Friday 29 Mar 2024
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This article first appeared in The Edge Malaysia Weekly on January 27, 2020 - February 2, 2020

AFTER about 36 years of being in business in Malaysia, The Body Shop — through its holding company InNature Bhd — is set to be listed on Bursa Malaysia’s Main Market next month.

According to Innature managing director Datin Mina Cheah-Foong, the cosmetics and toiletries group, which had been working on a listing since early 2018, will launch its prospectus on Wednesday, with the tentative listing date set for Feb 20. It will fall under the consumer sector on Bursa.

Some may question the timing of InNature’s listing, considering the retail market’s lacklustre growth in recent times. Last month, Retail Group Malaysia (RGB) cut its 2019 sales growth forecast for Malaysia — for the third time — to 3.7% following 3.9% growth in 2018.

Cheah-Foong, however, is unfazed. “Some people advised us to postpone the listing, saying the consumer sector in better times can command valuations of 30 to 40 times PER (price-earnings ratio). We seriously considered [doing so] but then decided not to. You cannot wait — the retail market is dynamic; if it is not one thing, it’s another. We are at the market where it is and there are always opportunities to go. Okay, it may not be so good in Malaysia right now, but it is very good in Vietnam and Cambodia. And that may change with time if you wait. So, these are the cards in my hand and I am going to play them to the best of my ability,” she tells The Edge in an exclusive interview.

InNature has 124 The Body Shop stores in total, 89 of which are in Malaysia. It also operates the business in Vietnam, where it has 34 stores. In November last year, it opened its first store in Cambodia. In Malaysia, InNature is the single largest mono-brand beauty speciality retailer with a market share of 12.3% as at 2017, according to its draft prospectus last July.

Cheah-Foong says the the retail market has been lacklustre for various reasons, including weak consumer sentiment and lower tourist arrivals, as well as intense competition. The rise of e-commece in the retail space has also been challenging for the traditional retail industry. She points out, however, that The Body Shop was the first cosmetic company to tap the e-commerce trend. It launched a dedicated e-commerce website in Malaysia in 2012, and in Vietnam a year later.  These contributed 1.8% of its total sales in Malaysia, and 8.4% of sales in Vietnam, in 2018.

“The thing is, everything goes in cycles. This will be our 36th year in Malaysia — we have been through recessions, calamities like the SARS and Nipah virus, the MH370 crash ... and yet, we have always managed to progress, and always managed to thrive. So this [current market] is a hiccup. My time horizon is very long. So, yes, the retail market was very challenging last year, and there are mixed expectations for this year — some are saying it is going to be good, others are saying it will be bad. But as far as we are concerned, it is a cycle. You just have to manage your business, good or bad,” she says.

RGB, which prepares quarterly sales reports for the Malaysia Retailers Association, forecasts improved sales growth of 4.6% in the country this year.

InNature’s revenue has grown at a compound annual growth rate (CAGR) of 7.4% between the financial years ended Dec 31, 2016 (FY2016) and FY2018, while core net profit — which strips out one-off  items — grew at a CAGR of 13%. Its gross margin in that period was relatively stable at 67%, while core net profit margin was 18%.

The bulk of the group’s sales come from Malaysia.
 

Booming Vietnam

Although the Malaysian retail market may be “a little bit in the doldrums”, InNature takes comfort in the fact that Vietnam’s is “booming”, says Cheah-Foong. The company opened eight stores there last year.

“We have been in Vietnam for 10 years and the country is currently at its inflection point. We needed the time to get to know the market and what the preferences were like. We have a 100% Vietnamese team leading our business there. Vietnam revenue grew at over 30% last year, and in the three years before — between 2016 and 2018 — we grew at a CAGR of 14.1%,” she says. “So, we are not completely reliant on Malaysia for business. But, while Malaysia is a strong, steady revenue growth generator for us, Vietnam is where we are expecting exponential growth.”

InNature ventured into Cambodia three months ago, opening its first store on Nov 2 in Phnom Penh. It has already secured the location for the second store there, which will be opening mid this year, says Cheah-Foong.

“Although Cambodia’s population [of about 16 million] is small, the country has a big tourism industry. We are expecting good things from Cambodia. Just that one store we have there ranks among the top 10 stores in Malaysia in terms of sales,” she shares.

According to its draft prospectus, InNature’s net profit stood at RM45.03 million in FY2018, up 87% from a year earlier, helped by a fair value gain of RM10 million from the disposal of non-cash assets to the owners. Revenue grew 7.3% to RM184.47 million. It has not published its FY2019 numbers yet.

What are the group’s expectations for the next three years? “As a group, we are expecting growth but, obviously, Malaysia will be flattish. There will be revenue growth for sure, but profit growth may slow because we are investing in store openings in Vietnam and Cambodia and building the Natura brand, so there is a gestation period. Historically, the net profit CAGR has been 13%. Looking at the next three years, it might be slightly lower, but there will still be growth,” she says.

InNature has set its sights on expansion, not just within Asean but also beyond. “The listing gives us that sort of stature and profile and the ability to move beyond where we are now,” she says.

Within Asean, Laos is a possibility as it is the only market that has no The Body Shop stores. There are also none in China, but there is a hitch to expanding into that market.

“China is challenging because it still requires animal testing, which is something that we would never do. Since The Body Shop’s inception, during founder Dame Anita Roddick’s days, we have always been against animal testing ... and we are certainly not going to start now. So, as long as there is a possibility that China can take your products off and require you to test on animals, we will not go there,” says Cheah-Foong.

Meanwhile, InNature is also investing in a new beauty brand — Natura — for which it is a distributor. While The Body Shop products are 100% vegetarian, with Natura, the group is going one step further. “Natura is 100% vegan, which is relevant to young people and a growing trend. Natura is an interesting prospect for us because it allows InNature to have a different channel of business. In short, it is direct selling 2.0, [as] Natura will take away all the pain points of direct selling,” says Cheah-Foong.

The group, which obtained its direct selling licence only last month, expects to blaze a trail in the industry by selling the products through the social media network of its agents, or what it refers to as beauty consultants.

“We have only just started and we expect that it is really going to be a disruptor of the direct selling industry. We hope Natura will break even in 2021,” she says.

The Natura brand is owned by Natura Cosmeticos, a Brazilian group that bought the UK-based The Body Shop group in 2017. 

InNature has a pop-up Natura store in Sunway Pyramid mall, but also plans to open flagship showroom stores across major Malaysian cities, starting with Mid Valley Megamall in Kuala Lumpur in July.
 

ESG factor

Some analysts note that in a market of few good options for ESG (environmental, social and governance) investors, InNature could emerge as an obvious option given its strong emphasis on ethical business and tireless campaigns on environmental and social issues. These are key reasons The Body Shop  has stood the test of time and remained appealing to its customers, Cheah-Foong says. About 61% of its loyalty programme members are aged 39 and below.

The group’s campaigns run from saving the tigers in the Belum forest, Temenggor, to climate change.

“Yes, I believe that could set us apart from other companies, and that is what we are working towards. We have to push that agenda. I do not want fund managers to have a situation where they want to invest in ESG-compliant companies ... but have to go abroad to do so. I would like to  stand up, put my hand up and say, ‘I am an ESG-compliant company’,” she says.

In its draft prospectus, InNature said its initial public offering would entail the issuance of 177.27 million shares comprising a public issue of 74.07 million new shares and an offer for sale of 103.20 million existing shares.

Investment banking sources say that the group expects to raise some RM120 million from the IPO. It intends to pay at least 30% of its annual net profit  to shareholders as dividends. “The purpose of our listing is to enable our stakeholders to become shareholders and they will, of course, [expect returns]. We have a stated dividend policy of a minimum 30%, but we want to give more robust dividends than that. That is our ambition,” she says.

Going forward, the group will continue to focus on both the retail stores — it rents space at malls, mainly — and digital channels to sell its products. “There will be fewer new stores, though, maybe two new locations a year (in Malaysia) but we are also going to be looking at relocations and upgrades,” Cheah-Foong says. 
 

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