Why Mr DIY could be a Worthy Investment Opportunity — Outlook for the Incoming IPO (Part 1)

Mr DIY will be listing its shares to the public possibly by the 4th quarter of 2020, hoping to raise about RM1.5bn with a price of RM1.6 per share. This marks one of the biggest issuance in years as it is in talks with investors like AIA, Aberdeen and Blackrock to be its cornerstone investors. Is Mr DIY a worthy investment to partake in? What are its strengths and prospects for the future that makes it worth it? This research piece will be exploring these questions about Mr DIY. In this part 1, I will just be investigating what Mr. DIY does and the market conditions its operating in as its financials have not been disclosed yet. I will cover its financials and valuation when its prospectus is out in part 2.

Mr DIY has a Simple and Straightforward Business Model, to Sell Everything a Family or Person would Need in Their House

Mr DIY primarily sells Hardware, Household, Electrical, Furnishing, Car Accessories, Stationery & Sports, Toys, Gifts, Computer & Mobile Accessories and Jewellery & Cosmetics products to everyday people. It does this primarily through their physical shops, with 640+ stores in Malaysia, and its online platform, MrDIY Online.

Source: Mr DIY

Mr DIY is the kind of place you will go to if you are:

1. Fixing your pipes, but don’t need a complete set of components.
2. Making a cake, and need a baking tray
3. Missing your Philips screwdriver
4. Changing your lightbulbs
5. Doing Arts and Crafts
6. Finding accessories for your car or motorcycle
7. Buying accessories for your computer, laptop or phone
8. Many other more

Basically, you can find almost everything at Mr DIY (you just have to ask the people there where to find it cause there are mountains of things there). It runs its own brand of products and also sells other company’s products.

Mr DIY Operates in a Market that has Steady Demand even during a Recession, but Don’t Expect Exponential Growth

Mr DIY does not specialise in any particular product segment as it sells everything a family would need. I classify its demand as essential demand as everyone would need their products at all times, similar to how we need to buy food, clothes, laundry detergent. Mr DIY’s target market is recession proof, but people normally do not buy its products excessively.

Source: Mr DIY

Hence, I do not see anyone buying products like lights, cooking pan, mouse, pen, or windshields 4 times a week … more like twice. Its the kind of place you go to if you just need to buy certain things.

Now, for some big picture economics stuff. I am going to introduce 2 statistics here called the Gross Domestic Product of Consumption and Retail Trade. They are both published by Department of Statistics Malaysia. Consumption just means the services and things we buy, for example if we buy an apple, the transaction will be recorded as activity. So the more apples you buy, the more activity, and the more demand for apples. Retail Trade, is the same concept, but its recorded specifically for the selling of things at retail shops, supermarkets, grocery shops, etc, which will serve well in investigating how well the various shops are doing.

With those out of the way, the amount of consumption in Malaysia has been very steady, growing at an average of 6.9% the last 5 years. However, we need to take note of 2 significant developments from 2014 to 2019, the introduction and subsequent abolishment of Goods and Services Tax in 2014 and 2018. 2015 and 2016 growth rate was much lower due to introduction of GST, and 2018 growth was much stronger due to abolishment of GST. Additionally, 2Q 2020 is a really bad quarter due to the Movement Control Restrictions.

Digging deeper into the individual segments, the retail trade sector has been moderating (growth rate decreasing, a growth rate from 5% to 4% is called moderation), since the abolishment of GST in the 2nd half of 2018. This is to be expected as many people rushed to buy things during this period before the introduction of SST by the new government. However, it does seem like the segment was doing very well from 2016 to 2017, which might reflect the fact that consumers were starting to spend more after the introduction of GST in 2015. In the 1st half of 2020, the segment was hit hard by the movement control restrictions order.

Both the analysis above points to 3 trends that we can cross check with Mr DIY’s financials when it comes out.

1. 2015 and 2016 are bad years for people to buy things because of GST
2. 2nd half of 2018 is really strong because of the abolishment of GST
3. 1st half of 2020 is particularly bad because of movement control restrictions

By cross checking these big picture trends to Mr DIY’s financials, we can form informed views on how the big picture impact Mr DIY. This will also help us in projecting the outlook for Mr DIY in the valuation portion as I will be using the GDP forecast from various research houses and international organisations to project Mr DIY’s revenue in 2020 and 2021.

The overall business environment is expected to be weak in 2020, and rebound in 2021…Maybe

I think we can all agree that 2020 will be a bad year for all businesses. It is the narrative of a rebound in 2021 that needs to be examined properly. Both Bank Negara Malaysia and World Bank expect that GDP growth will be about -4.5% in 2020 and 6.5% in 2021.

Source: Bank Negara Malaysia, World Bank

The narrative makes sense, but I am not entirely convinced about the rebound. There will be a rebound but whether it will hit a high as 6.5% in 2021 is suspect. Some expect the pandemic to last till 2022 (Center For Infectious Diseases Research and Policy), while some at least till end of 2021 (Bloomberg). I am more skeptical about the 2021 projections as I think this pandemic will not be gone anytime soon.