This article first appeared in The Edge Malaysia Weekly on February 27, 2023 - March 5, 2023

THE cessation of Creador Funds as a substantial shareholder of Mr DIY Group (M) Bhd could well be in line with the private equity fund’s target to realise its investment, as PE funds typically have an average life cycle of five years up to even 10 years.  Nonetheless, having been a substantial shareholder of Mr DIY long before it went public, will Creador’s move to trim its stake be viewed differently, to the extent that investor sentiment may be affected?

Since hitting a high of RM2.79 (adjusted post-bonus issue) in April 2021, Mr DIY’s share price has slipped 40.5% to close at RM1.66 last Friday, valuing it at RM15.66 billion, against RM10 billion when it debuted on the local bourse in October 2020.

As a long-time investor in the group, taking some profit off the table is normal, asserts Creador’s founder and CEO Brahmal Vasudevan, who has increased his shareholding in the company, as he says he continues to believe in Mr DIY’s prospects.  Even after the disposal of another block of 65 million shares last Wednesday, Creador Funds remains Mr DIY’s third-largest shareholder, with a 4.93% stake, held via Hyptis Ltd.

Mr DIY founder Tan Yu Yeh is still the largest shareholder, with 50.79% equity interest in the group held through Bee Family Ltd.  Another substantial shareholder is Platinum Alphabet Sdn Bhd, with a 6.1% stake. Platinum Alphabet is held by a group of Mr DIY employees.

Brahmal tells The Edge: “We have been a long-term investor in Mr DIY since 2016, for seven years. Mr DIY is adding more stores with growth in revenue and profit, so it is a sign that the business itself is in a very good position … [The trimming of its stake by Creador] shouldn’t affect the prospects of the company at all.”

Prior to the initial public offering, Creador — as one of the IPO promoters — had 18% equity interest in Mr DIY, before the stake was diluted to 15.3% when the listing plan kicked off.

Describing Mr DIY as the “best ever” company he has invested in, Brahmal observes that institutional demand for the group’s shares has been very strong, judging from the response to Creador’s share placements. “This time around, I think more than 10 funds participated in the placement … Every year, [institutional funds] will buy some shares, as they don’t all come in at once. As the share price has become more attractive, perhaps others may also step in or existing guys may buy more shares.”

Notable institutional investors in Mr DIY include the Employees Provident Fund (1.76%), Amanah Saham Nasional Bhd (1.59%), BlackRock Inc (0.86%) and Yayasan Pelaburan Bumiputra (0.68%).

Brahmal says, operationally, MR DIY’s founders remain committed to the company, with the Bee Family maintaining its stake around the same level since the listing exercise.

He believes recent share price weakness is due mainly to soft macro sentiment, although another contributing factor could have been the discount accorded when a share placement is undertaken. “When we do a placement, usually we have to give a discount against the prevailing share price. That’s why the price may have come off a little bit … It’s quite standard practice to do [a placement] at a discount.”

It is worth noting that Mr DIY’s valuations were priced on the high side at a forward price-earnings ratio (PER) of more than 31 times when the group made its debut on Bursa Malaysia at the height of the pandemic.

Having declined, Mr DIY is currently trading at a forward PER of 26 times. Yet, it is higher than that of other home-grown consumer brands such as Padini Holdings Bhd (15 times) and Bonia Corp Bhd (12 times).

During its share price rally in April 2022, Mr DIY had proposed a bonus issue of up to 3.14 billion shares on the basis of one bonus share for every two shares held.

Premised on the positive view, Brahmal increased his stake in Mr DIY to 0.064%, or six million shares, after acquiring 750,000 shares on the open market last Thursday, for RM1.26 million, or RM1.68 a share.

“I do believe in the long-term prospects of the company and so that’s why I purchased it personally,” he says, adding that he does not rule out further increasing his stake in the group. “I may consider doing that going forward, but I haven’t thought about it that much.”

Financially, Mr DIY has been in a growing mode in the past few years, with its net profit doubling to RM473 million for the financial year ended Dec 31, 2022 (FY2022), from FY2017.

Net profit margin was slightly lower at 11.9% for FY2022 compared with 12.8% for FY2021.

Bloomberg’s consensus earnings forecasts indicate that the group may continue to post higher earnings of RM581.63 million in FY2023, and RM681.25 million in FY2024.

With gross borrowings of RM330.3 million and lower cash and bank balance, Mr DIY’s net debt came in much higher at 192.4 million as at end-December 2022, compared with RM15.7 million a year ago.

The group declared a dividend per share of 2.4 sen for FY2022, translating into a 12-month gross dividend yield of 2.19%.

This year, Mr DIY plans to open 180 new stores across all brands (Mr DIY, Mr Dollar and Mr Toy), which will bring the total nationwide store network to 1,260. It was operating 1,080 stores in Malaysia and Brunei as at end-December 2022.

Following the release of the latest quarterly financial results two weeks ago, analysts remain positive about the group’s prospects, with 13 analysts having “buy” calls on the group. Only two recommended a “hold” while one had a “sell” call. The consensus target price is RM2.26, which suggests a 36.1% upside against its closing price of RM1.66 last Friday.

While there could be a short-term impact on investor sentiment as a result of Creador ceasing to be a substantial shareholder in Mr DIY, Hong Leong Investment Bank Research analyst Syifaa’ Mahsuri Ismail believes there will be continued interest in the stock if it can meet earnings expectations. She maintains a “buy” call on the stock, with a lower target price of RM2.15 from RM2.40 previously.

Nonetheless, she warns of the cautious stance adopted by some consumer firms, given the current weak consumer sentiment. “It’s hard to gauge where this is going. Covid is behind us, but now we have inflationary pressures and an economic slowdown, which may drag on consumer spending.”

Touching on its prospects when announcing the latest financial results, Mr DIY said: “During the year [FY2022], given persistent cost pressures, the group made price adjustments to its core product offering, which has led to the improvement in gross profit margins in 4QFY2022 compared with earlier in the year. The group expects margins to be sustained in FY2023, given the above and the added benefit of an improving inflationary climate going forward.”

Kenanga Research, which has a “market perform” call on Mr DIY, is cautious about the group’s top-line performance, owing to inflationary concerns. “Margins may come under pressure due to rising operating cost, though cushioned by price hikes and the easing of freight cost,” it said in a Feb 15 note, adding that the group’s FY2023 earnings have been cut by 6%, with a lower target price of RM1.85, from RM2 previously.

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