On 26 October 2020, Mr.D.I.Y. Group (M) Berhad (herein referred as “the Group” or “DIY”) will be listed in the Main Market of Bursa Malaysia Stock Exchange. Currently, investors can subscribe to its IPO until 14 October 2020 at an offer price of RM1.60 per share. The main question is, should you subscribe?
DIY is in the business of home improvement retail chain and claimed to be the largest in Malaysia. Basically, they open retail stores that sells products such as lightbulbs, measurement tools, plumping items, gardening items, etc.
I have done a detailed reading and analysis into the Group’s prospectus. Here’s my take on the Group. For your better understanding, I have segregated my points into 2 sections – 1) Downside Risks; and 2) Upside Potentials:
#1: Overall Industry Risks is High
Let’s face it, what DIY is selling are products that does not have any differentiation. This means price is the main driver to the Group’s financial performance. Customers are often sensitive to these product pricing.
I could get a lightbulb replacement regardless of which store is selling it. As long as it is convenient to me and the price is deemed reasonable, I would buy it. Seldom you will see that there is a brand loyalty.
Because of this, there is intense price competition coming from other retail stores (i.e. Ace Hardware, Daiso, Aeon Mall, etc.). The biggest competition that DIY needs to face is “E-Commerce”.
Platforms like Lazada usually are cheaper than any other bricks and mortar model. This is because the sellers do not require to set-up physical stores and pay a hefty sum of rental to the landlord.
Nevertheless, DIY’s pricing seems to be holding up well as its gross profit margin has been hovering above 40% for the past 3 years from 2017 to 2019. This gives the Group more room for price adjustments in the future. However, one must wonder how low can a product price be selling at? Hmm…
#2: Rising Costs of Doing Business
DIY’s revenue has been increasing for the past 3 years but its net profit was flattish in year 2019. This normally indicates that the Group incurs higher costs of doing business. It is not surprising considering that the Group has 640 stores as of September 2020.
My only worry is that the Group might be over-expanding its retail stores. According to its prospectus, DIY is planning to further open a total of 132 stores and 175 stores in year 2020 and 2021 respectively.
#3: DIY’s IPO Funds Used for Repayment of Loan
Upon DIY’s successful listing, it is expected to receive a total proceeds of RM301.4 mil. The Group intend to use 91.6% of the total proceeds for repayment of loan. As of 30 June 2020, the Group has about RM608.9 mil in borrowings.
It is a little surprise for me that the Group allocates most of the proceeds for repayment of loan rather than business expansion. On the bright side, loan interest will be reduced which could lead to higher profit in the future.
#1: Market Leader
According to its prospectus, DIY has a market share of 69.2% in 2019 making it the market leader in home improvement retail sector. This means DIY is well positioned to generate more sales since the home improvement retail sector in Malaysia is expected to grow at a CAGR of 10.2% until 2024.
#2: Double Digit Profit Margin
One thing that impresses me is DIY’s profit margin. Despite the intense price competition, the Group still able to achieve a gross profit margin of above 40% and net profit margin of above 10% for the past 3 years from 2017 to 2019.
#3: Potential Dividend for Investors
Who doesn’t like to receive dividends? I love dividends! According to the Group’s prospectus, the management has set out a dividend policy with a target payout ratio of 40% of its net profit attributable to the owners.
As of 30 June 2020, the Group has a cash and bank balances of RM272.5 mil and it has been generating free cash flows consistently since 2017. Will DIY be able to sustain its 40% payout ratio? In my opinion, they should be able to sustain it.
So, should you subscribe to DIY’s IPO? The valuation for DIY based on its offer price of RM1.60 per share seems to be at the higher end. At its offer price, it gives a PE ratio of 31.6x. There are no comparable listed companies that I can use as a benchmark for DIY’s valuation.
In my opinion, DIY’s business model is not that attractive for me as there are no economic moat. In addition, I believe that the recent MCO implemented during March 2020 has changed people’s mindset about online shopping. This change in spending habit coupled with the current covid-19 situation still remain unresolved will definitely affect DIY’s future business growth.
I personally would not subscribe to it after reading through its prospectus. Whether you should subscribe or not, I think I have laid down my case and I shall leave it for you to make your own decision.
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DISCLAIMER: The above mentioned stock is NOT a recommendation to buy or sell but merely for education purpose. You should do your own due diligence on this company before making any investment decision. The author is not liable for your profit or losses made out of your decision to buy or sell.