT fell 6% QoQ despite the continuous GPM expansion.

• Outlook. We believe the positive earnings momentum is sustainable, taking into account the cost tailwinds with the favourable freight rates movement. This should protect the improved GPM, and at the same time, render Mr DIY room to be more aggressive with promotions. This will be effective in driving foot traffic and stimulating consumer spending against the backdrop of elevated inflation. Meanwhile, the plan to open 180 stores in FY23F is on track with the addition of 45 net new stores in 1Q23 – the group is also introducing a new variant of the Mr Dollar brand in the form of Mr Dollar One Plus in order to be more flexible with its product offering. Furthermore, it is targeting to launch a new brand – Empro (Figure 2).

• Risks to our recommendations include a sharp hike in input or operating costs, and major supply chain disruption.

• ESG framework update. As there is now greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 12 May 2023