PETALING JAYA: MR DIY Group (M) Bhd
’s earnings outlook is expected to be supported by the strengthening of the ringgit against the Chinese yuan, says CGS International Research (CGSI Research).
The research house said the 5.3% average appreciation of the ringgit relative to the yuan in the third quarter of 2024 (3Q24) versus the first half of 2024 is a positive for the home improvement retailer’s margins.
About 70% of MR DIY’s goods are purchased in the yuan and the company has an inventory stockpile of four to six months.
“If the average ringgit stays at 3Q24’s levels towards the end of the year and into 2025, we estimate MR DIY’s gross margin could strengthen by two percentage points, lifting our core net profit estimates by 9.5%, all else being equal.
“This would lead to a 9% increase in our valuation of MR DIY to RM2.89, all else being equal, or a 33% upside from its closing of RM2.17 as at Oct 9, 2024,” CGSI Research said in a report yesterday.
The research house expects the group to register quarter-on-quarter earnings growth for 3Q24, underpinned by store openings as well as an improvement in same-store sales growth (SSSG).
The research firm also projects MR DIY’s SSSG to return to positive territory in 3Q24, after having been negative since 3Q22.
“Its SSSG decline has been narrowing since 2Q23 and members of the Malaysia Retailers Association and Malaysia Retail Chain Association are optimistic about 3Q24, estimating an average growth rate of 3.6% year-on-year (y-o-y) in Malaysia’s retail sales for 3Q this calendar year,” the research house said.
Moreover, CGSI Research said improved policy direction from the government should be positive for the country’s economic growth in 2024.
It has forecast a 2024 gross domestic product growth of 5.2% y-o-y and private consumption growth of 6.9%.
“We see the following as key drivers of consumer sentiment and spending over the next six to nine months: flexible withdrawals from the Employees Provident Fund Account 3, cash assistance to lower-income households, higher civil servant salaries from December 2024 and a strengthening ringgit.
“All these drivers, in our view, should support the demand for lower-value goods, such as those sold by MR DIY,” the research house said.
CGSI Research reiterated its “add” call on MR DIY with an unchanged target price of RM2.65.
Downside risks to its call include weaker consumer sentiment hitting sales and weaker operating margins.
Meanwhile, Affin Hwang Research 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 Research 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,” the research house said.
