PETALING JAYA: Concerns with MR DIY Group (M) Bhd
centred around its increasing market saturation seem to have dissipated and there are a few catalysts to spur growth.
The strengthening of the ringgit against the yuan is one of the catalysts, which will boost MR DIY’s margins, and in turn, be able to offset the increasing operating expenditure while driving earnings higher.
Affin Hwang Investment Bank said it sees MR DIY as a beneficiary of the recent strong performance of the ringgit.
“Approximately 60% to 70% of its product supplies are sourced from China and settled in the yuan while the remainder is sourced locally.
“With the ringgit appreciating by about 6% to 7% against the yuan over the past two months, we believe this will lower MR DIY’s import costs, paving the way for further margin expansion,” the research house said.
However, Affin Hwang expects this margin improvement from the stronger ringgit to only be felt by early 2025, once the company draws down its current inventory.
“As a result, we make no changes to our financial year 2024 (FY24) gross profit margin of 45.5% but revise our FY25 to FY26 gross profit margin assumptions upwards from 44% to 47.5% for both years based on a foreign exchange assumption of 1.65 yuan to the ringgit in FY25 to FY26.
“In our sensitivity analysis, for every further 1% appreciation of the ringgit against the yuan, MR DIY’s earnings are likely to improve 2% to 3%,” it added.
Previously, Affin Hwang highlighted concerns of market saturation, which could result in lower same-store sales growth and subsequently margin compression.
“In our view, when the market becomes more saturated, the rapid pace of store openings would lead to a proportionately higher increase in operational costs relative to revenue growth.
“In other words, a 10% increase in store openings may no longer capture the same magnitude of revenue or market growth and thereby put pressure on margins and return on equity (ROE) for MR DIY.
“Indeed, we have seen this trend over the past few years whereby the margins and ROE have been trending downwards and the revenue growth could not catch up with the number of store openings,” it said.
Affin Hwang raised its earnings forecast for FY25 to FY26 by 5.7% to 9.3% after revising upwards its gross profit margin assumptions.
“Overall, we are expecting a 10.5% compounded annual growth rate (CAGR) in the top-line growth for MR DIY over the next three years, largely driven by new store openings, with new additions projected at 180, 180 and 150 stores in FY24 to FY26, bringing it closer to its 2,000 store target by 2028.
“On the bottom line, we see higher growth of a 14% CAGR as a result of the margin improvement,” it explained.
It has upgraded MR DIY to a “buy” with a higher target price of RM2.50.
“At a price earnings (PE) ratio of 26 times after our earnings upgrade, valuations stand out among the large-cap consumer peers (market capitalisation of more than RM10bil) in terms of earnings growth, as well as the PE multiple.
“Overall, we expect PE multiples to rerate eventually to 30 times (large-cap consumer peers’ PE) when its stronger earnings start to kick in, especially in 2025, with a strong 21% growth based on our projections,” Affin Hwang said.
Meanwhile, the research house is “neutral to slightly positive” on its new lifestyle retail format store venture via its 49% stake in KKV Supply Chain Sdn Bhd.
KKV stores offer a wide range of products, including beauty, skincare and household items as well as food and beverage covering over 20,000 stock keeping units.
This new format targets the higher-income market segments with a higher retail price point with an average basket size of around RM70 to RM80 and competes directly with Miniso.
“While KKV might have a limited total addressable market in Malaysia, it nevertheless does help MR DIY to generate another revenue stream beyond just its home-improvement business,” it added.
