Post 4QFY22 briefing, we remain positive on InNature’s future prospects given the better operating environment post Covid-19 pandemic. This is mainly premised on the robust demand for beauty products, new store openings as well as new product launches. Additionally, we foresee an uptick in InNature’s operating margins as the group had managed to pass on its cost via price hikes previously, lower input cost and reduce discounts as well as inventory write-offs. We maintain our earnings forecast for FY23-24F and are expecting InNature to post a 3-year earnings CAGR of 14%. We reiterate our Outperform call on InNature with a higher TP of RM0.73 as we roll forward our valuation base year to 18x FY24F EPS.
- Demand for beauty products to remain robust. We expect demand to remain strong due to its affordable pricing while benefitting from potential down-trading from consumers. The reopening of international borders should further drive sales as historically tourist spending accounts for 15% of InNature’s sales. In addition, we take comfort that despite raising ASP by c.7% throughout FY22, sales volume was not affected with InNature chalking a revenue growth of 13% in FY22. We mainly attribute this to its “Love Your Body” membership which accounts for c.80% of its sales, as it indicates strong customer loyalty. Meanwhile, InNature also intends to roll out new line ups for its fragrance and make-up products.
- Aggressive but strategic store opening plans to drive growth. We understand that InNature is looking to resume its aggressive store opening plans with c.9-12 new stores in FY23 (normal formats or pop-up stores) after closing down c.13-14 stores since FY19. As of FY22, the group has 114 stores. The group plans to open c.4-5 stores Malaysia, c.4-5 in Vietnam and c.1-2 in Cambodia, as compared to 5 in FY22. The new stores will likely be opened in strategic locations, where the group is less represented (beyond Ho Chi Minh city, Hanoi and Phonm Penh). We think that the pop-up stores will be a good indicator for footfall before opening normal format stores within the vicinity should the need arises. The group currently has 3 pop-up stores in Vietnam (contributes c.5% of Vietnam sales) and 1 in Langkawi.
- Potential margin expansion. We foresee InNature’s margins to improve further in FY23F as we believe that the group had successfully passed on the higher input cost through its gradual price hikes. In addition, we understand that the pop-up stores require a smaller capex of c.RM100k (normal format stores c.RM400-500k) and lower rental expense, which we think this should lead to an uptick in operating margins. Furthermore, the recently implemented Free Trade Agreement between Vietnam and UK is estimated to reduce InNature’s cost of purchase by c.4%.
Source: PublicInvest Research - 27 Feb 2023