Investment Highlights

• Maintain BUY with an unchanged DCF-based fair value (FV) of RM2.60. No changes to WACC of 7.5% and terminal growth rate of 1.5% in our DCF valuation assumption, which implies a PE of 43x based on FY23F EPS. No change in our neutral 3-star ESG rating.

• We also maintain our earnings forecasts as MR D.I.Y. Group (M)’s (MR DIY) 2QFY22 core net profit of RM137mil (+37% QoQ, +67% YoY) is within our expectation but below consensus. We exclude a one-off RM2.1mil penalty in relation to the timing of tax deductions from core earnings calculation.

• Cumulatively, MR DIY’s 1HFY22 core earnings of RM238mil (+15% YoY) accounted for 48% of our full-year forecast and 43% of street’s.

• The sequential rebound in 2QFY22 earnings was mainly attributed to stronger sales due to seasonality from the festive season in April and May. The group’s 2QFY22 revenue grew 16% QoQ, recovering from the previous quarter’s low base to RM1,049mil.

• 2QFY22 gross margin improved by 1.8% points QoQ as a result of a price revision exercise during the quarter. The full impact of the exercise, a further 1%-point improvement in gross margin, is expected in the upcoming quarters.

• YoY, 2QFY22 revenue grew 38% driven by the normalisation of consumer spending and sales from new stores. The group’s 2Q22 same-store sales growth (SSSG) jumped 20% YoY (Exhibit 2).

• MR DIY added 46 net new stores in 2QFY22 (+93 net new stores in 1HFY22), closer to achieving its target of more than 1,080 total number of stores by the end of 2022.

• Given persistent supply chain disruptions, the group is aiming to improve its inventory turnover days. It stands at a sufficient level of 121 days, but slightly lower compared to 133 days in 2021.

• We believe MR DIY’s sales performance is likely to be sustained moving forward despite rising inflation and price revision exercises. Under the inflationary environment, we believe inflation-strapped consumers would gravitate towards value retailers such as MR DIY. Backed by an over 900-strong store network, the group has strong bargaining power with suppliers and economies of scale to provide great value to its customers.

• At 38x FY23F PE, the company is trading below its historical 2-year average of 50x.

Source: AmInvest Research - 5 Aug 2022