Maybank Investment Bank has reiterated its BUY rating on MR. DIY even though the retailer’s 3Q22 results undershot expectations due to higher-than-expected operating expenses. As a result of this, the research house has lowered its FY22-FY24E earnings estimates by 5%-10%. It also expects sequential earnings to improve given the easing in freight and labour shortage issues alongside higher consumer spending during the year-end festive season. Hence, a lower target price (TP) of MYR2.50 (from a previous TP of MYR2.70) based on unchanged 40x FY23E PER.
3Q22 results adversely impacted by higher operating expenditure. MRDIY’s 3Q22 core net profit of MYR101m (+12% YoY, -29% QoQ) brought 9M22 core net profit to MYR344m (+16% YoY), reflecting 65%/66% of Maybank/consensus full-year earnings estimates. Higher operating expenses from increased labour cost largely attributed to the disappointment.
Stable GP margins dragged by increased labour costs. 3Q22 revenue grew 26% YoY due to added contribution from new stores (+197 stores YoY) and positive SSSG (+5.5% YoY). 3Q22 GP margin was flattish YoY at 41.1% as price adjustments (conducted throughout 2Q22) were partially offset by higher freight and input costs. Note that the group’s internal freight cost to East Malaysian stores was elevated in 3Q22 as inventory levels were significantly depleted in 2Q22. EBIT margin fell to 15.4% (-2.6ppts YoY) on higher labour cost (from store openings and minimum wage took effective 1 May 2022]), utility and marketing expenses.
Lowered FY22E-FY24E earnings estimates by 5-10%. The research house FY22E/FY23E/FY24E earnings estimates are lowered by 10%/8%/5%. Although sequential earnings are expected to improve with normalization in store inventory levels and improved consumer spending during year-end festivities, Maybank IB believes that product mix improvement or another round of price hikes might be necessary for operating margins to meaningfully recover in the near term. Nevertheless, MRDIY remains a key beneficiary for consumer down-trading due to its product affordability and mass-market appeal.
Risks identified. As more than 70% of its products are sourced from foreign end suppliers, particularly in China, any major changes in currency, tax, trade policies or tariffs in China may adversely impact earnings. Higher operating expenses through minimum wage hikes could also impact earnings growth negatively.
