• Maintain BUY, TP rises to MYR2.40 from MYR2.20, 14% upside with c.3% FY25F yield. Mr DIY Group’s 1H24 results broadly met expectations, underpinned by new store openings and healthy GPM. It announced a new retail brand, KKV, which could help to sustain longer-term earnings growth and expand ROE, thereby serving as a catalyst to provide more legs for its share price after the YTD rally. In addition, its solid growth – notwithstanding the soft consumer sentiment, high trading liquidity and increased dividend payouts – should continue to garner investor interest.

• 1H24 results broadly in line. Net profit of MYR300m (+8% YoY) accounted for 47% of our and consensus forecasts, and we expect a stronger 2H24 ahead on seasonal factors. That said, we raise FY24-26F earnings by 1%, 3% and 5% after factoring in the associate earnings from KKV (refer overleaf for our detailed write-up). Our DCF-derived TP rises to MYR2.40 (inclusive of a 4% ESG premium) after we roll over our valuation base year. The TP implies 30x FY25F P/E, or close to the stock’s 3 year-mean.

• Results review. YoY, 1H24 revenue rose 9% YoY to MYR2.3bn, primarily driven by its net store additions (+172 outlets, to a total of 1,340) as SSSG remained in negative territory. On a more positive note, GPM expanded by 0.3ppt on lower input costs, which led to a gross profit growth of 10%. 1H24 opex grew 13% YoY, largely in tandem with the growth in its store count. As a result, 1H24 net profit climbed 8% YoY to MYR300m. QoQ, 2Q24 revenue and net profit was 5% and 7% higher at MYR1.2bn and MYR155m on the higher number of stores and festive season demand (due to Aidil Fitri). A second DPS of 1.2 sen was declared, implying an all-time-high payout ratio of 73%, which is a positive surprise.

• Outlook. Its earnings growth should continue to be anchored by its robust outlet expansion (FY24F target: c.180 stores) for deeper market penetration as well as the entrenched brand equity, thanks to its effective business model. Meanwhile, the strong cash flow generation and normalisation of inventory turnover and capex should sustain its high dividend payout ratio of >70%. Notwithstanding the cautious consumer spending on the back of heightened inflationary pressures, Mr DIY is well-positioned to benefit from any consumer downtrading, given its value-for-money product offerings and convenient locations. We also view Mr DIY as a major proxy to capitalise on recent positive developments including the salary hikes for civil servants and flexible Employees Provident Fund withdrawal scheme – we think that the beneficiaries of both proposals fall well within Mr DIY’s customer groups.

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

Source: RHB Research - 14 Aug 2024