Investment Highlights

• We maintain BUY on MR D.I.Y. Group (M) (MR DIY) with a higher fair value (FV) of RM4.48/share (vs. RM3.80/share previously). Our FV is based on a PE of 38x on FY23F EPS. There is no adjustment to the FV based on our 3-star rating.

• Our PE of 38x (previously 36x) is at a 30% premium to its regional peers’ average of 29x. We applied a premium to account for the strong possibility that MR DIY will be included in the FBM KLCI, as well as for its recovery prospects as pandemic restrictions begin to wane. Except for Home Product Centre PCL in Thailand’s SET 50, none of its regional peers are included in their local equivalents. Additionally, MR DIY has the scarcity premium of being the sole large market cap player in the affordable home improvement retailer category.

• We are optimistic on MR DIY’s future earnings outlook, given its unrivalled GP margins of ~43%, expansion into less urban areas, quick store breakeven periods of <2 years and expected success of its multi-store format. Also, a recovery in pandemic restrictions will improve footfall and the transaction volume of high-margin stationery and sports equipment items.

• We spoke to MR DIY recently. Here are some key highlights:

1. We maintain our sales growth of 52% for FY21F. This is expected to be underpinned by the opening of 100 MR DIY stores, 25 MR TOY stores and 50 MR DOLLAR stores in FY2021. So far, MR TOY has seen improvements in basket size, experiencing a 33% YoY increase to RM40 by end-2020.

2. The group intends to open a larger proportion of stores in remote areas. We are positive on this news as these outlets have a 15–20% higher revenue contribution than urban counterparts.

• In particular, MR DOLLAR’s direct competition will be against local mom-and-pop stores, which do not have the capital nor bargaining power to compete with the group’s lower priced goods.

• Chain discount retailers such as Daiso and AEON are more urban-curated, leaving MR DOLLAR unimpeded in its accumulation of market share in these locations.

3. We believe that MR DIY’s 1QFY21 performance will only be mildly affected by the latest MCO. More than 95% of the group’s outlets remained opened. On the flip side, the group has seen a lower volume of transactions during the MCO as result of lower footfall. Some mitigation may come in the form of a higher basket size as customers aim to make less trips.

5. We also expect a stronger contribution from its high-margin stationery and sports segment. This is due to a gradual relaxation of MCO restrictions and a reopening of schools. The segment yields the second-highest GP margin of ~46%. We expect it to return to pre-pandemic levels of ~10% of revenue, after falling to ~7% in FY20.

6. We affirm our gross profit margin of 43% for FY21F. We believe that costs of goods will not fluctuate too much, as MR DIY has made attempts to reduce currency risk against China’s yuan. While it has not hedged its currency exposure, it has reduced its China imports from 74.3% in 1HFY20 to 70.8% at end-FY20. Going forward, we do not expect any significant change to this value, as attempts at alternative sourcing may not be competitive.

7. Thus, no major shake-up in expenses expected. Yearly expenses are allocated as a percentage to revenue (Exhibit 1). With cost of sales, the largest contributor to group costs, having reduced exposure to currency fluctuation, the group does not envisage any significant changes in the coming years. In terms of cost reduction, MR DIY is currently optimizing more energyefficient methods to save on utilities costs, but its effect is unlikely to be material.

8. We believe that contribution from e-commerce channels will remain immaterial. Aside from sudden spikes during periods of movement lockdown, the average monthly figure remains less than RM1mil. MR DIY believes this is because the products are cheaply priced and abundantly found. As a result, customers prefer to pay and handle the products in person rather than ordering online.

Source: AmInvest Research - 15 Apr 2021