KUALA LUMPUR (Nov 23): UOB Kay Hian, which maintained a buy call on Mr DIY Group (M) Bhd, has revised up its target price to RM3 from RM2.40 earlier, as it sees the group displaying resilient earnings and offering attractive growth going forward.

The research house’s analyst Philip Wong said in a note today that since initiating coverage, Mr DIY’s share price has gained 46% and had reached his previous target price.

“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 and valuations,” he said while pegging the counter at a higher 35 times 2021 price to earnings (31 times previously).

Mr DIY continued to scale new high today. At noon break, it rose eight sen or 3.43% to RM2.41. This was 50.63% higher than its initial public offering price of RM1.60.

Based on the share price of RM2.41, Mr DIY has a market capitalisation of RM15.13 billion.

Wong opined that Mr DIY, which is already the 33rd largest market-cap company in Malaysia, is poised for an FBM KLCI inclusion in the future.

“Should it reach our target price of RM3, Mr DIY would command a market capitalisation of RM18 billion,” said Wong, adding that this places it within touching distance of an inclusion into the FBM KLCI.

Currently, a company would require a market capitalisation of RM19.5 billion to become the 25th largest market cap company to qualify for an inclusion into the FBM KLCI.

“Given Mr DIY’s attractive earnings trajectory beyond 2021, this could be well within its grasp. Furthermore, in Jan 21, management’s stake would be reclassified and free float would rise up to >30% from the existing 15%,” said Wong.

Wong also noted that the inclusion of Nestle (M) Bhd into the FBM KLCI sparked a rerating for companies such as QL Resources Bhd and Fraser & Neave Holdings Bhd (F&N).

Upon Nestle’s entry into the FBM KLCI, it was re-rated to an average PE of 49.6 times (from 29.8 times), while QL and F&N were rerated to 36.7 times each (from 23.6 times).

Wong thinks Mr DIY should eventually deserve a rerating, given its large earnings base, which is wider than QL's; more attractive three-year net profit compound annual growth rate (CAGR) of 25.2% in 2019 to 2022 (Nestle: 1.8%, QL: 11.5%, F&N: 8.7%); and highly resilient earnings amid 9M20 earnings through growth of 1%. In comparison, Nestle's earnings growth contracted by 22.3%, while QL's shrank by 2.1%, whereas F&N's growth remained flat.

Wong also raised his 2020-2022 net profit forecasts for Mr DIY by 6%, 9% and 9% respectively on higher revenue-per-store growth and margin assumptions.

“Our previous 2021 revenue-per-store projection was merely 1.2% higher versus 2019’s and is therefore conservative,” he said.

Wong also believed Mr DIY 4Q20 earnings could be at least flattish quarter-on-quarter, which would be an impressive feat, given that the Conditional Movement Control Order (CMCO) was implemented since Oct 14, 2020.

“An earlier MCO had impacted its 1H20 earnings that only summed up to 3Q20 earnings. With that, it is poised to beat consensus expectations by at least 10%,” said Wong, adding that higher store count and seasonality will support the group’s 4Q20 earnings.

Wong said he continued to like Mr DIY for its significantly superior net profit CAGR of 25.5% in 2017 to 2021 which is almost triple its peers’ average of 8.1%, its established track record and it being the largest home improvement retailer in Malaysia, and home improvement spending in Malaysia being among the highest in the ASEAN region.