This article first appeared in The Edge Malaysia Weekly on September 28, 2020 - October 4, 2020

DESPITE mounting anticipation over the listing of Mr DIY Group (M) Bhd at end-October, its debut on Bursa Malaysia’s Main Market is not expected to catalyse retail stocks.

The home improvement retailer, whose initial public offering (IPO) has been delayed since last year, is set for a valuation of RM10 billion, according to sources, reportedly raising RM2 billion for the company. The RM10 billion figure had been reported previously and said to be on the high end.

In a statement last Thursday, Mr DIY says it will issue 941.49 million new and existing ordinary shares as part of its IPO, offering 470.75 million shares to bumiputera investors approved by the Ministry of International Trade and Industry, 309.21 million existing ordinary shares to local and foreign institutional investors, and 161.53 million shares to retail investors.

Peter Lim Tze Cheng, head of research at EquitiesTracker Holdings Bhd, says the retail sector will continue to be challenging, as the retail environment is doing poorly. “This can change only when the retail business picks up and does so quickly. As people gain the confidence to step outside, more concrete business activities will come onstream and income recovery will pick up, only then will there be further interest in the stock market.”

The end of the loan moratorium — to be replaced by targeted assistance — will not be helpful, as investors will be concerned about finances. Even with the pandemic in the country largely contained, the clusters of infections could leave many apprehensive about spending.

Market watchers say, for any tangible revival in the retail sector, there must be time for the economy to recover.  “A vaccine, local stimulus programme as well as budgetary aids would help. Sentiment will return gradually when there are further economic movements such as cross-border or regional reopenings and lowering of unemployment rates,” says a fund manager.

“Hopefully, retail companies do not miss out on seasonal opportunities such as Christmas and Chinese New Year to sell their earlier stocks. If they cannot sell the current batch, they will have to order a massive write-off, given the impending stock obsolescence.”

Another fund manager says the absence of a pool of retailers similar to Mr DIY on Bursa does mean a retail catalyst is unlikely. “In addition, Mr DIY’s rich valuation puts tremendous pressure on the company. At that valuation, it would be difficult to sustain if the company was unable to display the expected growth.”

An analyst with a non-bank-backed research house says the effects of the Movement Control Order have translated into losses in the retail sector, as seen in companies’ financial results for the quarter ended June.

“We hope to see a recovery in the third quarter. Year-on-year results are likely to be lower than in 2019, however, compounded by weak consumer sentiment, owing to a high cost of living and climbing unemployment rates.

“It will be interesting to see how Mr DIY will price its stock as well as its projection for FY2021. With sluggish results expected in FY2020, it would hope for a recovery next year with its IPO announcement.

“With Mr DIY coming onstream, I doubt it would create interest in other retail stocks. With less disposable income, investors will be focused on existing commitments. Should they decide to invest in Mr DIY, however, the market may see a shift in investment from other retail stocks to Mr DIY. Much will depend on strong results by the company and its ability to survive the pandemic.”

Listed retailer AEON Co (M) Bhd posted a net loss of RM9.56 million for its second quarter ended June 30, compared with a net profit of RM19.45 million in the previous corresponding quarter. “I’m expecting 22% EPS growth in FY2021 on the basis of a recovery in its property management and retail management segments,” says the analyst.

She adds that supermarkets were not making a higher contribution to group revenue compared with before the Covid-19 pandemic. “Shoppers may be buying bigger loads for each trip to the supermarket, but their frequency is reduced. Thus, the numbers balance out.”

Of the eight analysts covering AEON, four have a “buy” call, two a “hold” and two a “sell”, with a consensus target price of 94 sen, giving the counter an upside of 23.7% from its close of 76 sen last Friday.

Shares in Parkson Holdings Bhd (PHB) drew buying interest when the group announced on Sept 15 that a tribunal hearing granted compensation to its Singaporean unit, following arbitration proceedings with Cambodian firm Hassan (Cambodia) Development Co Ltd for prolonged delays in handing over new store premises in Phnom Penh.

PHB is an investment holding company with 67.96% equity interest in Parkson Retail Asia and 54.97% in Parkson Retail Group Ltd, which are listed on the Singapore Exchange and Hong Kong Stock Exchange respectively.

The stock almost doubled from 10 sen on Sept 11 to 19 sen on Sept 17. It closed last Friday at 14.5 sen for a market capitalisation of RM154.7 million. The only research house to cover PHB has a “hold” recommendation and a target price of 14 sen.

Similarly, apparel retail chain player Padini Holdings Bhd has fared poorly, registering a net loss of RM16.84 million in its fourth quarter ended June 30 versus a net profit of RM54.43 million a year ago. Of the 14 analysts covering Padini, five have a “buy” call on the stock, six a “hold” and two a “sell”, with a consensus target price of RM2.43, just 5.2% higher than its last Friday’s close of RM2.41.

With the outlook for the sector unexciting, the analyst does not see interest in retail stocks with the exception of Mr DIY’s IPO. The retailer, which operates 640 stores in Malaysia, is said to be on schedule to release its prospectus in early October and list at the end of the month.

“Mr DIY can have an IPO in the current climate because it has proved itself with the ability to have an incredibly strong, fast and sustainable recovery,” says a person familiar with the company.

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