InNature’s 2QFY23 core net profit fell 70.5% YoY to RM1.7m, as the group continues to be affected by the subdued consumer sentiment and higher operating expenses. Cumulative 1HFY23 results of RM4.8m was below our and consensus estimates, accounting for 24% and 23% of our full-year estimates respectively. The discrepancy in our estimates was mainly due to the higher-than-expected operating costs incurred. In light of the challenging operating environment on lower consumer spending power and higher operating costs, we cut our earnings forecast for FY23- 25F by 20-35%. As such, we downgrade our call on InNature to Neutral with a lower TP of RM0.48 (previously RM0.62) based on 18x FY24F EPS.

• 2QFY23 revenue declined by 14.7% YoY to RM33.7m, as both Malaysia (- 15.1% YoY) and Vietnam (-15% YoY) operations posted lower sales. We attribute the decline in sales to the weaker consumer spending power, given a rising interest rates environment and a higher base effect in 2QFY22. On a QoQ basis, revenue grew by 4.1%, thanks to higher festive spending (Hari Raya celebration).

• 2QFY23 core net profit tumbled by 70.5% YoY to RM1.7m. InNature saw its operating profit margin decreased by 11.8 ppts, dragged by the higher staff costs, IT and travelling expenses. In addition, InNature’s Vietnam operations recorded its second consecutive loss, due to the slower-than-expected recovery and the higher rental expenses.

• Outlook. Given the absence of major festive season in 3QFY23, we are expecting sales to moderate on a QoQ basis before recovering in 4QFY23, on stronger festive spending. We are expecting InNature to post a 38% YoY decline in FY23F earnings, as the operating environment for retailers remains challenging with consumer sentiment being affected by macroeconomic headwinds. In order to remain prudent throughout the tougher operating conditions, InNature is looking to scale down on its store opening plans to c.4 in 2HFY23, while closing down 2 underperforming stores. While near-term challenges persist, we are optimistic on the group’s long-term prospects, underpinned by the greater attention towards beauty and aesthetic appeal and the growing middle-income class.

Source: PublicInvest Research - 28 Aug 2023