Mr DIY Group’s (MRDIY) FY23 results met expectations on its solid sales and GPM recovery. Its current market valuation is undemanding, considering its fundamentals to deliver solid growth amidst a soft business environment, thereby outperforming most consumer sector peers.
RHB Investment Bank (RHB) said today that it likes MRDIY for its entrenched store network and effective business model to capture resilient consumer spending. A positive outcome of the ongoing civil servant salary scheme review is also a catalyst for the stock.
FY23 results in line
The group’s core net profit of MYR561m (+17% YoY) accounted for 99% and 100% of our and consensus forecasts. Post-results, RHB’s FY24-25F earnings are <3% lower after making housekeeping changes.
Correspondingly, their DCF-derived TP also drops to MYR2.20 (inclusive of a 4% ESG premium), which implies 33x P/E FY24F or close to the stock’s 3 year-mean.
Results review
YoY, FY23 revenue grew 9% to MYR4.4bn, mainly underpinned by the new store expansion (+175 outlets to total 1,261). SSSG was at -3.7%, being negatively impacted by ensuing demand elasticity on ASP increases and soft consumer sentiment.
Meanwhile, FY23 GPM expanded by 4ppt to 45.4% to reflect ASP increases and the normalisation in freight costs.
This more than offset the rise in operating costs and propelled the 17% YoY jump in FY23 PBT to MYR753m. QoQ, 4Q23 revenue and net profit rose 8% and 28% due to favourable year-end seasonality and product mix. FY23 DPS totalled 3.2 sen, which points to a higher 54% payout ratio vs FY22’s 48%.
Outlook
RHB expects its store network expansion to remain the primary growth driver. MRDIY plans to open 180 new stores in FY24, with a focus on the underpenetrated East Malaysia region, which currently generates higher average sales per store. In addition, the negative SSSG trend could be reversed, with the effect of demand elasticity likely to wear off.
On the other hand, Mr DIY has no plans to adjust ASPs, notwithstanding the meaningful hike in freight costs in recent months as the impact is manageable. Instead, RHB believes the company could be more aggressive with price promotions to induce consumer spending, leveraging on its healthy GPM.
Essentially, RHB expects that its proven business model of offering a wide range of products at competitive prices across convenient locations should continue attract sticky demand even if consumer sentiment remains subdued.
Downside risks to RHB’s recommendation include weaker-than-expected consumer sentiment and a sharp rise in operating costs.
Meanwile, Kenannga Investment Bank (Kenanga) said MRDIY’s FY23 results met their expectations. Its FY23 net profit grew 16% driven by store expansion, price hikes and lower freight cost. It is planning for a net addition of 180 stores in FY24.
Kenanga reduced their FY24F net profit forecast by 2% and trimmed their TP also by 2% to RM1.75 (from RM1.78) but maintain an OUTPERFORM call.
The company declared a 1.0 sen DPS in 4Q, bringing its full-year DPS to 3.2 sen (54% payout), up from 2.4 sen in FY22 (43% payout). YoY, its FY23 top line grew 9% propelled by a net addition of 175 stores (bringing its total store count to 1,255) and a 16% growth in transactions to 165m, partially offset by a 5% reduction in average basket size to RM26.40 (from RM27.80).
Its monthly sales per sq ft eased 4% to RM35.60, vs. RM37.20 in FY21-22, which could be attributable to the impact of carryover effect of previous price hikes, but still above RM34.50 in FY20.
Its gross profit rose by a steeper 20% as it gross margin expanded to 45.4% (from 41.3%) driven by lower freight costs and the price hikes.
Its monthly gross profit per sq ft hit a record RM16.10 in FY23 (vs. RM15.00 to RM15.40 over the past three years) for the same reasons.
However, its net profit only grew 16% due to higher staff and other operating costs, primarily associated with an upwards revision in the minimum wage in May 2022 and store expansion.
QoQ, its top line grew 8% underpinned by store expansion and a seasonally strong period on the back of festivities and school holidays.
Its net profit rose by a sharper 28% driven by margin expansion.
The key takeaways from the results’ briefing are as follows:
1. It is planning for a net addition of 180 stores in FY24. It believes that it will not be materially affected by the weak consumer spending sentiment amidst sustained high inflation at present given its value-for-money offerings of hardware and household products.
2. Its automated warehouse building has been completed, pending equipment installation by Apr 2024. The warehouse should fully come online by 3QFY24, which will bring about earnings and cash flows enhancement of about RM10m and RM20m, respectively, from reduced labour and warehouse rentals.
3. It intends to continue with quarterly dividend payouts at 50%-65% of its net profit backed by its strong financial standing and robust cash flows.
Valuations
RHB has also fine-tuned down their TP by 2% to RM1.75 (from RM1.78) based on unchanged targeted FY24F PER of 25x, which is at a 5x multiple premium to the average forward PER of its regional peers of 20x to reflect a relatively under-penetrated home improvement market in Malaysia. There is no adjustment to their TP based on ESG given a 3-star rating as appraised by Kenanga.
