Mr DIY’s global ambitions

MR DIY Group (M) Bhd has become one of Bursa Malaysia’s biggest retail success stories.

Since its listing in 2020, the home improvement retailer has built a formidable presence across Malaysia, expanding its store network to more than 1,400 outlets under brands such as MR DIY, MR.TOY, MR.DOLLAR and EMTOP.

The company’s ability to consistently grow earnings, generate healthy cash flow and maintain a resilient business model has made it a favourite among institutional and retail investors alike.

But as the group steadily extends its footprint beyond Malaysia, a question has emerged among investors: Why are many of MR DIY’s international businesses, which are held privately, not housed under the listed company?

The company declined to comment on questions sent by StarBiz 7.

The question is becoming increasingly relevant as the retailer transforms itself into a global value-retailing player.

The MR DIY brand now operates in 14 other countries including Thailand, Indonesia, the Philippines, Vietnam, India, Bangladesh, Turkiye, Spain, Poland and South Africa.

According to a source, it is expected to open a total of four outlets in Germany, along with one in Dublin.

Given the scale of its overseas ambitions, some shareholders may wonder whether they are missing out on a potentially lucrative growth engine. After all, wouldn’t it be more beneficial if all international operations sat under the Bursa-listed vehicle?

A larger business generally commands a larger valuation.

Consolidating overseas operations would potentially increase group revenue, earnings and asset size.

Investors would gain direct exposure to faster-growing international markets while the company could market itself as a regional or global retailer instead of just a Malaysian player.

In theory, such a move could enhance shareholder value.

In practice, though, there are compelling reasons why management may have chosen a different path. One of them is valuation.

According to Rakuten Trade head of equity sales Vincent Lau, investors often favour “pure play” businesses because they are easier to understand and value.

“Maybe when the overseas businesses become more lucrative, they may spin off these businesses to better monetise them,” he says.

The listed MR DIY currently offers a relatively straightforward investment proposition.

Investors are essentially buying into a dominant Malaysian retailer with a proven expansion model, predictable earnings growth and strong exposure to domestic consumption.

Introducing multiple overseas markets into the equation could complicate that narrative.

Country risks

Each country comes with its own economic conditions, regulatory frameworks, competitive landscape and consumer behaviour.

Expansion into Poland or Spain carries very different risks from opening stores in Penang or Johor.

Instead of rewarding the diversification, investors may begin applying a conglomerate discount to reflect the increased complexity and uncertainty.

More importantly, keeping the international operations outside the listed entity may help preserve one of MR DIY’s most valuable attributes – earnings visibility.

The Malaysian business is already operating at scale.

Years of expansion have enabled the company to optimise its supply chain, procurement network and store operations.

This has translated into relatively stable margins and predictable earnings growth.

The same cannot be said of the overseas markets. Venturing into new countries typically requires significant upfront investment.

Retailers often need to spend heavily on warehousing, logistics infrastructure, technology systems, employee recruitment and marketing before they achieve sufficient scale to become profitable.

An analyst covering the stock describes the arrangement as a “give-and-take”.

“Ventures into new markets often entail high degree of earnings risks and could take some gestation before yielding positive results.

“So leaving the international expansion out of the listed company will help to maintain earnings visibility and stability,” the analyst explains.

Had all overseas operations been consolidated into the listed company from the outset, losses from newly entered markets could potentially dilute earnings and depress margins.

Quarterly results would become more volatile and analysts would find it harder to forecast future performance.

For a stock that currently trades on the strength of its earnings consistency, that uncertainty may not necessarily be welcomed by investors.

Thailand experience

The Thailand experience offers a glimpse into how management may be thinking about international expansion.

Thailand has grown into one of MR DIY’s most successful overseas ventures, with over 1,000 stores across 73 provinces, making it the group’s third largest overseas market.

Rather than folding the business into the Malaysian-listed entity, the group pursued a separate listing of MR DIY Holding (Thailand) Plc Co Ltd on the Stock Exchange of Thailand.

The move suggests management may view certain overseas markets as standalone businesses capable of commanding their own valuations. From a corporate finance perspective, this can be a highly effective strategy.

Allowing international businesses to mature independently creates flexibility.

Management can choose to list them separately, bring in strategic investors, undertake partial stake sales or eventually inject them into the listed parent at a later stage.

Each option potentially unlocks value in different ways.

For controlling shareholders, separate listings may even yield higher valuations than if all businesses were bundled together under a single listed vehicle.

This aligns with Lau’s observation that the overseas businesses could eventually be spun off once they become more lucrative.

This strategy is not uncommon among large regional groups.

Many conglomerates incubate high-growth ventures privately during their early stages when earnings are volatile and capital requirements are high.

Once the businesses achieve meaningful scale and profitability, they can be monetised through listings, stake sales or corporate restructuring exercises.

MR DIY’s international operations resemble growth ventures that are still in the process of being built.

Opportunity versus certainty

The arrangement is not without its critics.

Minority shareholders may question whether some of the group’s most attractive growth assets are being developed outside the listed entity.

If overseas operations eventually become significant contributors to the broader MR DIY ecosystem, investors may expect greater clarity on how that value will ultimately be shared.

Will the mature international businesses eventually be injected into the listed company?

Will shareholders be given opportunities to participate in future listings? Or will the overseas ventures continue to operate independently?

These questions will likely become more pressing as the international businesses scale up.

For now, however, the market appears comfortable with the existing structure.

The listed company continues to benefit from a clear investment strategy centred on domestic consumption, store expansion and stable earnings growth.

Meanwhile, management retains the flexibility to nurture overseas businesses without exposing the listed entity to the risks and volatility typically associated with international expansion.

Ultimately, the structure reflects a trade-off between certainty and opportunity.

Shareholders of Bursa-listed MR DIY enjoy exposure to a proven Malaysian retail champion with predictable earnings and strong cash generation.

What they do not yet fully own is the group’s potentially higher-growth international story.

Whether that overseas empire eventually finds its way under the listed company may depend on one thing: when those businesses become valuable enough to unlock the next phase of shareholder value creation.

Until then, the billion-ringgit question remains unanswered.