Maintain BUY with a lower TP of MYR3.90
MRDIY’s 1Q22 results disappointed as the group committed to keeping
product prices unchanged despite rising input costs and also due to lower
store traffic from a spike in COVID-19 cases. It has since raised product
prices in Apr & May and will continue to do so if the need arises in order
to buffer further cost increases relating to raw materials, freight and staff
wages. We lower our FY22-FY24 earnings estimates by 7%-8% to derive a
lower TP of MYR3.90 on unchanged 40x FY22 PER. Maintain BUY.
Below expectations
1Q22 core net profit of MYR101m (-20% YoY, -25% QoQ) came in below
expectations at 15%/16% of our/consensus full-year earnings estimates.
The underperformance was led by weaker-than expected sales and erosion
in operating margins. MRDIY declared a first interim DPS of 0.7sen/shr
which translates to 44% DPR (1Q21: 0.8sen/shr, DPR: 50%).
High input costs suppressed margins
MRDIY’s 1Q22 revenue grew 4% YoY largely driven by added contribution
from new stores (New stores YoY: MR DIY: +128, MR TOY: +12, MR DOLLAR:
+19). GP margins however fell to 39% (from 42% in 1Q21) resulting from
higher freight costs, currency volatility and its price-lock promotional
campaign. Further, higher staff and utilities expenses led to weaker EBIT
of -19% YoY while EBIT margins compressed by 4.8ppts YoY.
Passing on costs to consumers through price hikes
Factoring the weak set of results, we lower our FY22/FY23/FY24 earnings
estimates by 8%/7%/7%. Margins are expected to improve in sequential
quarters (FY22 GP margin target: 41-42%) as it has already begun passing
on costs through product price hikes in Apr & May 2022. Logistics remains
a key challenge in the near term given the lockdowns in China from where
they import >70% of their products. To mitigate this risk in future, MRDIY
will lift its buffer stock inventory at stores and central distribution
centres. Separately, >50% of MRDIY’s c.12,600 workforce will be affected
by the hike in minimum wage to MYR1,500/mth (from MYR1,200/mth),
with a c.MYR2-3m direct impact to staff costs.