This article first appeared in The Edge Malaysia Weekly on February 13, 2023 - February 19, 2023

MAIN Market-listed InNature Bhd, which operates The Body Shop (TBS) stores in Malaysia, Vietnam and Cambodia, will embark on a more aggressive expansion plan this year as it looks to ride a more favourable operating environment in the aftermath of the Covid-19 pandemic.

It is also positioning for a stronger comeback in foreign tourist arrivals, a market that typically makes up about 15% of its revenue.

“We are starting 2023 off in pretty good shape, with a clean inventory — we don’t have to do as much [stock clearance] as we did in 2022 — and we have our [expansion] plans in place as well as new launches. Hence, we are quite bullish. All the housekeeping has already been done and now we can actually focus on driving growth in the business,” managing director Datin Mina Cheah-Foong tells The Edge in a telephone interview.

As at Dec 31 last year, the group had 114 stores, of which 73 were in Malaysia, 38 in Vietnam and three in Cambodia. This year, it is looking to open as many as 12 stores compared with five last year.

“In Malaysia alone, we’re looking at four to five locations and, in Vietnam too, four to five. In Cambodia, we’re looking to open one to two stores. So, in total, we’re looking at a minimum of nine and maximum of 12 new stores this year, versus five last year,” Cheah-Foong shares.

Most of the TBS stores are located in shopping malls.

One of the confirmed key store openings in Malaysia is at the upcoming The Exchange TRX in Kuala Lumpur.

There could also be one at the Kuala Lumpur International Airport (KLIA). Late last year, InNature submitted a bid to the airport operator, Malaysia Airports Holdings Bhd (MAHB), seeking a prime location in the satellite building of KLIA in anticipation of stronger tourist arrivals.

“We are hoping to be able to secure a prime location in KLIA. They (MAHB) put out a tender and we submitted our bid. Hopefully, we’ll hear back from them by the end of this quarter,” says Cheah-Foong.

She clarifies, however, that InNature’s aggressive store openings this year are not entirely predicated on the expectation of higher tourist arrivals.

“We had closed down 13 or 14 stores since 2019, and some were opportunistic closures because we see traffic patterns changing. We want to make sure we relocate and open new stores in the areas where people are shopping, where people prefer to go. So, it’s not just in anticipation of tourists coming,” she explains.

Tourists from China, which reopened its borders on Jan 8, have yet to return to Malaysia in a big way, she points out. “Based on all the travel-related surveys out there, they appear to favour other markets such as Vietnam, Bali, Phuket and Singapore.”

Nevertheless, InNature’s business in Cambodia appears to be a strong beneficiary of Chinese tourism as January sales is understood to have expanded at a double-digit pace from a year earlier. All three TBS stores there are located in Phnom Penh.

“The [reopening of China] has been good news for us in Cambodia, less so for Vietnam because it is still quite restrictive [in terms of travel requirements]. That’s why we’re looking to expand beyond Phnom Penh, to Sihanoukville and Siem Reap,” says Cheah-Foong.

Despite expectations of a slower economy this year, Cheah-Foong sees demand for TBS products holding up well. This is, in part, due to consumers increasingly having a preference for ethically and sustainably-produced products.

“I believe our products are a staple. People need to use their shampoo, face creams and perfumes … they may switch to a cheaper or more expensive brand, but they will continue buying [from us]. The reason we’re confident is that, since Covid-19 hit, it has raised people’s desire for simplicity and for the natural, healthy and organic — basically, there’s more conscientious and conscious consumption. And, I think, TBS is very well placed to ride this wave,” she says.

She says there are no plans to raise prices, apart from ongoing efforts since last year to hike prices for repackaged and new products. According to CGS-CIMB Research, the company has progressively hiked product prices by about 15% on average via new product launches since the fourth quarter of 2021.

“We are quite conscious that some people are experiencing pains from inflation, so we are not anticipating big price movements. And because we are starting 2023 with a clean inventory, we don’t have to do as much [stock] clearance as we did in 2022, hence, we expect our margins to remain robust. So, when there are opportunities, we will ensure that they are reasons for our customers to continue to shop with us because they are quite price sensitive,” she remarks.

For the first nine months of the financial year ended Dec 31, 2022 (9MFY2022), InNature reported a net profit that had doubled to RM14.71 million from RM7.26 million a year earlier, which was within analysts’ expectations. Revenue improved 23.1% to RM108.58 million. Its 3QFY2022 net profit, at RM4.56 million, expanded 532% from a year earlier but fell 18.8% from the previous quarter.

Analysts see TBS doing better, sequentially, in the final quarter, given that it is historically a strong quarter, with year-end festivities and school holidays driving sales.

InNature is expected to release its full-year results next week.

Cheah-Foong shares that while the company generated strong sales during the recent Christmas and year-end festivities, these were not as good as the year-ago period in 2021 when people were just emerging from prolonged lockdowns.

And, because the Chinese New Year (CNY) fell barely a month after Christmas, sales during that festive period were also not as strong as in the previous year.

“We see this happening every time CNY falls in January. When it’s too close to the previous celebratory event, there is a little bit of [shopper] fatigue,” she remarks.

Nevertheless, she anticipates sales during the upcoming Ramadan and Hari Raya season — which falls in the second quarter — to be better than a year ago.

“Our special gift sets for Ramadan this year are more than three times what we had last year. All in all, yes, we expect 2023 to be a better year for us [in terms of profitability],” she says.

Meanwhile, Cheah-Foong says she is in talks with stock market regulator Bursa Malaysia Securities Bhd on the matter of rectifying a shortfall in InNature’s public shareholding spread.

In a stock exchange filing on Dec 30 last year, the company said Bursa had given it a six-month extension, until March 29, to comply with the spread. As at Dec 20, the public spread stood at 19.157%, below the required minimum of 25%.

According to Cheah-Foong, the shortfall was triggered in September last year when Prudential plc, which had progressively been buying InNature’s shares, emerged as a substantial shareholder with a 5.8% stake.

“Unbeknownst to us, Prudential UK had been buying our stock, and all of a sudden we were informed by our company secretary that they had exceeded the 5% mark. And, because they were buying the shares for themselves [as a private investment] and not as part of a fund, they were no longer considered [as] free float. So that’s the position we found ourselves in,” she explains.

“So, I am actually having some conversations with Bursa as to why this is my problem. I have no control over Prudential’s actions, we are completely separate — so why are their shares considered as non-free float? How can I stop Prudential or any other investment company from buying the company’s shares?

“The other point is, from the get-go, we have positioned ourselves as an ESG (environmental, social and governance) stock. There aren’t that many ESG stocks in the market. So, when someone recognises that and buys into us — I assume Prudential picked us because of our ESG credentials — and we are successful in building this segment of the investor market, why then penalise me? I think it’s actually quite unfair,” she says.

She adds: “I’m in a quandary as to what to do. The obvious thing to do is to sell down my shares. But, I believe in [the potential of] my company, so why should I sell down my shares just to release free float to do this?”

Cheah-Foong, together with her husband Datuk Simon Foong and their two sons, collectively hold 74.84% of InNature through four private companies, namely Etheco Sdn Bhd, BluPlanet Sdn Bhd, Pelagos Sdn Bhd and Primarium Sdn Bhd.

Bloomberg data shows that all four of the analysts who track InNature currently have a “buy” call on the stock, with the average 12-month target price at 69 sen. The counter, which has gained 0.3% over the past one year, closed at 64.5 sen last Friday, giving the company a market capitalisation of RM455.3 million.

CGS-CIMB Research, in a Jan 11 report, upgraded the stock to “add” from “hold” and raised its target price by 25 sen to 80 sen.

“We turn positive on InNature’s outlook, given the demand recovery for personal care products, a better operating environment and its store expansion drive,” it says. It expects the company’s earnings per share to grow at a three-year compound annual growth rate of 27.6% on increased sales, price hikes, lower input costs and a stronger ringgit versus the British pound.

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