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MR DIY to be more agile and data-driven

MR DIY Group (M) Bhd has had an explosive growth in the last five years.

From opening its 250th store in 2017 to finishing the first half of 2022 with 993 stores across three brands, the group is currently Malaysia’s largest home improvement retailer.

MR DIY serves more than 80 million customers annually at all stores in Malaysia and Brunei, as well as its online store.

The group has also seen its latest quarterly revenue breaching the RM1bil-mark.

Bottomline-wise, MR DIY enjoys a good net profit margin of almost 13% for the quarter ended June 30.

A large part of its aggressive expansion was made possible with the backing of Creator, the same private equity firm that is behind CTOS Holdings Bhd, BIG Pharmacy, Eco-Shop, Bake With Yen and Tealive.

MR DIY onboarded Creator as its investor in 2016, when the former’s market share was 15.5%. Five years later, the market share more than doubled to 38.5% in 2021.

In October 2020, MR DIY emerged as the biggest listing on Bursa Malaysia for the year, with a market cap of RM10bil. Less than eight months later, the group joined the coveted league of FBM KLCI.

Moving forward, MR DIY continues its aggressive expansion strategy, aiming to open 180 stores in 2022, surpassing the record 175 stores it opened in 2021.

Up until end-June 2022, the group has opened 93 new stores, out of its overall target of 180.

With more new stores incoming, normalization of consumer spending and the price hike undertaken by the group in the first half of 2022 (1H22), MR DIY could be looking at a stronger topline and a continued growth momentum.

RHB Research Soong Wei Siang sees MR DIY as a better proxy to capture the recovery in consumer spending thanks to its entrenched network of stores and strong brand equity.

“The valuation gap versus its large-cap peers should close, premised on the company’s superior earnings growth profile and higher trading liquidity, in our view,” he says in a note.

Looking ahead, Soong opines MR DIY’s encouraging earnings recovery momentum would sustain, driven by continuous new store expansion and further gross profit margin 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.

“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 rationalization in product offerings,” according to him.

RHB Research maintains a “buy” call on MR DIY, with a slightly reduced target price of RM2.90.

In comparison, the stock closed at RM2.24 per share yesterday.

Soon points out that MR DIY’s 1H22 results slightly missed RHB Research’s lofty forecasts, despite the record earnings in the second quarter.

“Core net profit of RM242mil (up 17% year-on-year) met 43% and 44% of our and consensus forecasts as we believe our previous cost assumptions were too optimistic.

“Post-results, we cut earnings for the financial year of 2022 (FY22) by 5% and FY23 to FY24 earnings by less than 3%,” he says.

Earlier in a statement issued on Aug 4, MR DIY chief executive officer Adrian Ong hinted that the operating environment may get tougher moving forward.

Amid the expected impact of inflation and rising interest rates on disposable incomes, MR DIY remains “cautiously optimistic” on its prospects.

Ong said the group will focus on optimizing costs and achieving operational efficiencies, while ensuring optimal levels of stock at stores.

“It is clear that moving forward, the market is going to be more sensitive to external impact; we will need to accept this dynamic.

“Agility, responsiveness and a data-driven approach will be key tenets of our management philosophy, moving forward,” he says.

Meanwhile, Hong Leong Investment Bank (HLIB) Research left its forecasts unchanged, highlighting that MR DIY’s core profit after tax (PAT) in the second quarter ended June 30 of RM141.7mil was broadly within expectations.The second-quarter core PAT rose by 41.1% quarter-on-quarter and 72.7% year-on-year.

HLIB Research analyst Syifaa Mahsuri Ismail expects MR DIY to witness a margin recovery in 2H22 with the price hikes implemented.

“We understand that the group has implemented a price hike across broad categories of their products in April and May which we opine should help to cushion its margin contractions from multiple cost headwinds.

“As per management guidance, the full implementation of this price increase will be fully reflected in the coming quarter,” she says.

HLIB Research retains its “buy” call on MR DIY, with a target price of RM2.92.

Syifaa notes that MR DIY recently launched its maiden MR DIY Plus in Mid Valley Megamall with an overwhelming response.

Spanning a bigger space of 30,000 sq ft as compared to an average 10,000 sq ft MR DIY store, MR DIY Plus houses all three brands namely MR DIY, MR DOLLAR and MR TOY under one roof.

“The group plans to expand its MR DIY Plus to 10 stores in the next two to three years with focus on prime locations with higher foot traffic,” according to her.

Earlier, MR DIY’s Ong described the response for MR DIY Plus as “tremendous”, with over 200,000 visitors to the store in the one month since it opened.

Amid the positive expectations on MR DIY’s store expansion strategy, Kenanga Research analyst Ahmad Ramzani Ramli remains cautious on the group’s sales in 2H22.

He has downgraded his call on MR DIY to “market perform”, with a target price of RM2.40.

Ahmad Ramzani’s cautious outlook is due to the creeping inflationary pressures ahead, although he notes that historically the fourth quarter is the strongest quarter due to the year-end shopping season and festivities.

“With the adjustments in prices, we expect gross profit margin to remain stable at about 41% for the rest of the year,” he says in a note.

Post 1H22 results, which he described as “disappointing”, Ahmad Ramzani slashed the earnings forecasts for FY22 and FY23 by 16% and 10% respectively on expectation of a slowing performance in 2H22.

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