Kenanga starts coverage of MR DIY with 'outperform' call, TP of RM4.10

Kenanga starts coverage of MR DIY with 'outperform' call, TP of RM4.10
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KUALA LUMPUR (July 21): Kenanga Research has initiated its coverage of MR DIY Group (M) Bhd with an "outperform" call and target price (TP) of RM4.10 based on its forecast financial year ending Dec 31, 2022 price-earnings ratio (FY22 PER) of 36 times.

In a note to investors today, the research firm said it believes the stock deserves a high premium as its forecast three-year average (FY19-22) net profit compound annual growth rate (CAGR) of 31% is higher than its regional peers of 10%.

Kenanga analyst Ahmad Ramzani Ramli said MR DIY is operating in an under-penetrated home improvement retail market and is the largest home improvement retailer in Malaysia with no major domestic competitor in sight.

“We are positive on MR DIY for its robust growth potential driven by both higher market demand for its products and store expansion, strong GP (gross profit) margins (above 40%) with the absence of near-and long-term margin volatility thanks to its supply source, China’s massive economies of scale, the robust balance sheet providing it ample cash for expansion, and its net cash position ahead allowing MR DIY to deliver sustainable dividends,” he said.

Despite the ongoing Covid-19 pandemic, the analyst noted that the group saw a 63% top line growth year-on-year (y-o-y), underpinned by its large networks all over Malaysia and Brunei.  

“The home improvement retail space in Malaysia is expected to chalk a CAGR of 10.2% (FY19-24) and is still largely under-penetrated, thus offering the group an opportunity to open new stores and new catchment areas — as such, it is targeting to open 175 stores each year in FY21/22 (FY20: 141 stores opened).

“This ambitious target includes the opening of 50 MR DOLLAR stores — offering popular everyday essentials at RM2 and RM5 — and 25 stores for MR TOY — supplying value-for-money toys for the underserved,” said Ahmad Ramzani.

Furthermore, Kenanga expects the group to achieve a net cash position in FY21, comfortable enough to comply with its 40% dividend payout policy and fund further expansion in FY22.

“[The company’s] gross margins have been stable and robust, with gross margins averaging 43% (FY17-20) despite having over 72% of its products sourced from China whose economies of scale have kept imported product costs low and helped further by a favourable ringgit against the yuan.

“The introduction of MR TOY is likely to sustain margins further. Its product mix is reviewed every quarter and changes are made if needed to maintain these robust margins,” added Ahmad Ramzani.

At the time of writing today, MR DIY had fallen 4.02% or 14 sen to RM3.34, giving the group a market capitalisation of RM20.96 billion.

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