Maintain HOLD with a lower TP of MYR0.23

INNATURE faces a challenging outlook. Sequential earnings may remain subdued with inflationary pressures hindering sales recovery in its countries of operations. Hence, we cut FY24E-FY26E earnings by 29% to 34%. We also lower our TP to MYR0.23 (-7sen) based on unchanged 16x FY25E PER, -1SD to mean. Risk-reward is balanced at current level with the stock trading at 18x 12M forward PER; maintain HOLD.

1H24 net profit fell 21% YoY

2Q24 net profit of MYR1.5m (-19% YoY, -38% QoQ) brought 1H24 net profit to MYR3.8m (-21% YoY), reflecting only 36% of both our and consensus full- year earnings estimates. Weak sales volume and higher-than-expected operating costs attributed to the earnings underperformance. No dividend has been declared YTD (1H23: Nil).

Weaker sales in Malaysia, Vietnam & Cambodia

INNATURE’s 2Q24 revenue declined 7% YoY given lower sales in Malaysia (-6% YoY), Vietnam (-13% YoY), and Cambodia (-19% YoY) as inflationary pressures continue to mar consumer spending. 2Q24 group SSSG fell -9.4% YoY. Pre-tax profit fell by a wider -19% YoY due to weaker gross profit margin (-1.4 ppts YoY) from unfavourable FX and higher advertising & promotional expenses. QoQ, the increase in Malaysia sales (+5% QoQ) from Hari Raya Aidilfitri festive spending was offset by weaker sales in Vietnam (-20% YoY) and Cambodia (-11% QoQ). Gross profit margin also fell -1.3 ppts QoQ.

Revised forward earnings estimates

Our FY24E/FY25E/FY26E earnings are cut by -34%/-29%/-31% upon imputing for lower SSSG of -10%/+3%/+3% (from +5% p.a. previously). We expect sequential earnings to remain weak before consumer spending picks up during the year-end Christmas and school holiday period. Based on channel checks, INNATURE has raised product prices in 3Q24 but we are unsure of the quantum of adjustment at this juncture. INNATURE has a total of 119 stores (incl. 5 pop-up stores) as at end-Jun 2024.

Source: Maybank Research - 28 Aug 2024