Wednesday 06 Dec 2023
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This article first appeared in The Edge Financial Daily on February 3, 2020

KUALA LUMPUR: The valuations demanded by InNature Bhd, the company holding the exclusive trading and distribution licence for The Body Shop (TBS) products, is rather fair, considering the decent return on equity (ROE) achieved by the company.

The company, which launched its initial public offering (IPO) prospectus last week, intends to raise RM50.37 million at issue price of 68 sen per share.

“In terms of valuation it is considered quite fair, so there should be some upside to it. The company is valued at trailing PE (price-earnings) ratio is about 13 times, which is quite fair for a retailer giving a ROE over 20%,” said TA Securities analyst Jeff Lye.

For comparison, Esthetics International Group Bhd, which is also involved in the distribution of cosmetic products, is trading at a PE of 17.18 times with a trailing 12-month ROE of 4.28%.

TA Securities values the company at 15 times of the company’s forecasted FY20 earnings per share, giving a fair value of 78 sen per share, translating to a 14.7% upside to InNature’s IPO price of 68 sen.

Other listed retail companies such as Padini Holdings Bhd, Focus Point Holdings Bhd and Bonia Corp Bhd are trading at PEs of 13.6 times, 11.4 times and 8.39 times respectively.

InNature has the exclusive rights to distribute TBS products through its subsidiaries Rampai-Niaga Sdn Bhd in the home market, TBS Vietnam Co Ltd in Vietnam and Green Cosmetics (Cambodia) Co Ltd in Cambodia. InNature has been running the franchise in Malaysia since 1984 and later expanded into Vietnam. It expanded into Cambodia late last year, making it the third country InNature has its presence.

“Future growth would probably be coming from the Indochina region, particularly Vietnam at this juncture, as TBS in Malaysia has very much matured. There are about 90 outlets now in Malaysia, so Malaysia seems very saturated,” said Lye.

“There are many listed companies like InNature which operate franchises. Branding-wise, it would be great if these companies have their own brand, but there are no listed players with a substantial Malaysian-made brand.

“EIG, for example, owns AsterSpring and they also distribute international brands as well such as Dermalogica,” said the analyst.

Currently the company has 34 points of sale in Vietnam, comprising mall and high-street outlets.

For the financial year ended Dec 31, 2018, its Vietnam operations accounted for 11.4% of its revenue, while the Malaysian business accounted for the remaining chunk of revenue.

Out of the total proceeds to be raised, InNature has earmarked RM27.3 million or 54% of the funds for capital expenditure (capex) purposes, out of which RM14.5 million will be used for the opening of new outlets in Malaysia, Vietnam and Cambodia.

The company intends to open six new points-of-sale in Malaysia, 18 in Vietnam and five in Cambodia.

InNature is also expanding its brand portfolio with the addition of the Natura line of products, following an agreement signed in November last year with Natura Cosmeticos S.A., which owns The Body Shop International.

Currently, the Natura business is operated through an e-commerce website and one pop-up store.

The company is currently finalising the terms of the definitive agreements with Natura Cosmeticos and expects to ink the agreements after its listing exercise.

“We believe this represents a catalyst for growth to the group as it expands InNature’s business portfolio while also enabling diversification.

“We expect InNature to operate two Natura points-of-sales in FY20 and another two in FY21 as a physical place to showcase its products, while onboarding users to Natura’s software applications to grow its social commerce networks,” said Lye.

Meanwhile, he noted InNature’s lack of control over brand value as a risk for the company, given that it is not the brand owner of TBS and Natura.

Some analysts noted that in the home market, competition is intensifying in the market segment that InNature is serving as more brands are entering the market over time.

TA Securities estimates the group to record earnings of RM34.4 million for FY19, RM36.6 million in FY20 and RM41 million for FY21, and expects the accelerated growth rate in the latter years to be supported by new points-of-sales in Vietnam and Malaysia, as well as improving brand penetration for TBS in Cambodia and Natura in Malaysia.

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