InNature’s 3QFY23 headline net profit plunged 76.6% YoY to RM1.1m, dragged by the higher operating costs and weaker consumer sentiment especially in Vietnam. After adjusting for forex loss, InNature’s core net profit came in at RM1.3m. Cumulative 9MFY23 results of RM6.1m was below our and consensus estimates, accounting for 48% of our estimates. The discrepancy in our estimates was mainly attributable to the higher-than-expected operating costs. As such, we slash our estimates for FY23-25F by an average of 20%, to account for the softer consumer sentiment and higher operating costs. We maintain our Neutral call on InNature with a lower TP of RM0.38 based on 18x FY24F EPS following our earnings adjustment.

• 3QFY23 revenue decreased by 9.2% YoY to RM32.0m, mainly attributed to a sharp decline in Vietnam sales (-25.2% YoY) given the challenging operating environment. The drop in sales was likely due to increasing interest rates, impacting consumer sentiment. On a QoQ basis, InNature saw its revenue dipping 5.1% due to the absence of festivities and decreasing seasonal demand, as compared to the preceding quarter (2QFY23: RM33.7m).

• 3QFY23 core net profit declined by 70.1% YoY to RM1.3m, largely due to its operations in Vietnam, which recorded a RM774k loss as a result of declining topline, higher operating expenses as well as write-off of fixed assets for closed stores. We gather that the group had closed down 2 stores in Vietnam and is looking to open 1 new store in Malaysia by 4QFY23. As such, InNature saw its profit margin decreased by 9.6 ppts to 3.3% (3QFY22: 12.9%). Its Malaysia and Cambodia operations on the other hand, were profitable in the third quarter.

• Outlook. We believe that the group will post better results in 4QFY23, as we foresee an uptick in consumer spending given the year ending festive season. However, we remain wary on InNature’s future prospects as consumer spending power continues to be affected by macroeconomic headwinds especially for its operations in Vietnam. We do not discount the possibility of price hikes in the future to sustain its profit margin as the price adjustments that was completed in FY22 were unable to mitigate the impact from the higher operating costs. Nevertheless, we think that the group’s long-term outlook is still positive, driven the greater awareness for beauty and aesthetic appeal whilst being supported by the growing middle class.

Source: PublicInvest Research - 24 Nov 2023