CGS-CIMB upgrades its call to ADD from HOLD for MR DIY Group Bhd as it turned positive on its growth trajectory driven by its focused store expansion and private label strategy.
The research house also raises its GGM-based TP to RM1.90 as it rolls forward its basis period and lift its earnings forecast.
“Our GGM assumes a recurring return on equity (ROE) of 33.2% as we roll over our valuation base year to CY25F, 5.5% long-term growth, and lower cost of equity (COE) of 9% compared to 9.5% previously.
“We update our beta to reflect latest data and its increased dividend payout policy,” it said in its Company Note today (Jan 12).
Additionally, CGS-CIMB saw the the delivery of an improved earnings trajectory as the key re-rating catalyst.
“Following its 11% share price under-performance versus the FBMKLCI since 1Q23 results on May 11, 2023, it now trades at a compelling 22.0x FY24F P/E with a 22% discount to Dollarama’s historical 10-year average P/E versus global peers.
“A 2% to 3% dividend yield provides support,” it said, adding weaker-than-expected consumer sentiment and operating margin as the downside risks to its call.
It said it turned more positive on Mr DIY’s revenue growth following its recent meeting with management to discuss its 5-year store expansion plan, for the year 2024 to 2028.
“We raise our FY24/25F sales year-on-year (YoY) growth assumptions to 10.6% and 10.5% compared to 6.3% and 5.2% previously.
“This is premised on management’s renewed focus on expanding its store network, particularly its flagship MR DIY-concept store, into underserved areas of East Malaysia.
“We believe this should drive sales growth as MR DIY noted that its EM stores typically experienced more than 30% higher average sales per store compared to Peninsular Malaysia,” it said.
According to CGS-CIMB, East Malaysia stores only accounted for just 12% compared to 87% in Peninsular Malaysia or 144 of total store count as of September 2023, indicating room for more stores.
It added that the group also reiterated its 180 new store openings target in FY24F and store count target of 2,000 by 2028F as Malaysia’s home improvement retail (HIR) sector remains underpenetrated.
HIR formed 3.1% of total retail sales in 2022, according to Frost & Sullivan.
Elaborating on the group’s private label strategy, it said that it is encouraged by the strategy in having MR DIY-branded goods as it continues to build up its own product brand image.
“We gather from management that private label product sales have grown considerably from just 17% in FY19 to 50% of total sales currently.
“In our view, this is a testament to its growing brand equity. This should bode well for its gross profit (GP) margin trajectory, whereby MR DIY’s GP margins widened by 480 basis point (bp) YoY to 45.2% in 9M23.
“We believe that private label strategy allows MR DIY to expand its private label offerings and stock keeping units (SKUs) into new product categories, which is supportive of basket size. A further scale up in its store operation and offerings should drive margin expansion and basket size, in our view,” it said.
