Maintain HOLD with lower TP of MYR0.35

3Q23 results fell short led by softer sales volume and compressed margins. Seasonally higher spending during YE festivities may drive in-store sales in 4Q23 but sustainable earnings recovery will continue to be hindered by subdued consumer sentiment. We cut FY23E-FY25E earnings by 22%-24% to derive a lower TP of MYR0.35 (-15sen) based on a lower FY24E PER multiple of 16x (vs. 18x previously) on updated -1SD to mean.

3Q23 results underperformed

INNATURE’s 3Q23 net profit of MYR1m (-77% YoY, -41% QoQ) brought 9M23 net profit to MYR6m (-60% YoY), at just 58%/46% of our/consensus FY23E. Weak sales volume and margin compression mainly led to the earnings shortfall. No dividend was declared for 9M23 (9M22: 1sen/shr).

Lower YoY in all core markets

3Q23 revenue fell 9% YoY given the decrease in sales from an accelerated slowdown in consumer spending and general cost inflationary pressures across Malaysia (-5% YoY), Cambodia (-25% YoY) and Vietnam (-5% YoY). With weaker product mix and fixed store operating costs, group pre-tax profit (PBT) declined by a wider 71% YoY with lower PBT margin by - 11.8ppts YoY.

Cut earnings estimates

Our FY23E/FY24E/FY25E earnings are cut by -24%/-22%/-23% on adjusting for current sales and operating cost run rates. Our DPS estimates are also reduced to 0.3sen/0.7sen/0.7sen (from 3sen p.a.) to reflect its minimum 30% DPR. Although 4Q net profit will be aided by higher seasonal spending, prolonged weak consumer discretionary spending may continue to hinder earning recovery prospects. Potential boost in international tourism sales may be muted in the near-term (tourism historically contributed c.15% to sales pre-pandemic). Separately, we understand that INNATURE has yet to encounter any operational disruption from Natura & Co’s recent disposal of The Body Shop’s global business to private equity group, Aurelius.

Source: Maybank Research - 24 Nov 2023