U/G to BUY; TP tweaked to MYR0.34

The broad retail environment continues to face challenges due to weak consumer sentiment but we nonetheless expect INNATURE to benefit from intermittent boosts in sales during festive seasons. The expected uptick in international tourism in FY24 should also support sales momentum. Note that INNATURE is not operationally affected by The Body Shop UK’s restructuring exercise. Our earnings estimates are tweaked by -1% to -3% on housekeeping, deriving a lower TP of MYR0.34 (16x FY24E PER). With its’ extended share price derating now appearing overdone, we upgrade INNATURE to BUY.

Above expectations

4Q23 net profit of MYR5m (-30% YoY, +334% QoQ) brought FY23 net profit to MYR11m (-51% YoY), accounting for 132%/104% of our/consensus full- year earnings estimates. The earnings beat was mainly due to better operating margins from product mix improvements. A final DPS of 1sen was also declared (FY22: 3sen).

FY23 SSSG: -12.6% YoY

INNATURE’s revenue declined 9% YoY due to the underperformance in Malaysia (-10% YoY), Vietnam (-9% YoY), and Cambodia (-0.1% YoY) which resulted in negative group SSSG of -12.6% YoY. The slowdown in consumer spending amidst living cost inflationary pressures was the main cause of the sales weakness. Higher store operating costs, particularly from rising labour costs resulted in a wider FY23 pre-tax profit decrease of -52% YoY.

Maintaining earnings estimates

Our FY24E/FY25E earnings estimates are tweaked by -3%/-1% on housekeeping after updating FY23 numbers. We also lift DPS estimates to 1sen p.a. (vs. 0.7sen p.a. previously). We expect better quarterly earnings on the back of potential increases in tourism-led sales and stronger festive spending in FY24E. As at end-4Q23, INNATURE has a total of 121 stores (115 retail, 6 pop-up stores) across Malaysia, Vietnam and Cambodia. [Prior:HOLD]

Source: Maybank Research - 29 Feb 2024