KUALA LUMPUR (July 21): Kenanga Research anticipates MR DIY Group (M) Bhd's net profit will soar to RM707 million in the financial year ending Dec 31, 2022 (FY22) or 11.2 sen per share versus RM451 million or 7.2 sen in current FY21.

Given the bullish earnings forecast, Kenanga Research pegs its target price for MR DIY at RM4.10, valuing the home improvement outlet chain at a price-earnings ratio of 36 times of its earnings forecast of FY22.

On the-back-of-an-envelope calculation, MR DIY will be valued at nearly 57 times of profit forecast of FY21 based on the target price of RM4.10.

Kenanga Research's forecast is the highest among analysts who track the company, according to Bloomberg. The market consensus forecast of MR DIY's net profit is RM517.7 million in FY21 and RM647.2 million in FY22.

To put things in perspective, the market estimate of Nestle (Malaysia) Bhd's annual profit is RM676.5 million for FY22, with the highest forecast at RM750 million. Meanwhile, the consensus forecast of AEON Co (M) Bhd's annual profit is at RM114.1 million with the highest estimate at RM131 million, Bloomberg's data showed.

MR DIY closed at RM3.34, down 14 sen, on Wednesday, giving it a market capitalisation of RM20.96 billion.

In a note to its clients on Wednesday, Kenanga Research said it believes MR DIY deserves a high premium as its forecast three-year average (FY19-22) net profit compound annual growth rate (CAGR) of 31% is higher than its regional peers' 10%.

The company posted a net profit of RM124.79 million in the first quarter ended March 31, 2021, more than double of RM58.46 million achieved in the previous corresponding quarter. Quarterly revenue jumped to RM870.18 million from RM534 million the year before.

Kenanga Research analyst Ahmad Ramzani Ramli said MR DIY is operating in an under-penetrated home improvement retail market and is the largest home improvement retailer in Malaysia with no major domestic competitor in sight.

"We are positive on MR DIY for its robust growth potential driven by both higher market demand for its products and store expansion, strong GP (gross profit) margins (above 40%) with the absence of near- and long-term margin volatility thanks to its supply source, China's massive economies of scale, the robust balance sheet providing it ample cash for expansion, and its net cash position ahead allowing MR DIY to deliver sustainable dividends," he said.

Despite the ongoing Covid-19 pandemic, the analyst noted that the group saw a 63% top line growth year-on-year, underpinned by its large networks all over Malaysia and Brunei.

The home improvement retail space in Malaysia is expected to chalk a CAGR of 10.2% between FY19 and FY24.

"It is still largely under-penetrated, thus offering the group an opportunity to open new stores and new catchment areas — as such, it is targeting to open 175 stores each year in FY21/22 (FY20: 141 stores opened).

"This ambitious target includes the opening of 50 MR DOLLAR stores — offering popular everyday essentials at RM2 and RM5 — and 25 stores for MR TOY — supplying value-for-money toys for the underserved," said Ahmad Ramzani.

Furthermore, Kenanga Research expects the group to achieve a net cash position in FY21, comfortable enough to comply with its 40% dividend payout policy and fund further expansion in FY22.

"[The company's] gross margins have been stable and robust, with gross margins averaging 43% (FY17-20) despite having over 72% of its products sourced from China whose economies of scale have kept imported product costs low and helped further by a favourable ringgit against the yuan.

"The introduction of MR TOY is likely to sustain margins further. Its product mix is reviewed every quarter and changes are made if needed to maintain these robust margins," added Ahmad Ramzani.

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