MR DIY rises as much as 5.65% upon being added to SC’s Shariah-compliant securities list

MR DIY rises as much as 5.65% upon being added to SC’s Shariah-compliant securities list
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KUALA LUMPUR (Nov 30): MR DIY Group (M) Bhd shares rose as much as 5.65% or 14 sen to RM2.62 after it was added to the Securities Commission Malaysia's (SC) latest list of 715 Shariah-compliant securities.

The SC yesterday said in an update on its website that its Shariah Advisory Council (SAC) adopts a two-tier quantitative approach, which applies business activity benchmarks and financial ratio benchmarks in determining the Shariah status of listed securities.

MR DIY rose as much as 5.65% or 14 sen to RM2.62 this morning. As at 9.42am, the stock had pared some gains at RM2.58, still up 10 sen or 4.03%.

The stock, among the top gainers this morning, saw 3.38 million shares traded.

AmInvestment Bank Research today initiated coverage of the group with a "buy" call and fair value (FV) of RM2.94.

It said MR DIY's FV is based on a price-earnings ratio (PER) of 31 times earnings per share (EPS) of 9.5 sen forecasted for the financial year ending Dec 31, 2022 (FY22).

The PER assumption of 31 times is at the high end of the FY22 PER forecast of 23 times to 31 times of home improvement retail companies in Thailand, Indonesia and the Philippines, the research house said.

“We believe that MR DIY’s premium PE valuation is justified due to the group’s strong profit growth, expansionary business plans and established name recognition. MR DIY is currently trading at FY21 PE of 33 times and FY22 PE of 27 times,” it said.

AmInvestment also holds the view that MR DIY is positioned to benefit from a recovery in consumer spending in Malaysia in FY21.

The group’s large network of stores across cities and small towns, coupled with products priced within the affordable range, are expected to translate into higher customer footfall and spending, it said.

The research house also noted that MR DOLLAR and MR TOY are envisaged to support MR DIY's profit growth in the future.

It said MR DOLLAR, which focuses on food and beverage (F&B) products and products priced at RM2 to RM5 per piece, allows MR DIY to compete with the likes of ECO Shop and Daiso.

“We do not foresee sales cannibalisation between MR DOLLAR and MR DIY as there is [a] minimum product overlap,” it said.

Meanwhile, the group plans to open 50 MR DOLLAR and 25 MR TOY stores in FY21. Average costs to open MR DOLLAR and MR TOY stores are about RM1.2 million and RM1 million reach respectively, lower than the RM1.6 million cost for a MR DIY store.

Over 90% of MR DIY stores are profitable with an average target payback period of less than two years, it said.

“We believe that MR DIY would be able to grow its market share [based on revenue] in the home improvement retail business in Malaysia, underpinned by aggressive store openings and a recovery in consumer spending.

“We estimate MR DIY’s market share to exceed 30% in FY21 from 29.1% in FY19. Currently, MR DIY is the largest home improvement retailer in Malaysia with 670 stores,” it said.

AmInvestment also estimated MR DIY's core net profit to grow 58.9% and 31% to RM454.7 million and RM595.9 million for FY21 and FY22 respectively from a low base of RM286.2 million for FY20.

Earlier on Nov 23, UOB Kay Hian’s Philip Wong also maintained his "buy" call for MR DIY with a higher target price (TP) of RM3.

“Since our initiation [of coverage], MR DIY’s share price has gained 46% and reached our previous TP. This is, however, only a prelude to its electrifying prospects that have yet to be fully realised, thereby prompting us to further upgrade our earnings [forecasts] and valuations,” he said.

Wong also noted that MR DIY is already the 33rd largest company in Malaysia in terms of market capitalisation. Factoring in its growth ahead, the research house believes the group is poised for an FBM KLCI inclusion in the future.

He raised his FY20 to FY22 net profit forecasts by 6%, 9% and 9% respectively on higher revenue-per-store growth and margin assumptions for MR DIY.

Wong believes MR DIY's earnings for the fourth quarter ending Dec 31, 2020 (4QFY20) could at least be flattish quarter-on-quarter (q-o-q), which would be an impressive feat, given that the conditional movement control order (CMCO) has been implemented since Oct 14.

“The earlier MCO impacted its 1HFY20 earnings (for the first half ended June 30, 2020), which only summed up to 3QFY20 earnings. With that, it is poised to beat consensus expectations by at least 10%,” he said.

Wong also believes resilient demand, a higher store count and seasonality will support the group’s 4QFY20 earnings.

Earlier on Nov 5, Affin Hwang Capital analyst Chow Wei Nien maintained his "sell" call for MR DIY with a TP of RM1.21.

He said earnings downside risk remains for MR DIY in the subsequent quarters, considering sporadic lockdown measures, potential margin compression from accelerated store openings and with restocking activities trickling off.

“We retain our cautious stance given a potentially volatile earnings delivery amid a challenging retail environment,” he said.

Surin Murugiah