Expecting slower earnings recovery ahead
- We are positive on the disposal of its Natura segment, which was lossmaking between FY19 and FY21, to improve its earnings profile.
- However, improved profitability may be offset by potentially lower sales and margin contraction from 2H22F on a weaker consumer outlook.
- Retain Hold with an unchanged TP of RM0.55 (16.2x CY23F P/E).
Disposal of Natura segment could enhance earnings profile
InNature announced the completion of the disposal of its Natura business segment (making up <1.0% to 2.2% of total revenue between FY19 and 1HFY22; Fig 1) on 3 Oct 22. Thus, we now impute lower sales but higher operating margin assumptions in our financial forecasts given that Natura has been in the red with losses of RM1.1m-RM3.0m (FY19- 21). While Natura’s sale could improve profitability, it might not be enough to offset the potentially weaker sales momentum and margin contraction from the existing business due to weaker consumer discretionary spending power and sluggish tourist arrivals. As such, we cut our FY22-24F revenue forecasts by 0.5-1.8% and lower our core net profit estimates by 0.7-1.7%.
Could experience a contraction in GP margin should recession hit
Based on our historical checks, InNature has remained profitable, albeit with narrowed margins, during past financial crises and virus outbreaks. For instance, the average GP margin declined from c.78.5% (1996-1997) to c.56.3% (Asian Financial Crisis 1998-1999) and to c.60% (SARS outbreak 2003-2004), c.63.4% (Global Financial Crisis 2008) and c.64.4% (peak coronavirus in 2021). In comparison, the average GP margin during the prepandemic period was c.67% between FY17 and FY19. Thus, we believe InNature could experience a decline in GP margins should Malaysia be hit by a recession, though it may not be significant given its current sizeable loyal customer base of c.300k (accounted for 76% of its total revenue in 1H22) as of 30 Jun 22 (c.250k from Malaysia).
High inflation and interest rate hike could dampen sales momentum
While we expect InNature’s sales in 3Q22F to recover yoy due to low base effects and higher footfall post economic reopening, recovery could be gradual, in our view, given the weaker discretionary spending power amid high inflation and interest rate hikes as well as sluggish tourist arrivals. Nevertheless, InNature’s sales and earnings in 3Q22F likely fell on a qoq basis as 3Q is typically a seasonally softer quarter.
Reiterate Hold with an unchanged TP of RM0.55
We cut our FY22-24F EPS by 0.7-1.7% to reflect lower revenue and operating margin assumptions from weaker consumer spending power amid rising interest rates, high inflation and elevated operating costs (i.e. rental, labour and marketing). We retain Hold with a TP of RM0.55 (16.2x CY23F P/E, a 10% discount to CGS-CIMB’s consumer discretionary 10-year mean P/E of 18.0x, to account for the potential risks of weaker consumer sentiment from 2H22F. We believe its share price is supported by decent dividend yields of 3.6% (FY22-24F) and its strong “Love Your Body” membership base.
