Expect strong sales recovery from 4QFY21F

■ We turn positive on InNature given its plans to raise prices, which will protect margins, and better-than-expected sales contribution from its omni-channels.
■ We expect InNature to record stronger results from 4QFY21F onwards, driven by the strong recovery in mall traffic in light of upcoming festivities.
■ Upgrade to Add on the grounds of appealing valuations and TP raised to RM0.84 (20x CY23F P/E) as we ascribe an additional 10% ESG premium.

Remains a leading CPC retailer that outperformed the industry

In our view , InNature is one of the few major cosmetics and personal care (CPC) retailers that remained profitable in 2020-2021 (during the Covid-19 pandemic). This can be attributed to its early investments in beefing up its omni-channel distribution system, which helped to shore up sales despite the various lockdowns and store closures, and prudent cost management (i.e. negotiated better rental rebates and shuttered 7 non-performing stores). Accordingly, InNature experienced a smaller decline in revenue than the personal care retail sub-sector (Figure 6).

A potential price hike in FY22F is a positive

InNature said that it plans to increase selling prices in CY22F in view of rising commodity prices and elevated freight costs in a bid to protect margins. This bodes well for sales. Given the strong brand equity of The Body Shop (TBS) and its sizeable loyal customer base (c.273k ‘Love Your Body’ members as of 30 Sep 2021) who are mostly in the middle to high income segment, we believe InNature can pass on the higher input costs with ease as w e estimate that more than 60-70% of sales are made by repeat customers.

Hybrid strategy to drive future growth via physical and remote sales

While consolidating its store network, w e understand that InNature will adopt a more careful approach in store expansion. Note that the group closed 2 stores in Malaysia and opened 1 new store in Vietnam during 4QFY21F (Figure 5). InNature also aims to expand its remote selling channels, which have been instrumental to ensuring profitability (Figures 4, 5). We are positive on this as it could cater to shifting consumer behaviours by offering multiple non-physical purchase options. Meanwhile, we expect the group to post stronger results from 4QFY21F onwards due to: i) strong recovery in mall footfall post reopening on 11 Oct 2021, ii) majority of its store base resuming full operation across its three operating countries, and iii) ability to capitalise on major festive sales.

Upgrade to Add, with a higher TP of RM0.84; a recovery play

With the recent retracement of its share price over the past 3 months from its high of RM0.86 (-24%), we believe that its valuation is attractive (now 16x CY23F P/E, c.11% discount to the weighted average CY23F P/E of small-cap consumer discretionary names of 18x and 29% discount to InNature’s historical average of 22.6x since listing). Our TP is raised to RM0.84 (20x CY23F P/E) as w e ascribe a 10% ESG premium (Figure 7) for InNature as it is a leading ESG play in Malaysia.