• Maintain BUY, with new TP of MYR2.59 from MYR2.40, 27% upside and c.3% FY25F yield. Mr DIY Group is a beneficiary of the stronger MYR, given the high imported content of its COGS. The cost savings from this will mitigate the higher freight costs and render it greater flexibility to launch more promotional activities. We continue to like the company for its established position to capture the resilient consumer spending, whilst the dynamics of a stronger MYR will catalyse the stock after the solid YTD rally.

• Factoring in the new FX assumption. We understand that 70% of Mr DIY’s COGS is imported from China, and as such, our revised in-house assumption of a stronger MYR against the CNY will translate to material cost savings. This should help offset the significantly higher freight rates, which now stand at MYR9-10k/container vs the average of MYR3.7k in FY23. That said, we also expect Mr DIY to leverage on the margin buffer and be more aggressive with price discounts and promotions in order to spur consumer spending and arrest the negative SSSG trends. After baking in the abovementioned factors, our FY25F-26F earnings are raised by 7% for each year. Correspondingly, our DCF-derived TP rises to MYR2.59 (inclusive of a 4% ESG premium), which implies 30x FY25F P/E, or close to the stock’s 3-year mean.

• Proxy to benefit from Budget 2025. We expect the upcoming Budget 2025 to be consumer friendly. The usual measures such as cash handouts for the lower income group and bonuses for civil servants will effectively benefit Mr DIY, as the recipients fall well within the company’s customer groups. In addition, the salary adjustment for civil servants, effective end-2024, will be a more positive and sustainable sector development to lift spending. While the initiatives to rationalise subsidies may dampen consumer spending, the rechannelling of the savings to the lower income groups could mitigate the impact, considering the higher propensity to spend.

• Solid growth fundamentals. Mr DIY’s earnings growth will continue to be underpinned by robust outlet expansion (FY24 target: c.180 stores) for deeper market penetration. Meanwhile, the strong cash flow generation, coupled with normalisation of inventory turnover and capex should sustain its high dividend payout ratio of >70%. On the other hand, KKV is an exciting new venture which may turn out to be Mr DIY’s second leg of growth. The expansion of KKV stores is progressing well, with the fourth and fifth stores opened in Malacca and Johor Bahru at end-September.

• Risks to our recommendation include weaker-than-expected consumer sentiment and a sharp rise in operating costs.

Source: RHB Research - 3 Oct 2024