THG deal talk tarts up its troubles

It should be no surprise that a beauty business is a dab hand at putting a good face on things.

Nutrition, beauty and logistics group THG’s cut to its profit margin outlook for this year came with something to pretty it up: the confirmation that it had received “indicative proposals from numerous parties” to buy the business, none of which had been deemed acceptable.

It’s a little odd that this popped up in the results statement. There have been repeated stories about takeover interest, which might have prompted a clarification if the details were right and the situation meaningful. Still, despite receiving multiple proposals from some parties, according to chief executive Matt Moulding, the company is “not currently in receipt of any approaches”.

It did smear lipstick on what might otherwise have been a slightly drab results day for THG. In January, when it cut its guidance for ebitda margins for 2021, to 7.4-7.7 per cent, the stock fell by nearly a tenth.

This time a cut to the margin outlook for 2022, from a similar level to closer to 6 per cent, compared with its medium-term 9-10 per cent guidance, meant a chop to consensus profit forecasts of about a fifth. Thanks to the potential buyers flocking to THG’s door, though, the stock rose by up to 18 per cent.

The shares are volatile, of course, having lost more than 80 per cent of their value in the past year. And the pressure on margins wasn’t entirely unexpected given the inflationary environment. THG says it will take a hit to protect the nation’s bodybuilders from rising whey prices.

The company always seems to have a lot going on. As the shares started to slide last September, it pledged to list its beauty division this year, about which there was no update on Thursday. It is reconsidering its options with the arrival of new chair, Charles Allen.

Then there was the SoftBank deal in March 2021, where the dilution of a $1bn equity raise was gazumped by the free option handed to SoftBank to take a 19.9 per cent stake in Ingenuity, the integrated ecommerce and logistics business that prompted such excitement when the online retailer listed.

The price valued Ingenuity at $6bn (£4.3bn) in terms of enterprise value, and the stock popped. THG’s entire market value is now about £1.4bn. The separation of Ingenuity from the rest of the business should be finished shortly — a prerequisite for the option’s exercise. But it is inconceivable that SoftBank would use it: for a start, the SB Northstar hedge fund unit that did the deal has been wound down within the Japanese conglomerate.

Will takeover hopes find a path to actuality? A business still investing in growth, and expected to be free cash flow negative to the tune of £200mn this year, seems a funny fit for a traditional private equity buyer. Moulding talked about being focused on the “best environment” for the business. That (apparently) did not refer to public versus private ownership. But it will hardly damp speculation that he might like to escape the hordes of marauding short sellers he blames for the stock’s travails.

It wasn’t all bad news. Guidance for sales growth was unchanged, at 22 to 25 per cent, as was revenue guidance of £108mn to £112mn for Ingenuity Commerce, the most prized bit of its empire.

That leaves much work to do. First-quarter revenue growth of 16 per cent (admittedly on a high base in lockdown last year) was boosted by acquisitions, suggesting perhaps 2 per cent organic growth according to Numis. Meanwhile, Ingenuity Commerce’s revenue fell quarter on quarter to £11.8mn, as did the annual run-rate revenue THG provides at £51mn, something that doesn’t seem to have happened in the past three years. The company said its client growth and pipeline gave it confidence in its outlook.

Given the translation rate of THG talk to reality, and an undoubtedly difficult operating environment, some investors (and perhaps buyers) might want to see those hopes hit the numbers.

For a global leader in end-to-end logistics, THG shows a remarkable ability to underdeliver.