Excerpts from UOB KH report

Analyst: Philip Wong

MR DIY Group (MRDIY MK) - Shopping For A Great Bargain

MRDIY, Malaysia’s most established home improvement retailer, offers a compelling 4-year earnings (2017-21F) CAGR of 20.6%, which is unrivalled in the region (peers’ average: 8.1%).

MRDIY

IPO price: 
RM1.60

Target: 
RM2.20

Robust organic growth of 8.9% is further supplemented by new store rollouts and expansion into new retail formats.

Ultimately, it has a sterling track record, execution ability and a highly cash-generative business model.

Initiate coverage with BUY and target price of RM2.20.


MrDIY10.20

• The go-to home improvement retailer for the masses. MR DIY Group (MRDIY) is synonymous with Malaysian households for its quality home improvement products at affordable prices.

"Frost & Sullivan’s price benchmark study on a basket of goods found MRDIY’s prices were on average 21% cheaper than its physical-store competitors. Our ecommerce study found MRDIY’s basket of goods to be 20% cheaper." 

-- UOB KH report

MRDIY’s attractive value proposition combined with its convenient locations and large offerings at an average of 16,600 SKUs per store entrench it as the go-to one-stop shop for home improvement products.

Undisputable market leader in a growing and resilient segment of the retail sector in Malaysia. MRDIY holds a 30% market share in home improvement spending in Malaysia.

It could gain further market share via its aggressive expansion in a highly fragmented industry.

Meanwhile, natural organic growth as forecasted by Frost & Sullivan is attractive at 8.9% (2019-24F).

Establishing new concept stores within the toy and dollar store concept will provide additional impetus for growth.

Outperforming East Malaysia MRDIY stores suggests ample room for growth beyond urban cities.

Compelling cash generation derived from impressive revenue growth, high profitability and brief payback. We expect MRDIY’s free cash flow (FCF) to grow at a 5- year CAGR (2017-22F) of 38.2%.

This is supported by a trifecta of factors:

a) store expansion and robust same-store sales (SSS) growth;

b) high operational profitability (EBITDA margins of 26-30% in 2017-22); and

c) instant brand recognition, need-based demand and an impressive operating cost structure that significantly reduce store payback period to two years from the usual three years.

• Negative perception carves out opportune window. There could be an opportune buying window, given the uninformed and negative perception among retailers, which was perpetuated by a media report.

But we expect upcoming quarterly results to dispel the perception of declining prospects (eg SSS growth).


STOCK IMPACT
Clear cost price leader. Although it was established just 15 years ago, MRDIY is already synonymous for its affordably-priced home improvement products.

In a survey by Frost & Sullivan of 43 home improvement SKUs across three various categories (hardware, electrical and household), MRDIY’s prices were found to be on average 21% cheaper for the same comparable product offered by any of its eight peers surveyed (including Ace Hardware, Daiso and One Stop Superstore).

This reflects MRDIY’s highly appealing price-to-quality products aimed at the mass market.

• Cheaper than e-commerce competitors as well. We benchmarked MRDIY against established e-commerce sites (Lazada and Shopee).

Our screening was the cheapest price narrowed by two factors, namely:

a) top 30 searches; and
b) a minimum of 15 ratings with an average of more than 4.0 out of 5.0.

Similar to MRDIY’s price discount to its physical store competitors, its basket of goods was sold close to 20% discount to the e-commerce sites as well.

MARKET SHARE BY STORE COUNT (END-19)

Retailer

Total no. of outlets

Market share

Mr. DIY

640

9.0%

One Stop Superstore

83

1.2%

Daiso

76

1.1%

Supersave

1.8

1.0%

Yubiso

7.3

0.9%

Others with >5 stores

171

2.4%

Home improvement stores in M’sia

7093

 

Source: Respective companies, Frost & Sullivan

Largest home improvement retailer. Frost & Sullivan estimates there were 7,093 home improvement stores as at end-19.

MRDIY has the largest share of 9.0% by virtue of its 640 stores nationwide as of end-19.

Its other competitors were at a far distant second with only about 10% of MRDIY’s store count.

In the RM7.7b home improvement retail sector, MRDIY dominates with a lion share of 29.1% (vs its 9.0% market share in terms of number of outlets).

Home improvement store footprint remains underpenetrated. In terms of store saturation, home improvement stores in Malaysia remain well underpenetrated (at 216.3 stores/million people) relative to advanced economies such as Australia, the US and Japan at 405.3, 370.2 and 236.6 respectively.

Should saturation rates equalise to that of Australia, Malaysia could see a potential doubling of the existing 7,093 home improvement stores.

This effectively paves the way for MRDIY’s sustained expansion of 175 stores annually, or by 30% in the foreseeable future.

Outperforming East Malaysia stores suggest ample room for growth beyond urban cities. Store expansion is not limited to urban areas such as the Klang Valley.

Despite higher urbanisation and income levels in Central Malaysia (Selangor, Kuala Lumpur and Putrajaya), MRDIY’s East Malaysia stores outperform those in Central Malaysia by a 15% higher revenue per-store basis at RM4.5m annually (Central Malaysia: RM3.9m).

Industry organic growth of 9.5%, notwithstanding further market share accretion. The home improvement market is poised for an attractive 5-year (2019-24F) natural organic growth of 8.9%, as forecasted by Frost & Sullivan.

Notably, the CAGR of 8.9% outstrips forecasted growth rates for key neighbouring ASEAN countries, with the exception of Vietnam.

EARNINGS REVISION/RISK
• None.
• Risks include supply chain is highly dependent on China, foreign exchange risk, foreign labour and minimum wage, and infringement claims on its large number of white-labels.

VALUATION/RECOMMENDATION
Initiate coverage with BUY and target price of RM2.20, based on 31.0x 2021F PE. Its regional ASEAN peers are trading at an average of 26.6x 2021F PE, but we opine that MRDIY well deserves a 15% premium to peers due to:

a) its significantly superior 4-year net profit CAGR (2017-21F) of 20.6% (peers: 8.1%);

b) its established track record and it being the largest home improvement retailer in Malaysia; and

c) home improvement spending in Malaysia is among the highest in the ASEAN region.

Our blue-sky valuations suggest a target price of RM2.50.


Full report here

You may also be interested in:


You have no rights to post comments

 

We have 899 guests and one member online

rss_2 NextInsight - Latest News