Maintain BUY with lower TP of MYR0.61

INNATURE’s 1Q23 results disappointed on weak sales volume and higher store operating expenses. 2Q23 earnings is expected to be seasonally stronger due to festive spending but may moderate in 3Q23 as sales momentum wanes. Key catalyst to topline growth depends on a significant increase in Malaysia’s international tourism. We reduce our FY23E-FY25E earnings estimates by 12%-15% to derive a lower TP of MYR0.61 (based on unchanged 20x FY23 PER, mean).

1Q23 results made up only 12% of FY23E forecasts

INNATURE’s 1Q23 net profit of MYR3m (-34% YoY, -55% QoQ) came in below expectations at only 12% of both ours/consensus full-year earnings estimates. The shortfall was attributed to lower-than-expected sales along with higher operating expenses.

Weak sales volume marred topline growth YoY

Despite higher product ASPs (c.7% YoY), 1Q23 revenue fell 4% YoY mainly from a sales volume decline in Malaysia amid: (i) the shorter sales period in the lead up to Chinese New Year, (ii) lower store footfall given the earlier commencement of Ramadan, and (iii) weaker consumer sentiment overall. Group retail sales accounted for 83% of total while digital & remote sales made up the remaining 17% in 1Q23. Pre-tax profit fell by a wider 33% YoY on the back of higher store operating costs (eg. labour) in Malaysia and Vietnam. As it stands, INNATURE has 113 stores and 6 pop-up stores across Malaysia, Vietnam, and Cambodia as at end-Mar 2023.

Cut FY23E-FY25E earnings estimates by 12%-15%

Earnings growth is expected to be seasonally stronger in 2Q23 driven by improved sales during the Hari Raya Aidilfitri celebrations. However, sales momentum may moderate in 3Q23 in the absence of festivity spending. Hence, our FY23E/FY24E/FY25E earnings estimates are lowered by 15%/12%/14% upon imputing for lower SSSG of 0%/4%/4% (from 8%/5%/5%) and higher SG&A expenses as % of revenue in FY23 at 26% (from 25%).

Source: Maybank Research - 26 May 2023