The home improvement chain operator’s net profit for Q3 ended Sept 30 (Q3 FY2024) fell 1.9% to RM121.65 million from RM123.95 million a year ago due to higher administrative and operating expenses.
Kenanga Research said its cumulative nine-month net profit (9M FY2024) of RM425 million came in below expectations at 65% and 66% of its full-year forecast and the full-year consensus estimate, respectively.
The research house said the key variance against its forecast came largely from “a double whammy” of softer sales and heightened cost pressures.
“The company indicated that tighter household budgets, affected by the removal of diesel subsidies, contributed to lower spending despite net total of 49 new stores during the quarter,” it said in a note.
Notably, the average basket size dropped by 90 sen quarter-on-quarter to RM24.90, compared to an average of 30 sen reduction over the past two years, it added.
The company said the higher administrative and other operating expenses was driven by higher staff costs, depreciation of assets, and higher utility expenses, consistent with its business expansion activities.
The government removed subsidies on diesel in June this year to reduce the burgeoning diesel subsidy bill of RM14.3 billion in 2023, up from just RM1.4 billion in 2019. Diesel prices in Peninsular Malaysia jumped by 56% from RM2.15 to RM3.35.
Things may get worse for Mr DIY as the government plans to implement a targeted subsidy plan for RON95 fuel in the middle of next year.
Hit with a downgrade
Kenanga cut its earnings forecast by 9% and 8% for FY2024 and FY2025 respectively to account for incremental cost pressures that may not be fully passed through in the near-term.
It also downgraded the counter to “market perform” from “outperform” and lowered its target price (TP) by 8% to RM2.20 from RM2.40.
Meanwhile, RHB Research cut its earnings forecast for FY2024-FY2026 by 6%,10%, and 11% respectively. It maintained its “buy” call on the stock but lowered its TP to RM2.35 from RM2.59.
It said Mr DIY’s 9M FY2024 results disappointed as “weak consumer sentiment continued to dampen consumer spending”.
“That said, we maintain our positive stance in anticipation of an improving environment ahead lifted by rising disposable income of which the company will be well-placed to capitalise on.”
It explained the higher wages in both the public and private sector in 2025 is expected to lift disposable income and consumer sentiment.
“Together with the upsized cash handouts for the lower-income groups, Mr DIY could stand to benefit as the recipients of these measures fall well within its targeted customer groups,” it said in a note.
On top of that, it said a stronger ringgit versus the renminbi is another catalyst, potentially boosting its margins.
At the time of writing, Mr DIY was trading at RM1.85, valuing the group at RM17.5 billion. It is up 27.6% year-to-date but has fallen almost 14% in the last five days following its results announcement.
The company was founded by Tan Yu Yeh and his brother Yu Wei in 2005, opening their first hardware store along Jalan Tuanku Abdul Rahman in the heart of Kuala Lumpur. The group now has over 1,300 outlets in the country.
Forbes lists the Tan brothers as having a net worth of US$1.7 billion (RM7.6 billion) as of April 15 this year. The company was listed on Bursa Malaysia in October 2020 at an IPO price of RM1.60.