InNature Bhd (InNature), The Body Shop® (TBS) retailer group, is seeking listing on the Main Market on 20th Feb 2020, raising RM50.4m at a market cap of RM480.0m, with the bulk of the proceeds allocated for business expansion especially for the Vietnam market and new Natura brand. We expect the expansion plan to incur start-up costs which will erode its nearterm earnings margin, while SSSG will remain under pressure from intensifying competition. Hence, the stock is Not Rated with a fair value of RM0.720, based on 15x FY20E EPS.

The Body Shop® (TBS) & Natura. InNature Bhd (InNature) is primarily involved in retailing and distributing The Body Shop® (TBS) brand products i.e. skin care, body care, hair care and make-up products. Through its subsidiaries, the company holds TBS franchises in Malaysia (89 stores), Vietnam (34 stores) and Cambodia (1 stores). TBS is the leading mono-brand beauty retailer, with an 11% market share in Malaysia with the highest number of physical point-of-sale (POS), and it is scaling up its market share in Vietnam to 3.5%. InNature recently expanded its brand portfolio by introducing NATURA by Natura Cosmeticos (Brazilian global personal care cosmetic group), which is focussed more on direct selling compared to TBS through Natura’s social e-commerce website (new business model) and a pop-up store, with the definitive agreement expected to be signed after the listing.

Expansion path, Vietnam market as the second base? InNature will continue to expand its footprint with 57% of the IPO proceeds (RM28.9m) to be used to further grow InNature’s TBS business with RM14.5m allotted for 29 new TBS point-of-sales over the next few years (Malaysia: 6; Vietnam: 18; Cambodia: 5) and RM8.4m set for renovations of 21 existing point-of-sales. Note that historical cost of opening new TBS point-of-sales is c.RM500k per unit. Vietnam market is seen as at the epicentre of a second base for its fastest growing retail market in Southeast Asia (>RM108bn annual industry revenue) especially with the growth of middle-income class (income-per-capita at CAGR of 14.8%) and increased spending power from women in the workforce (54.1% of the population in 2018). Cambodia also represents a new market for InNature as it has only been awarded the franchise right in 2018. On the other hand, Innature will be looking at improving the multichannel customer experience (online and offline) to drive SSSG and assimilating its business into the growing e-commerce market.

New ventures, Natura to dampen near-term earnings. We expect InNature to incur start-up costs from the addition of Natura business line which will erode its near-term earnings margin and same-stores-sales growth (SSSG) before reaching sustainable contribution, especially with the 1% sales royalty fee to its principal as a part of the franchising agreement. Note that InNature plan to utilise 30% of the IPO proceeds (RM15.1m) to nurture the Natura Brand in Malaysia. InNature plans to open 6 Natura points- of-sales over a period of 3 years with estimated cost of c.800k/store, more than TBS as Natura store requires bigger space for showroom and retail sales. It recently opened a Natura pop-up store in Sunway Pyramid as an introduction before going into definitive agreement. Nevertheless, we believe the Natura line will act as a catalyst for InNature to propel its products line on bigger scale especially on its ecommerce side over the longer term.

NOT RATED with fair value of RM0.72. All in, we are forecasting InNature to register a core net profit of RM31.9m (-10% YoY) and RM33.9m (+6% YoY) for FY19 and FY20. Note that, InNature sales is affected by seasonality factor in the order of Hari Raya Aidilfitri, Christmas & Year-End, School Holidays and Chinese New Year. Our fair value of RM0.72 is based on 15x FY20E EPS, at a discount of 23% to local peers’ average PER of 19.6x due to its small market cap and gloomy near-term earnings growth prospects, but comparable with our ascribed valuation of Padini (OP; TP: RM4.00 based on 15x FY20 EPS), competing in the same middle-income consumer market as well as stores placement in similar strategic locations. In view of limited upside potential, InNature is a Not Rated stock. Risks to our call include lower-than-expected sales and margin.

Source: Kenanga Research - 5 Feb 2020