MR DIY on the up and up

Rising confidence: Ong remains confident that MR DIY is not only set to grow even more, but is in a solid position to stave off competition.

MR DIY Group (M) Bhd’s solid share performance since its listing two weeks ago seems to have proven its detractors wrong, at least for now.

On Thursday, the home improvement retailer posted a massive 54% jump in its net profit to RM113.45mil in the third quarter (Q3) ended Sept 30,2020, compared to RM73.62mil a year earlier.

This was simply due to higher average monthly sales per store.

In addition, the group announced that it has adopted a policy to pay dividends on a quarterly basis.

It declared an interim dividend of 0.73 sen per share, totalling at RM45.8mil for the third quarter.

Note that MR DIY has a definitive dividend policy to pay out 40% of its net income to shareholders, which will be funded by internally generated cash flows.

No wonder MR DIY’s shares saw its biggest leap on Friday since its listing, closing at 8.5% up to RM2.04 a share.

Recall that detractors have questioned MR DIY’s prospects.

Affin Hwang Capital had earlier issued a sell call on MR DIY with a target price of RM1.21 per share, below the company’s IPO price of RM1.60 a piece.

On MR DIY’s recent stellar earnings for its third quarter, Affin Hwang deemed those numbers as “decent.” The research house opined that the earnings were largely aided by an expansion in gross margin by two percentage points to 42.4%, which was partly due to a lower base in the third quarter of 2019 due to the write-off of certain non-compliant products.

“The uplift is likely one-off 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.

“An accelerated store count may be counterproductive in a softer same store sales growth (SSSG) environment, ” said Affin Hwang Capital, which has maintained its sell call on the stock.

The research house also reckons that MR DIY’s earnings downside remains a risk in the subsequent quarters, on the back of sporadic lockdown measures, potential margin compression from accelerated store openings and restocking activities trickling off.

On the other hand, UOB Kay Hian has been more bullish with a target price of RM2.20, driven by MR DIY’s sturdy revenue growth underpinned by store expansion as well as improving revenue per store going forward, given that 2019 and 2020 are low bases.

UOB Kay Hian opined that MR DIY deserves a 15% premium to its regional Asean peers’ 2021 price-earnings (PE) multiple of an average 26.6 times due to the group’s four-year earnings compound annual growth rate (CAGR) outlook of 20.6% from 2017 to 2021, more than double its peers’ average of 8.1%.

Besides that, MR DIY has an established track record, being the largest home improvement retailer in Malaysia and home improvement spending in Malaysia is among the highest in the Asean region.

StarBizWeek caught up with Adrian Ong, the CEO of MR DIY this week, in his first big interview since the company’s recent listing.

Ong remains confident that MR DIY is not only set to grow even more, but is in a solid position to stave off competition.

“We are on track to achieving 132 new stores this year.

“Being a large scale business, we are able to import products in large volumes from manufacturers and have greater bargaining power to get the best prices for our customers.

“In fact, our scale allows us to not only be present in small towns, but also implement common prices nationwide, despite the higher logistics cost in East Malaysia, for example, ” he says.

In the third quarter of FY20, MR DIY added 48 new stores, bringing its total number of stores to 688, of which 656 are MR DIY stores, 28 MR Toy and four MR Dollar stores.

MR Toy and MR Dollar stores are complementary verticals to the MR DIY brand, with store formats that feature affordably priced toys and fixed prices of RM2 or RM5, respectively.

The capital investments for each store, inclusive of working capital, amounts to an estimated RM1.6mil.

“Our investment model has always been to earn a payback in two years’ time, after a new store is opened.

“To date, more than 90% of our stores are profitable and the average revenue per store has increased by 7% year-on-year, mainly due to strong sales growth in standalone stores, ” says Ong.

He adds that the Covid-19 pandemic has brought a shift in consumers’ shopping preferences, as more opt to visit standalone MR DIY stores that are less crowded than mall-based MR DIY stores.

During the third quarter of FY20, MR DIY’s average monthly revenue was RM246.7mil, as compared to RM187.2mil in the same quarter last year.

Note that the average basket size per customer is RM25, according to the company.

As for online sales, MR DIY continues to scale its business both across its own platform and other ecommerce platforms.

Ong notes that while the group’s online sales are doing well, MR DIY is primarily focused on its brick and mortar business.

It remains to be seen how MR DIY will perform in its fourth quarter earnings, which is a seasonally stronger quarter due to the festivities.

On a nine-month basis, the group’s earnings are almost on par to the previous financial year, despite store closures as a result of the movement control order (MCO) from March 18 until May 3.

UOB Kay Hian expects the fourth quarter of FY20 to see a quarter-on-quarter contraction given the conditional MCO.

However, the research house notes that MR DIY’s robust third quarter earnings represents a preview of a normalised quarter’s contribution, which has yet to factor in the aggressive store expansion going forward.

This is attributed to MR DIY commanding inelastic demand for its products as well as its extremely lean and efficient operating cost structure.

“The home improvement industry is slated to grow 10% each year.

“As such, we are cautiously optimistic of our prospects ahead and believe we will continue to do well as we strive to offer affordable, quality products - keeping to our tagline of ‘Always Low Prices’, ” says Ong.