• Maintain BUY, new TP of MYR2.20 from MYR2.29, 44% upside with c.3% FY24F dividend yield. Mr DIY Group’s FY23 results met expectations on its solid sales and GPM recovery. Its current market valuation is undemanding, considering its fundamentals to deliver solid growth amidst a soft business environment, thereby outperforming most consumer sector peers. We like MRDIY for its entrenched store network and effective business model to capture resilient consumer spending. A positive outcome of the ongoing civil servant salary scheme review is also a catalyst for the stock.

• FY23 results in line. The group’s core net profit of MYR561m (+17% YoY) accounted for 99% and 100% of our and consensus forecasts. Post-results, our FY24-25F earnings are <3% lower after making housekeeping changes. Correspondingly, our DCF-derived TP also drops to MYR2.20 (inclusive of a 4% ESG premium), which implies 33x P/E FY24F or close to the stock’s 3 year-mean.

• Results review. YoY, FY23 revenue grew 9% to MYR4.4bn, mainly underpinned by the new store expansion (+175 outlets to total 1,261). SSSG was at -3.7%, being negatively impacted by ensuing demand elasticity on ASP increases and soft consumer sentiment. Meanwhile, FY23 GPM expanded by 4ppt to 45.4% to reflect ASP increases and the normalisation in freight costs. This more than offset the rise in operating costs and propelled the 17% YoY jump in FY23 PBT to MYR753m. QoQ, 4Q23 revenue and net profit rose 8% and 28% due to favourable year-end seasonality and product mix. FY23 DPS totalled 3.2 sen, which points to a higher 54% payout ratio vs FY22’s 48%.

• Outlook. We expect its store network expansion to remain the primary growth driver. MRDIY plans to open 180 new stores in FY24, with a focus on the underpenetrated East Malaysia region, which currently generates higher average sales per store. In addition, the negative SSSG trend could be reversed, with the effect of demand elasticity likely to wear off. On the other hand, Mr DIY has no plans to adjust ASPs, notwithstanding the meaningful hike in freight costs in recent months as the impact is manageable. Instead, we believe the company could be more aggressive with price promotions to induce consumer spending, leveraging on its healthy GPM. Essentially, we expect that its proven business model of offering a wide range of products at competitive prices across convenient locations should continue attract sticky demand even if consumer sentiment remains subdued.

• Downside risks to our recommendation include weaker-than-expected consumer sentiment and a sharp rise in operating costs.

Source: RHB Research - 26 Feb 2024