By HARIZAH KAMEL / Pic TMR

MR DIY Group (M) Bhd’s net profit is expected to grow at a compounded annual growth rate (CAGR) of 22.4% for the financial year of 2019 (FY19) to FY22, underpinned by its rapid expansion of 175 retail outlets per annum and positive same-store sales growth (SSSG).

Hong Leong Investment Bank Bhd’s (HLIB) noted that while the group’s SSSG is expected to fall 11.5% in FY20, mainly due to the Movement Control Order (MCO) impact, the investment bank expects it to rebound 9% and 2.5% in FY21 and FY22 respectively.

“We initiate coverage on Mr DIY with a ‘Buy’ call and a target price of RM3.33 based on 40 times mid-FY22 earnings. This price-to-earnings (PE) ratio implies a 30% premium to Mr DIY’s regional home improvement peers.

“This premium is justified given its favourable earnings outlook against its peers,” it said in a research note yesterday.

The investment bank mentioned that Mr DIY’s FY19-FY22 net profit CAGR of 22.4% dwarfs its peers’ average rate of 8.9%, adding that the company’s PE ratio of 2.7 times is far lower than its listed regional peers’ average of 6.1.

Since growing aggressively from 244 outlets in FY16 to 656 outlets as of September 2020, Mr DIY intends to continue their rapid expansion strategy.

Going forward, HLIB expects the group to open at least 100 outlets per annum in FY21 and FY22.

Despite disruptions on operations caused by the fresh MCO, Mr DIY is on track to reach this target, having opened 77 stores as of September last year.

MR DIY still has room for store expansions given its short payback period per store opening, revenue per store and average value of each transaction are still growing year-on-year, and store performance in rural areas appears to be stronger-than-anticipated.

HLIB added that some investors have expressed concern that the market for home improvement stores is reaching saturation point, but the investment bank stated that the home improvement market is far from oversaturation.

“While the number of home improvement stores per million people in Malaysia is comparable to developed markets, this is due to the disproportionately high number of stores in Malaysia being independently run in smaller for- mat stores,” it said.

Home improvement sales per capita in Malaysia are significantly lower than developed nations and even regional peers like Thailand, Vietnam and Singapore.

The investment bank is positive on Mr DIY’s newer retail formats Mr DOLLAR Sdn Bhd and Mr TOY that now have four and 28 stores respectively as of the third quarter of 2020. HLIB is particularly optimistic about Mr DOLLAR given that the market is already receptive to the “dollar store” concept, with existing players in the market ramping up store rollout plans.

The group intends to open 50 Mr DOLLAR and 25 Mr TOY stores per annum in FY21 and FY22.

Store expansion is expected to be funded by internally generated funds. The aggregate cost of opening a new outlet of Mr DIY is RM1.6 million per outlet, Mr TOY (RM1 million) and Mr DOLLAR (RM1.2 million).

Based on the historical average cost of store openings and management guidance, HLIB expects the group to incur around RM235 million in capital investment for store openings in FY21.

Furthermore, Mr DIY intends to pay out more than 40% of net profits, and therefore, is expected to have a dividend yield of 0.7% based on FY21 earnings.

Currently, the group is the 26th-largest listed company in Malaysia by market capitalisation whereby it will become eligible to be included in the FTSE Bursa Malaysia KLCI should it enter the Top 25 or an existing member falls below the 35th position.