KUALA LUMPUR (Nov 6): Affin Hwang Capital Reseach has maintained its “sell” rating on MR DIY Group (M) Bhd (MR DIY) at RM1.88 with an unchanged target price (TP) of RM1.21, and said the firm’s earnings downside remains a risk in the subsequent quarters, considering: i) sporadic lockdown measures; ii) potential margin compression from accelerated store openings; and iii) restocking activities trickling off.

MR DIY registered a core net profit of RM113.5 million (+54% y-o-y) for 3Q20, on the back of higher store count and a pent-up sales recovery post-lockdown.

Affin Hwang noted that the decent 3Q20 earnings delivery was also largely aided by an expansion in gross margin by two percentage points to 42.4%, in part due to a lower base in 3Q19 on the write-off of certain non-compliant products.

“ The uplift is likely one-off, in our view, as we expect price competition intensity to remain elevated in the longer run.

“This, coupled with our projection of softer per store sales going forward, will likely further suppress margins as operational costs (such as rental and wages) start to outpace sales growth,” it said.

Affin Hwang made no changes to its earnings forecasts.

“Looking ahead, in view of the CMCO reinstatement and given risk of lockdowns potentially stretching into 2021, we are keeping our cautious stance.

“With 60% of its stores located in malls, this may pose a threat to earnings over the near term.

“As such, its premium valuations are unwarranted and hence we maintain our 'sell' rating with an unchanged 12-month TP of RM1.21,” it said.