Mr DIY Group’s quarter one financial year 2023 core net profit of RM127.6 million was within CGSCIMB and Bloomberg consensus’s expectations at 22% of financial year 2023 future estimates.
According to CGSCIMB in the latest Company Note, quarter one financial year 2023 revenue rose 15.6% year-on-year, mainly driven by a higher store count of 1,125 and larger transaction volume of 38.2 million, albeit moderated by lower average transaction size of RM27.3.
Higher gross profit margins of 44.3% as a result of lower freight costs, the full impact of price hikes in quarter three financial year 2022 and higher sales of higher-margin own brands and branded products were positive but largely expected, as was its first interim dividend of 0.6 sen per share.
Sales per square foot for quarter one financial year 2023 stayed flat year-on-year at RM36, with same-store-sales growth up just 0.4% year-on-year.
Despite MRDIY’s decent quarter one financial year2023 results, CGSCIMB is concerned over whether its growth expectations can be met.
This is in view of the slower demand for consumer goods on weaker spending power amid inflationary pressures, and its new store format tweaks, such as the shift away from its fixed-priced MR DOLLAR store format to one offering a wider range of products priced under RM10, that may not necessarily resonate well with its originally targeted customer profile, in CGSCIMB’s view.
This could lead to short-term downward pressure on sales momentum. The impact of minimum wage hikes continues to be a near-term earnings dampener as well.
CGSCIMB sees slowing growth tempering return on equity (ROE) and thus valuation multiples ascribed to its shares. ROE is a measure of financial performance calculated by dividing net income by shareholders’ equity. Because shareholders’ equity is equal to a company’s assets minus its debt, ROE is considered the return on net assets.
While MRDIY’s ROEs are mid-tier versus its global peers, its downward sloping returns are a contrast to the more stable ROEs of its peers.
Downside risks are an acceleration of consumer demand towards services rather than goods, delayed turnaround in new store formats, and failure to improve margins on higher-than-expected operating costs.
Conversely, upside risks come from management’s ability to sustain, if not accelerate, ROE generation as well as higher-than-expected sales.
