Sunday, 8 November 2020

COULD MR DIY HIT RM2.50?

 


In our previous writeups on MRDIY highlighting its challenges and opportunities, we had cited reasons why the IPO is overpriced. Now, we will look at reasons why the IPO is (plausibly) underpriced.

We are not wedded to our pre-existing biases. Given that future outcomes are such fickle things, we always think in probabilities, never absolutes.

Hopefully you won’t be surprised if the stock keeps going up, for the same reasons you won’t be surprised if it suddenly collapses. Considering all probabilities simply provides a better understanding of a stock. It's how we approach everything, from trading strategy to fundamental anaysis. 

At the end of the day,  the market is always right upon closing time, and there is no denying that the current price action has been overwhelmingly positive. 

MRDIY is now the 33rd most valuable company on Bursa Malaysia with a RM12.8 billion market capitalisation as of 7 November 2020. It's firmly in the big leagues, and last Friday it rallied to record highs just after posting solid quarterly earnings growth amid a pandemic. Impressive stuff.

After a 28% gain from the IPO price in just two weeks, it’s worth exploring why it can stay up, since we’ve already explained the reasons why it can go down.

It's very intriguing that two research houses currently have vastly differing views on the stock.

Here's Affin Hwang's rating, which is largely aligned with our own views on saturation and declining same store sales growth:


And then there's UOBKayHian:

To be honest, we have not been so preoccupied with the upside potential before this, owing to our very human biases. So let's look at the glass half full, super-bullish theory.  

A MASSIVELY SUCCESFUL LISTING

As far as we can remember, MRDIY is already the most successful multibillion ringgit Main Market listing since IHH, and that was waaayyyy back in 2012. 

The other major listings, as if they're in a league of their own in utter mediocrity, have faltered, and some have crashed and burned since going public. Among those in this list are FGV, AAX, LCTITAN, and ASTRO. 

So if there’s a once-in-a-decade chance to snag an actual newly-listed blue chip with further growth opportunities in Malaysia, it could be MRDIY. 

Note that IHH was notorious for carrying a ridiculously high  price-to-earning (P/E) ratio for years – the premium was a reflection of their growth aspirations. All things considered, they succeeded in realising that growth.

IHH's financial performance, FY2015-2019, sourced from the 2019 Annual Report


GROWTH + CASH + DIVERSE + RESILIENCE = FAT PREMIUM

For MRDIY, the comparison with another successful growth story – QL Resources – may be warranted. QL attained blue chip status over a span of 4-5 years as its stock more than tripled. It has an intact growth proposition as well as an immensely cash -generative business. 
 
Partly due to these factors, the market continues to assign a large premium on the stock. It has consistently traded at a very high P/E (currently at close to 50 times 2021 earnings based on one estimate). 
 
QL's finely tuned cash machine. From the 2020 Annual Report.

It has these in common with MRDIY, if you really dig the blue sky scenario:

- a growth story

- cash-rich business / fantastic operating cash flows growth

- diversification of business

- resilient/fairly inelastic demand for its products

From MRDIY's 3QFY2020 earnings disclosure

If there's one thing investors go nuts over, it's a blue-chip stock with credible growth avenues. A value stock with growth attached may sound contradictory, but we prefer to look at blue chip status as a reflection of market capitalisation, not so much the stage of the business cycle.

The question essentially boils down to this : how much of a premium is the market willing to assign for a unique, resilient, cash-rich stock during these trying times?


At 50 times FY2019 earnings, MRDIY’s stock would fetch a valuation above RM2.50. 

And if we use UOB’s forward earnings estimates:


As part of this superbull narrative, consider this : the market has been assigning stupid premiums to undeserving companies all year long. It could be due to excess liquidity, excess speculation, the work-from-home boost, and the everything bubble, just to name a few possible reasons.

So how would the market value deserving companies? 


THE LIQUIDITY FACTOR

This is something we had deeply thought about since listing day. The stock is fairly ‘scarce’ in the sense that it is not bogged down by fear-driven selling, except for the first 30 seconds of trading on the day of its debut when it plunged to RM1.50. Buyers at those levels have not stopped smiling since.
 
The 15% free float special allowance is one key reason behind this current scarcity, and sometimes, scarcity brings desirability in ownership. So as shares go up, more buyers come in. The resulting demand then pushes prices higher in a virtuous cycle. 

This relative lack of liquidity in the shares is further exacerbated by locked-in shares held by controlling investors, none of whom would be keen to sell anytime soon. Not only are they riding the current gains, they just recently cashed out, remember? 

For clarity, Bee Family Ltd’s share sale moratorium is six months, Hyptis/Creador is six months (or earlier provided there’s written consent by the joint bookrunners), and Premium Alphabet is three months (or earlier if the same condition was met). 
 
From MRDIY's prospectus

In simple terms, look at this as a liquidity timebomb, in the implausible case that a flood of selling hits the market by these fellas once the share sale moratorium is lifted. That’s about three to six months from now. 

For the hero uncles and Bursa's eternal optimists, there is ample time for upside fluctuations. 
 
At present, as evidenced by the buy-sell queues comprising just a few thousand lots at a time, the stock has appealing liquidity characteristics, in our view. 
 
Look at it this way : 

Scarcity due to low-free float + market chasing the stock  = shares already up 40%

If sentiment remains positive, it could rally further. In an upside scenario, the next feasible target price is anywhere between 2.10 and 2.50, if you really want to stretch it. 

POST-PANDEMIC UPSIDE GOODNESS?

Timing-wise, it can be argued that MRDIY has not reached market saturation upon listing. Perhaps there are several more years until it’s no longer plausible to open DIY stores (by which time they would have a large stable of MR Dollar stores). 

Perhaps’s not listing at saturation point; it’s got that growth story going on, and the company is betting its future on this. As we have already argued, MR Dollar is the real growth driver going forward.
 
This particular point is of course what the promoters wanted people to believe. But as a public-listed entity, there may be some fuel left in the tank.

And lastly, consider this : if the business is doing well to cope with pandemic pressure, imagine how it will do when things normalise eventually?

This future expectation will dictate and determine the valuation of MRDIY's stock. At the moment it's too early to tell whether it will enjoy this scarcity premium indefinitely, but as evidenced by the post-listing rally, some have already plunged in.
 

MAKE UP YOUR OWN MIND

Always analyse all available information before considering a stock. Keep scrutinising the company's fundamentals; they will of course shift in time. 

Consider the stock itself, whether it's technicals interpretation in the chart how it looks from a price-volume analysis standpoint (our specialty).

And just as importantly, consider how the stock would be perceived in the current kind of market environment. 

Between the blue sky and six-feet-under scenarios, the truth lies somewhere in the middle. So be open about changing your mind.

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