MRDIY's 9MFY24 results missed expectations on softer sales and rising cost pressures. Despite 8% revenue growth, 9MFY24 core net profit rose by a smaller 6% YoY on higher operating costs, including labour, utilities and depreciation. Looking ahead, revenue growth will stem from strategic expansion plans for 190 new stores in FY25, and new concept stores like 'The Colorist' under KKV.

Keeping our revenue forecasts largely unchanged, we cut our FY24-25F earnings by 9-8% and correspondingly adjust our TP to RM2.20 (from RM2.40) to reflect short-term headwinds. After a 45% YTD gain, our total returns now map to a MARKET PERFORM, from OUTPERFORM.

MRDIY's 9MFY24 net profit of RM425m (after excluding RM3.7m one- off charges associated with new automated warehouse) came in below expectations at 65% and 66% of our full-year forecast and the full-year consensus estimate, respectively. The key variance against our forecast came largely from a double whammy of softer sales and heightened cost pressures.

It declared an interim dividend of 1.0 sen (3QFY23: 0.8 sen), with a pay- out ratio of 78%, well above its 50%-65% target range, reflecting its strong financial position despite weaker performance this quarter.

YoY, its 9MFY24 revenue grew 8% fuelled by a net addition of 134 stores, raising its total store count to 1,389 (including KKV). This expansion led to a 12% increase in transaction volumes to 136m, though partially offset by a 4% decrease in average basket size with fewer items per transaction. Its core net profit improved by a slightly lower 6%, tempered by higher administrative and operating costs, including labour, utilities and depreciation.

QoQ, its 3QFY24 top line fell 5%, due to the absence of festive periods like Hari Raya and weakened consumer sentiment. The company indicated that tighter household budgets, affected by the removal of diesel subsidies, contributed to lower spending despite net total of 49 new stores during the quarter. Notably, the average basket size dropped by 90 sen QoQ to RM24.90, compared to an average of 30 sen reduction over the past two years.

However, its core net profit plunged by a sharper 19% mainly due to: (i) increased staff costs, and (ii) higher expenses related to its new automated warehouse which is not yet fully operational amounting to RM2.3m, (excluding one-off charges of RM3.7m).

The key takeaways from its results briefing are as follows:

1. The company announced its FY25 expansion plan to open 190 new stores across core brands including KKV. Most new stores will be the flagship MR. DIY, emphasising on expansion in East Malaysia, though progress there may be slow due to regulatory issues. It also reaffirmed its FY24 target of 180 new stores, which we believe is achievable with a YTD net addition of 134 stores.
2. It also guided that, of the 190 new stores planned for FY25, at least 20 will be KKV and its new concept stores. The company is currently trailing a new store concept "The Colorist", which focuses on beauty and cosmetic products, with the first location set to open in Pavilion Bukit Jalil by end-FY24. We share similar view with the management that the performance of its KKV stores is expected to remain robust; however, the management is taking a more prudent approach in new store openings with 10 KKV new stores by end-FY24 (vs about 13 as stated previously).
3. It also indicated that about 56% of its total employees may be impacted by the upcoming minimum wage hike to RM1.7k (from RM1.5k), starting Feb 2025. The higher labour costs could be partially mitigated once its new automated warehouse project is fully operational, though this has been delayed from originally scheduled date of Nov 2024.
4. The automated warehouse, which is currently ramping up throughput and undergoing various trials. Since it is not yet fully commissioned, the company is incurring higher administrative and operating costs from running this facility alongside other warehouses.

Forecasts. We cut our FY24F and FY25F earnings by 9% and 8%, respectively, to account for incremental cost pressures that may not be fully passed through in the near term, given the reduction in average basket size and negative SSSG (3QFY24: - 1.8%); we have reflected the 4% reduction in average basket size, albeit expecting a 2% rebound in FY25 in tandem with expected wage hike effects benefitting consumers. While the upcoming minimum wage hike and delayed petrol subsidy could support discretionary spending, near-term pressures on costs may not be fully passed on for now.

Valuations. Consequently, we also reduce our TP by 8% to RM2.20 (from RM2.40) based on an unchanged 28x FY25F PER, which is at an 8x multiple premium to the average historical forward PER of its regional peers of 20x to reflect a relatively under- penetrated home improvement market in Malaysia as well as the introduction of the new KKV store format. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We like MRDIY for: (i) its dominant position in Malaysia's home improvement market, (ii) its size that translates to strong bargaining position vs. its suppliers, and economies of scale, (iii) its ample headroom for growth in terms of store count, and (iv) its continued efforts to improve operational efficiency such as the introduction of an automated inventory system. However, it may not be able to fully pass on its higher operating costs in the near term. Downgrade to MARKET PERFORM from OUTPERFORM.

Risks to our call include: (i) unfavourable forex trends, (ii) volatile supply and logistics, and (iii) elevated inflation putting a dent in consumer spending power.

Source: Kenanga Research - 15 Nov 2024