Comprehensive Analysis of Mr. DIY Group’s Latest Performance

Broker: UOB Kay Hian
Date: Friday, 15 November 2024

Company Overview

Homegrown Mr. DIY is the largest home improvement retailer in Malaysia, boasting more than 40% of the market share in this sector. The company also operates in Brunei and is involved in toy and dollar concept stores. With a strong foothold in the market, Mr. DIY continues to expand its presence, making significant strides in the industry.

Stock Data

GICS sector: Consumer Discretionary
Bloomberg ticker: MRDIY MK
Shariah Compliant: Yes
Shares issued (m): 9,453.6
Market cap (RMm): 20,325.2
Market cap (US\$m): 4,563.4
3-mth avg daily t’over (US\$m): 4.5

Price Performance

The stock price has seen fluctuations, with a 52-week high/low of RM2.15/RM1.38. Recent performance is as follows:

• 1 month: -1.9%
• 3 months: 1.5%
• 6 months: 21.1%
• 1 year: 42.8%
• Year-to-date (YTD): 48.9%

Major Shareholders

• Tan Yu Yeh: 51.0%
• Gan Choon Leng & Tan Gaik Hoon: 6.1%
• Hyptis: 4.9%

3Q24 Results: Dragged By Cautious Sentiment

Mr. DIY’s 3Q24 earnings missed expectations, impacted by cautious consumer sentiment and tightened purse strings, which weighed on in-store revenue and operating margins. Positively, its recent acquisition, KKV, remains a bright spot as its early results are promising and forex remains advantageous. Its below-mean valuations amid a decent earnings growth outlook suggest a still-favourable reward-to-risk payoff. Maintain BUY but with a lower target price of RM2.35.

3Q24 Results Summary

• Revenue: RM1,135.1m (-5.1% qoq, 6.4% yoy)
• Gross Profit: RM515.4m (-5.4% qoq, 7.5% yoy)
• EBITDA: RM266.1m (-13.1% qoq, 2.1% yoy)
• PBT: RM164.5m (-20.9% qoq, -1.5% yoy)
• Core Profit: RM125.3m (-19.2% qoq, 1.1% yoy)

Store count increased by 15.0% yoy to 1,389, but revenue per store dropped by 7.4% yoy. Margins were slightly affected, with Gross Profit Margin at 45.4% and EBITDA Margin at 23.4%.

Detailed Financial Performance

Mr. DIY registered a 3Q24 core net profit of RM125.3m, a 19.2% decline qoq but a 1.1% increase yoy. The core profit has been adjusted for a one-off charge associated with its new automated warehouse. The 9M24 core profit stood at RM425.4m, which is below both UOB Kay Hian’s and consensus expectations, at 64% and 68% respectively. This negative variance is attributed to a lull in consumer sentiment that weighed on sales and softer margins.

Dividend Payout

An interim DPS of 1.0 sen was declared, bringing the 9M24 DPS to 3.2 sen (9M23: 2.2 sen). The payout for the quarter is 78%, exceeding its 50-65% target dividend payout.

Key Financials

Sentiment Weighs on In-store Sales Generation

3Q24 revenue grew by 6.4% yoy but contracted 5.1% qoq. Sales increased yoy, boosted by an increased store count (+14.5%) amid lower revenue per store of –8.5% (same-store sales growth (SSSG): -1.8% yoy). SSSG was dampened by primarily sluggish consumer sentiment and increasingly smaller format stores. 3Q24 transaction count was largely unchanged but basket size shrank marginally to RM24.9 from RM25.5 in 3Q23, suggesting curtailed spending by consumers.

Operational Costs Impact Margins

3Q24 gross margin was stable, largely unchanged on a sequential basis at -0.1ppt to 45.4%. Operating margin declined to 2.2ppt yoy to 23.4% as a result of higher opex that included the one-off charge for its automated warehouse. Core margins largely tracked operating margins with a 0.9ppt yoy decline to 10.7% for the quarter. Gross margins could improve in 2025. The ringgit strength is holding up against the renminbi despite the recent weakness, with the current exchange rate of Renminbi/ringgit at +6.6% vs 1H24’s average. It is estimated that for every +1% in the ringgit/renminbi exchange rate, 2025 earnings will increase by 1.8%.

Stock Impact and Expansion Plans

Mr. DIY is ramping up its expansion with plans to open 190 new stores in 2025, including 20 KKV stores, following the recent acquisition of the KKV brand, which has shown promising early results. Six KKV stores are currently in operation, and this number is expected to reach 10 by year-end. KKV stores generate twice the revenue of a typical Mr. DIY outlet, in part due to their larger size (12,000 sf vs 8,400 sf). Additionally, KKV will introduce a new concept store focused on cosmetics and beauty called The Colorist, with the first store launching by the end of the month. Mr. DIY’s store expansion will also be skewed more towards East Malaysia, where there is a lower concentration of stores and less competition.

Broad Salary Adjustments Could Support Spending

The increase in the minimum wage to RM1,700 and civil servant salary adjustments are expected to infuse RM20.4b across 6.05m individuals. With a touted additional RM5b from the EPF Account 3 withdrawal scheme, this significant boost to disposable income could support household spending. For perspective, Mr. DIY reported a RM97m sales uplift during the RM44.6b EPF withdrawal scheme in 2022, underscoring the potential impact of this increased liquidity.

Earnings Revision and Risk

Earnings forecasts for 2024-26 have been cut by 13%/9%/11% respectively to adjust for lower sales assumptions. Key downside risks include a sharp weakening of the ringgit against the renminbi and trade restrictions by China.

Valuation and Recommendation

UOB Kay Hian maintains a BUY recommendation with a lower target price of RM2.35 (from RM2.45) as they cut earnings. Mr. DIY offers a decent three-year profit CAGR of 10.2%. Against a backdrop of valuations trading close to its historical mean, Mr. DIY’s reward-to-risk payoff is still relatively attractive. The PE ratio peg of 31.8x is based on 2025’s earnings or its historical mean PE.

Environmental, Social, Governance (ESG) Updates

Environmental

• Energy management: Mr. DIY targets to increase renewable energy sources by 30% from base year 2021 for its warehouses.
• Emission: By 2030, Mr. DIY aims to reduce Scope 1 and 2 emissions by 20% and 30% respectively from base year 2021.

Social

• Diversity & inclusion: Among its workforce, 57% are male, while 43% are female. Mr. DIY also employs 26 less-abled and four Orang Asli employees.

Governance

• Board gender diversity: Male to female ratio of 4:2.
• Board balance and composition: Three board members are independent directors, amounting to 50% of the board members.

Key Assumptions

PE Band

Profit and Loss

Year	2023	2024F	2025F	2026F
Net turnover (RMm)	4,359.3	4,969.4	5,634.4	6,299.5
EBITDA (RMm)	1,088.6	1,214.5	1,442.4	1,571.7
Deprec. & amort. (RMm)	298.8	395.5	458.4	506.3
EBIT (RMm)	789.8	819.0	984.0	1,065.4
Total other non-operating income (RMm)	30.2	34.5	39.1	43.7
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