• Maintain BUY, and new TP of MYR2.90 from MYR3.00, 25% upside. Mr DIY’s 1H22 results slightly missed our lofty forecasts despite record 2Q22 earnings. We continue to like Mr DIY as a major proxy to capture the recovery in consumer spending thanks to its entrenched network of stores and strong brand equity. The valuation gap vs its large-cap peers should close, premised on the company’s superior earnings growth profile and higher trading liquidity, in our view.

• 1H22 results trailed expectations. Core net profit of MYR242m (+17% YoY) met 43% and 44% of our and consensus forecasts as we believe our previous costs assumptions were too optimistic. Post-results, we cut FY22F earnings by 5% and FY23F-24F earnings by <3%. Correspondingly, our DCF-derived TP is adjusted to MYR2.90 (inclusive of a 4% ESG premium). The TP implies 42x FY23F P/E, in line with the valuations we ascribe to other large-cap consumer peers.

• Results review. YoY, 1H22 revenue rose 20% to MYR2bn, in tandem with the 20% net increase in new outlets to 993 stores. 1H22 gross profit only grew by 15% to MYR784m as GPM slipped 1.7ppts to 40.1% on higher input and freight costs compounded by the unfavourable FX. As a result, 1H22 PBT increased by 12% to MYR318m. QoQ, 2Q22 sales surged 16% to surpass the MYR1bn mark thanks to footfall normalisation post the emergence of the Omicron variant in 1Q22, Aidil Fitri festivities and 46 net new stores. 2Q22 GPM recovered by 1.8ppts to 41% after the implementation of price adjustments following the end of a price lock campaign. With that, 2Q22 core net profit jumped 41% QoQ to an all-time high of MYR142m.

• Outlook. The encouraging earnings recovery momentum should sustain going forward driven by continuous new store expansion and further GPM recovery to fully reflect the impact of price increases. In addition, we understand that the supply chain disruptions and logistics conditions have improved, and Mr DIY is increasing the inventory level in stores to prevent out-of-stock incidents. The company continues to see pockets of opportunities and is committed to its net new store expansion target of 180 (1H22:93). On the other hand, management also shared that Mr Toy (53 stores as at 1H22) has continued to gain traction since the economic reopening whereas Mr Dollar (51 stores as at 1H22) benefited from the strategy to maintain selling prices as well as rationalisation in product offerings.

• Risks to our recommendation include a critical supply chain disruption, and a resurgence of COVID-19 infection rates.

Source: RHB Research - 5 Aug 2022