KUALA LUMPUR (Jan 11): CGS-CIMB Securities has upgraded home improvement retailer MR DIY Group (M) Bhd to "add" with a higher target price (TP) of RM1.90, citing a positive outlook driven by the company’s focused store expansion and private label strategy.

In a note on Friday, the research house said MR DIY’s revenue growth trajectory has shifted to a positive stance after a recent meeting with the management to discuss its five-year store expansion plan (2024-2028).

Revised 2024 sales year-on-year (y-o-y) growth assumptions now stand at 10.6% (previously 6.3%), while 2025 sales y-o-y growth assumptions stand at 10.5% (previously 5.2%), reflecting management’s renewed focus on expanding the store network, particularly the flagship MR DIY-concept store, into underserved areas of East Malaysia.

“We believe this should drive sales growth as MR DIY noted that its East Malaysia stores typically experienced more than 30% higher average sales per store compared to Peninsular Malaysia," it said.

Meanwhile, it said East Malaysia stores constitute only 12% (versus 87% in Peninsular Malaysia), with 144 out of the total store count as of September 2023, signalling potential for expansion.

MR DIY reaffirms its goal of opening 180 new stores in 2024 and aims for a total store count of 2,000 by 2028, leveraging the underpenetrated state of Malaysia’s home improvement retail sector, which constituted 3.1% of total retail sales in 2022.

In addition, MR DIY’s private label product sales, constituting approximately 50% of total sales, has enhanced its brand equity, contributing to a widened gross profit margin of 45.2% in the first nine months of 2023 and supporting the expansion of offerings and basket size for potential margin expansion.

CGS-CIMB highlighted that the Gordon Growth Model (GGM) assumes a recurring return on equity (ROE) of 33.2% as it rolled over the valuation base year to calendar year 2025 (CY2025), a 5.5% long-term growth and a lower cost of equity capital of 9% (previously 9.5%, updating the beta to reflect the latest data and its increased dividend payout policy).

Following an 11% underperformance in share price since first quarter of 2023 results, MR DIY is now trading at 22 times financial year 2024 (FY2024) forecast price-earnings (P/E), a 22% discount to Dollarama’s historical average while the TP suggests a 25.8 times CY25 forecast P/E, an 8.5% discount to Dollarama’s historical average.

CGS-CIMB said key downside risks include weaker-than-expected consumer sentiment and operating margin.

At the time of writing on Friday, MR DIY shares were up one sen or 0.68% to RM1.46, with a market capitalisation of RM13.79 billion.