TP of MYR0.50; maintain HOLD

INNATURE faces a challenging outlook whereby sales volume trends are declining while store operating costs from labour have steadily increased. Although management has strategies in place to tackle elevated costs, we believe that meaningful earnings recovery will only return when domestic consumer sentiment improves or inbound tourism recovers. Our earnings estimates, HOLD call and TP of MYR0.50 (based on 18x FY24E PER, -1SD to mean) are unchanged.

Sales momentum might continue to be suppressed

At INNATURE’s 2Q23 briefing, management shared that sales trends declined in Malaysia and Vietnam with negative group SSSG of -12% YoY in 1H23, led by cost inflationary pressures in both countries alongside continued supply chain disruptions and a higher base effect from 2022 in Malaysia. Sales trajectory in sequential quarters are also expected to remain soft as consumer spending turns cautious.

Expecting higher marketing expenses

We expect INNATURE to emphasis on its marketing and promotional efforts in the coming quarters in order to drive higher sales volume within its existing and new customer base. A new marketing system is also being implemented internally to improve its customer outreach, which would lift operating expenses in the next two quarters, we understand.

Cost management is a priority going forward

As consumer sentiment remains weak, INNATURE will look to manage costs more stringently in order to sustain its current level of net profit margins. We also do not discount the possibility of further product price hikes if store operating costs continue to rise. On store opening strategies, the group plans to close two underperforming stores in Malaysia while store expansions in Vietnam may be put on hold due to high rental expenses. Instead, store kiosk formats will be preferred in both Malaysia and Vietnam given its lower capex requirements.

Source: Maybank Research - 29 Aug 2023