D/G to HOLD with a lower TP of MYR0.50

2Q23 results fell below our/consensus expectations on lower-than- expected sales volume and inflated operating expenses. INNATURE’s outlook has turned challenging as slowing sales momentum is unable to offset rising store operating costs. Hence, our FY23E-FY25E earnings are cut by 17-51%. Rolling forward valuations, we derive a lower TP of MYR0.50 based on 18x FY24E PER, -1SD to mean (20x PER previously). D/G to HOLD.

1H23 net profit fell -53% YoY

INNATURE’s 2Q23 net profit of MYR1.8m (-68% YoY, -40% QoQ) brought 1H23 net profit to MYR4.8m (-53% YoY), at only 23% of both our and consensus full-year earnings estimates. The shortfall was largely due to lower-than-expected sales volume along with higher-than-expected operating costs. No interim dividend was declared YTD (1H22: 1sen/shr).

Weaker sales in both Malaysia and Vietnam

Despite its price adjustment exercise in 2022, INNATURE’s 2Q23 revenue declined 15% YoY mainly due to weaker sales volume in Malaysia and Vietnam by -15% YoY respectively, led by subdued consumer sentiment and product supply disruptions, we suspect. 2Q23 gross profit margin increased by +1.5ppts YoY, but pre-tax profit fell by a larger 66% YoY due to higher store operating costs from increases in labour, IT and travelling expenses. QoQ, revenue grew 4% led by stronger sales during the Hari Raya Aidilfitri festive season.

Cut FY23E-FY25E earnings estimates by 17%-51%

Our FY23E/FY24E/FY25E earnings estimates are lowered by 51%/17%/18% upon adjusting for lower SSSG of -10%/+5%/+5% (from 0%/+4%/+4%) and higher operating expenses as a % of revenue at 76%/69%/69% (from 69%/68%/68%). We believe that sequential earnings are likely to remain soft given ongoing cautious consumer spending trends until the year-end festivities and school holidays nudge sales momentum upwards in 4Q. [Prior:BUY]

Source: Maybank Research - 27 Aug 2023