InNature’s 1QFY23 core net profit fell by 29.1% YoY to RM3.1m, on higher operating expenses, staff cost as well as the absence of one-off financial assistance  (RM0.75m) from Natura. Results was below our and consensus estimates,  accounting for 12% of our forecasts. The discrepancy in our numbers was mainly due to the higher-than-expected operating costs. We cut our earnings estimates for  InNature by 7-24% for FY23F-25F, as we raise our margin assumptions to account for the higher operating costs. While consumer sentiment remains weak, we expect demand for The Body Shop (TBS) products to remain resilient, given its positioning and its more affordable price tag as compared to its premium competitors. We maintain our Outperform call with a lower TP of RM0.62 based on 18x FY24F EPS.

• 1QFY23 revenue decreased by 3.9% YoY to RM32.4m, due to the lower sales in Malaysia (-5.2% YoY) and Vietnam (-0.6% YoY) given the challenging retail environment and seasonality factors (Lunar New Year and Tet celebrations)  occurring very soon after the festive year-end season. On the other hand,  Cambodia recorded a top line growth of 10.1% YoY on a new store opening.

• 1QFY23 core net profit declined by 29.1% YoY to RM3.1m, mainly due to  the increase in labour cost, higher operating expenses and absence of one-off financial assistance of RM0.75m from Natura. This had resulted in a decrease  in InNature’s operating profit margin to 10.4% (1QFY22: 17.7%). However,  InNature’s GP margin expanded by 2.8ppts YoY to 69.4%, attributable to the  price adjustments in FY22. To recap, InNature raised its ASP by c.7% in FY22.

• Outlook. We are still positive on InNature’s future prospects, driven by resilient  demand for beauty products, new store openings and a potential improvement in profit margins. We foresee demand for TBS products to remain healthy despite the rising inflationary pressure given its more affordable price tag as  compared to the other large ticket items. We are also expecting an uptick in  InNature’s margins, due to InNature’s cost pass-through strategy and favorable tariffs between Vietnam and UK (which is estimated to reduce  InNature’s COGS by c.4%). Given the challenging retail environment, we understand that InNature had scaled down on its store opening targets to c.4-6  in FY23, in less represented areas to further expand its customer base.

Source: PublicInvest Research - 26 May 2023