This article first appeared in The Edge Malaysia Weekly on May 27, 2024 - June 2, 2024

InNature Bhd (KL: INNATURE)’s planned diversification into the food and beverage (F&B) business in Asia, via the Burger & Lobster (B&L) restaurant chain, is aimed at mitigating risk amid recent developments in the UK with The Body Shop brand owner, its chief says.

In an interview with The Edge, managing director Datin Mina Cheah-Foong reveals that InNature — the franchisee of The Body Shop business in Malaysia, Vietnam and Cambodia — will continue to look for other diversification opportunities.

“We are open to anything that strengthens InNature’s business prospects and is aligned with our values. We can’t close the door to opportunities,” she says, adding that the group has a preference for cash-generating businesses. 

Cheah-Foong rules out the possibility of getting into any business that would be in direct competition with The Body Shop. “There is a clause in our franchise agreement that explicitly prohibits that. You can always ask permission, but right now, we’re making no attempt to go down that route,” she says.

On May 10, InNature took some by surprise when it announced that it planned to acquire Blu Restaurant Sdn Bhd — a company with exclusive rights to open and operate B&L restaurants in Malaysia (excluding the one in Genting Highlands) — for RM21.25 million in a related-party deal, as part of a diversification plan.

This followed a mid-February move by The Body Shop brand owner, Aurelius, to place The Body Shop business in the UK — the home market — into administration after it filed for bankruptcy, to facilitate a restructuring of the business.

Aurelius, a German private equity firm, had only last November bought The Body Shop International Ltd (TBSI), which owns and operates the business in the UK and many other markets, from Brazilian group Natura & Co for £207 million.

InNature, which derives nearly all its revenue from its The Body Shop business, gets its supply of products from TBSI.

“That we were reliant on a single brand for the entire business of InNature was always identified as a major risk for us — it was listed as one of our risks in our IPO (initial public offering) prospectus — but the likelihood of anything happening was low.

“However, with the sudden sale of The Body Shop by Natura to Aurelius, that likelihood actualised and it became high risk. So, as part of our risk strategy, we took the decision to diversify,” Cheah-Foong says.

She adds: “And now, with the progression of developments in the UK, it has become very clear to us that our strategy to diversify is the correct one, because it helps to safeguard the interests of all our stakeholders.”

However, she is quick to add that InNature has no plan to get out of The Body Shop business.

“We have not lost confidence in The Body Shop. We are still all in,” she assures. The business in Malaysia remains a profitable one for the group despite rising operating costs — a challenge faced by all retailers, she points out.

Last week, the administrators of The Body Shop in the UK, FRP Advisory, said there would be an auction of TBSI’s business and assets in the UK after rescue efforts through a company voluntary arrangement — basically, an arrangement with its creditors, including Aurelius, to settle debt — failed.

According to Cheah-Foong, FRP has already released the bid documents. “They (FRP) are actually going into a sale of the TBSI business, which is part of the administration process, to allow the creditors — being Natura and Aurelius themselves — to be paid back. They expect this whole sale process to finish in four weeks. Just yesterday (May 22), they released the bid documents. So now, they are asking people to put money on the table.”

Attention is now centred on whether Aurelius will make a bid and continue with the business or cash out. News reports out of the UK do not rule it out as a potential bidder.

“Either Aurelius ups the ante or there might be a new buyer emerging for The Body Shop,” Cheah-Foong opines.

Asked about the implications for InNature should there be a new buyer, she says: “You’ll find that customers don’t really notice any difference in their shopping with us. For us, and all the franchisees, it will be business as usual. We’ll just have to work with the new owner. The thing is, we’ve always been very professional operators, and the franchise portion of TBSI’s business is one of their most profitable, therefore, their most valuable. So, we expect business as usual.”

In most Asian markets, as well as the Middle East, the business is run by franchisees.

Meanwhile, Cheah-Foong says InNature’s planned F&B segment will focus purely on B&L given its strong growth prospects. The group has no plan to acquire any other F&B business for now.

Blu Restaurant is currently controlled by Cheah-Foong and her husband Datuk Simon Foong, who is InNature’s chairman, thus making the proposed acquisition a RPT under listing rules. The acquisition is being done at a price-to-earnings multiple of 8.32 times Blu Resturant’s 2023 net profit of RM2.55 million.

For now, it has only one B&L outlet at the Suria KLCC mall that has been in operation since October 2022. 

However, Blu Restaurant recently inked a memorandum of understanding with B&L Operating Ltd — the UK-based brand owner of B&L — to explore a broader relationship that would allow the former to also develop the B&L restaurant business in Cambodia, Taiwan, Macau, Hong Kong and the Philippines.

The MOU includes a right of first refusal to Japan and South Korea, Blu Restaurant said in a recent press release.

Among the key terms of the MOU is an exclusive right to develop and operate the B&L business, including managing and appointing franchisees, over a 15-year period with an option to extend for a further 15 years.

Foong, director of Blu Restaurant, has expressed confidence in the partnership, assuring it would pave the way for a successful venture into vibrant Asian markets.

Blu Restaurant’s expansion into those Asian countries, where there are currently no B&L restaurants apart from pop-ups in Hong Kong, bodes well for Innature given that the former will eventually become a subsidiary. 

Foong says there are already plans to develop a B&L restaurant in Manila and Jakarta. In Malaysia, a second B&L restaurant is being considered in Johor Bahru, he tells The Edge.

InNature will seek shareholder approval for the acquisition at an extraordinary general meeting tentatively on June 27. Cheah-Foong, her husband and their two sons collectively hold about 70.6% of InNature via four private companies.  They will refrain from voting on that in the EGM. 

Maybank Investment Bank (IB) Research holds a positive view of InNature’s plan to acquire the B&L business. “The group’s diversification into another revenue stream is a welcomed risk mitigation strategy given recent operational challenges facing The Body Shop’s global franchise. [We make] no change to our earnings estimates pending completion of the acquisition,” it says in a May 12 report where it kept its “buy” call on the stock and target price of 34 sen.

Bloomberg data shows that of three research houses that track the stock, only Maybank IB Research had a “buy”, with the other two having a “hold” call. The average 12-month target price was 33 sen, which suggests further upside from its closing price of 29.5 sen on May 24, which gave the company a market value of RM208.2 million.

The stock, which has shed 44% over the last 12 months, has been listless since the mid-February developments with The Body Shop in the UK. 

After its listing on the Main Market in February 2020, InNature’s annual net profit peaked at RM21.31 million in 2022 before falling to RM10.5 million last year. It is expected to announce its 1QFY2024 results on May 27. 

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