MRDIY's 9MFY23 results met expectations. It guided for a consistent 45% GP margin and revealed a five-year expansion plan to bring its store count to 2,000, introduce new formats and brands, and explore acquisitions. We maintain our FY23F numbers but raise our FY24F earnings forecast by 11%. We lift our TP by 7% to RM1.78 (from RM1.67) and maintain our OUTPERFORM call.

MRDIY’s 9MFY23 net profit accounted for 70% of both our full-year forecast and the full-year consensus estimate. We consider the results within expectations given a seasonally strong 4Q ahead. It declared a dividend per share of 0.8 sen for 3Q23, bringing the total DPS for 9MFY23 to 2.2 sen (or 52% payout), on track to achieve our targeted payout of 53% for the full year.

Results highlights. YoY, the group’s revenue grew 10% fuelled by the opening of 35 new stores in the quarter, cumulatively reaching 123 so far this year. This progress is in line with their goal to open 180 new stores, aiming for a total of 1,260 stores by the end of FY23. Its gross profit increased by 23%, with a gross margin rise to 45.2% vs. 40.4%, thanks to lower freight costs and last year’s price adjustments. Its EBIT and PAT only grew by 18-19%, due to higher administrative and operational expenses due to the store expansions.

QoQ, its 3QFY23 revenue and PBT lowered by 3% and 17% primarily due to the absence of holiday sales and a subdued retail sector, further impacted by weaker consumer confidence owing to higher inflation and rising interest rates.

The key takeaways from the results’ briefing are as follows:

1. It highlighted that FY23 GP margin of c.45% will be a new norm moving forward, owing to the stabilised of freight charges. Moreover, the implementation of a warehouse automation plan is expected to improve throughput, increase picking accuracy, and optimize space utilization. This initiative is targeted to result in annual net savings of around RM10m, mainly from reductions in labor and warehouse rental costs.

2. Its raised the dividend policy to a minimum of 50%, up from the previous 40%, and plans to reward shareholders with a quarterly dividend payout of 50%-65%, in line with its increasing profitability.

3. It also unveiled its 5-year expansion plan (2024-2028) targeting the opening of 180 new stores in 2024, primarily in underrepresented areas in East Malaysia due to high population density and potential for higher sales per store. Most of these stores will feature the flagship MR.DIY concept but on a smaller scale. The group's goal is to reach 2,000 stores by 2028, implying for an average of approximately 19,000 people per MR DIY store.

4. The company is planning to introduce one or two new store formats and brands or franchise opportunities. This strategy aims to leverage existing relationships with suppliers, landlords, and systems to enhance its business model moving forward.

5. The company intends to grow through modest acquisitions, with a focus on horizontal acquisitions aimed at increasing operational efficiency and earnings visibility. Vertical acquisitions, meanwhile, will target future earnings growth, enhanced operational synergies, or supply chain protection. Management has indicated that any vertical acquisitions are likely to come from the hardware business industry.

Forecasts: We maintain our FY23F numbers but raise our FY24F PAT forecast by 11% to reflect: (i) a higher number of new store openings, now targeted at 180 compared to 140 previously, (ii) a stronger gross profit margin to 45% from 43%, and (iii) a higher average basket size of RM29, up from RM28.

Correspondingly, we raise our TP to RM1.78 based on FY24E PER of 25x, which is at a 5x multiple premium to the average forward PER of its regional peers of 20x to reflect a relatively under-penetrated home improvement market in Malaysia. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

We like MRDIY for: (i) its dominant position in Malaysia's home improvement market, (ii) its impressive gross margins exceeding 40%, significantly outpacing its peers of 32%, a testament to its advantageous negotiation position with suppliers and benefits derived from economies of scale, (iii) a vigorous store expansion strategy aimed at broadening its national footprint, and (iv) the impending initiation of an automated inventory system in 1QFY24, which could further enhance its operational efficiency. Maintain OUTPERFORM.

Risks to our call include: (i) unfavourable forex trend, (ii) volatile supply and logistics, and (iii) high inflation denting consumer spending power.

Source: Kenanga Research - 21 Nov 2023