KUALA LUMPUR (Nov 9): MR DIY Group (M) Bhd, the largest initial public offering (IPO) on Bursa Malaysia in three years, saw its share price continuing to scale higher against a backdrop of strong quarterly earnings growth and dividends.

At 12.05pm, the stock was trading at a high of RM2.20, up 16 sen or 7.84%. This was 60 sen or 37.5% higher than its IPO price of RM1.60. The counter saw 21.81 million shares change hands.

UOB Kay Hian analyst Philip Wong said in a note last Friday MR DIY’s earnings for the third quarter ended Sept 30, 2020 (3QFY20) were within his expectations but ahead of the consensus.

“Going forward, we expect 4QFY20 to see a festivity-related seasonal boost to alleviate some softness related to the conditional MCO (movement control order),” he said.

He also noted that MR DIY’s sturdy revenue growth will be underpinned by its store expansion going forward.

“Based on our net additions assumption of 127/170/170 stores over 2020/21/22, the average store count could grow by 20%-28% over our forecasted period,” he said.

MR DIY’s store expansion includes other distinct store formats (MR Dollar and MR Toy), accounting for 43% of its store expansion.

“With the exception of 2020 that has been weighed down by the Covid-19 pandemic, top-line growth is largely expected to track this growth rate as we expect revenue per store to hold relatively steady,” said Wong.

Wong also maintained his forecasts for MR DIY as its earnings had fallen within his expectations.

However, given the robust earnings and increased store count heading into 2021, he believes there might be further upside to his 2021 forecast.

He maintained his "buy" call and target price (TP) of RM2.20 for MR DIY based on 31 times its 2021 forecast price-to-earnings (PE).

“Its regional Asean peers are trading at an average of 26.6 times 2021 forecast PE, but we opine that MR DIY well deserves a 15% premium to its peers due to a significantly superior four-year earnings compound annual growth rate (CAGR) (2017-21) outlook of 20.6%, more than double its peers’ average of 8.1%; its established track record and with it being the largest home improvement retailer in Malaysia; and that home improvement spending in Malaysia is among the highest in the Asean region,” he said.

Looking forward, his blue-sky valuation suggests a TP of RM2.50, premised on MR DIY trading at a premium of 25%, at 35.3 times its 2021 forecast, to its regional peers.

“Consistent execution of a large-cap consumer company has seen the likes of Nestle (Malaysia) Bhd and QL Resources Bhd commanding lofty valuations of 52.7 times and 49.5 times respectively. Therefore, a rerating of MR DIY’s valuations going forward would not be too far-fetched. Additionally, the expansion of its new store format, MR Dollar, could prove an additional leg of growth,” he said.

Last Thursday, MR DIY announced that its net profit for 3QFY20 jumped 54.11% to RM113.45 million, from RM73.62 million for the same quarter last year, as it recorded higher average monthly sales per store.

On the back of the strong earnings growth, it declared an interim dividend of 0.73 sen per share.

The group’s revenue also climbed 31.78% to RM740.23 million for 3QFY20 from RM561.72 million for the previous year.

For the nine months ended Sept 30, 2020 (9MFY20), the group's net profit was up a marginal 0.98% at RM228.9 million, from RM226.68 million previously, while revenue grew 7.99% to RM1.79 billion from RM1.66 billion.