UOBKH Research says better economics and customer reception of iterations of the MR DIY format continues to favour the group’s store expansion plans.
PETALING JAYA: MR DIY Group Bhd’s growth prospects remain intact underpinned by store rollouts, earnings growth and its highly cash generative business model, says UOB Kay Hian (UOBKH) Research.
The research house noted the home improvement retailer has a store expansion target of 180 outlets in 2023, which will consist of MR DIY (125 stores), MR DIY Express (35 stores) and MR Dollar and MR Toy (20 stores) respectively.
UOBKH Research added that better economics and customer reception of iterations of the MR DIY format continues to favour the group’s store expansion plans.
“We gather that MR Toy is profitable while MR Dollar is still undergoing gestation. The gradual but selective rollout of MR Dollar will eventually achieve scale which is critical to boosting store offerings (better and wider range of products) and attracting a higher mix of global suppliers.
“The improved holistic customer experience should then reflect better reception for MR Dollar format stores,” said the research house in a report yesterday.
For the third quarter ended Sept 30, 2022 (3Q22), the hardware retailer carried out an average selling price revision exercise, which will have a full quarter’s impact in 4Q22. UOBKH Research opined this could partially help MR DIY to mitigate sector headwinds.
“Broad retail sales and specifically subsector home improvement are expected to normalise in 4Q22 and we do not expect MR DIY to buck the trend.
“This could undershoot consensus’ expectations,” said the research outfit. The Retail Group Malaysia (RGM) forecast a 6% year-on-year (y-o-y) growth in sales for 4Q22, which is a normalisation from a 96% rise in 3Q22 and a 26.5% increase in 4Q21 which was partly due to the reopening of the economy and low base effect in 3Q22.
RGM expects weakness in discretionary spending to cause retail sales growth to plateau to 3.5% y-o-y in 2023.
On the other hand, the retail members of Malaysia Retailers Association and Malaysia Retail Chain Association were more optimistic, with 4Q22 sales forecast to rise 13.9% y-o-y. In particular, the furniture and furnishing, home improvement and electrical and electronics (FHE) sub-sector is expected to contract by 18.5% y-o-y in 4Q22.
“These expectations have two implications for MR DIY. Firstly, 4Q22 FHE sub-sector 18.5% contraction is well below consensus’ expectations for MR DIY’s revenue growth of 16.9% y-o-y, and MR DIY’s 3Q22 revenue grew by 25.8%, appearing to have underperformed the FHE sub-sector,” said UOBKH Research.
Disruption of the group’s inventory replenishment and other categories like electrical and electronic sales which in turn hampered FHE’s sub-sector sales could be attributed to MR DIY’s sub-par 3Q22 revenue growth.
UOBKH stated better stock replenishment and fulfilled inventory following the easing of tight labour supply could offer a turnaround for the group’s revenue growth in 4Q22.
UOBKH Research maintained a “buy” call on MR DIY with a target price of RM2.15 a share.
