THG, LON:THG, the GBP710m Manchester-based, e-commerce retail company should be promoted to the FTSE250 in the LSE market’s next reshuffle. Promotion is a good thing, as firms joining the two major indices (FTSE100 and FTSE250) get extra benefits as well as the kudos and profile boost, with tracker funds for the FTSE100 and FTSE250 buying their shares, and their liquidity improving.
THG, founded twenty-years ago with a GBP500,000 investment, listed on the London Stock Exchange in 2020 – the biggest IPO on the market for seven years. The share price rose in value by 25% on the first day of trading, generating GBP920m for the company and GBP961m for THG’s owners.
- IPO Radar: ServiceTitan, Shein, Greatland Gold
- Is now a good time to buy TBC Bank shares?
- Pets At Home outlook negative after results
However, the company couldn’t maintain those levels and over the next few years fell in value. THG opened the week (28th October) at 46.757p, down 29.1% over one-year and down 37.4% over the year-to-date.
Strategic and operational review
The company has been undergoing a strategic and operational review and in September concluded that it needs to hive-off, or demerge, THG Ingenuity, the company’s digital commerce solution arm. THG legally separated its business units in 2022. Currently, the main money-makers for the group are THG Beauty and THG Nutrition, which, according to THG’s recent 3Q24 results saw THG Beauty trading up 2.3% year-on-year to GBP254.7m for the quarter and up 5.2% year-to-date at GBP775m.
THG Nutrition had a poor quarter and YTD, down 13.1% y-o-y for the quarter at GBP134.5m and down 11.6% y-o-y YTD at GBP434.3m. However, management said that it was seeing “improving trends” for THG Nutrition “during the quarter”, with THG Nutrition sales recovering from July and improving “steadily through the quarter as the effect from the Myprotein rebrand fades”, reporting that September’s sales being the second-best sales performance of the year, “finishing the month in online growth excluding Asia.”
THG Ingenuity was up 15% y-o-y on the quarter to GBP44m and up 13.5% y-o-y YTD to GBP124.2m. THG Ingenuity onboarded CDS Superstores, trading as Wilko and The Range, and MySales during the quarter.
The plan for the demerger of THG Ingenuity, which management values at around GBP300m, is into a standalone independent private equity vehicle and to make this happen, THG’s management proposed a GBP75m equity raise, split between a placing and subscription and a separate retail offer. Leading the charge was THG’s CEO Matthew Moulding, who proposed taking GBP10m with further support from institutional investors and other key stakeholders, making up around GBP33m.
Hive-off of THG ingenuity to act as a stand-alone
The funds raised, alongside a discrete debt package, would give THG Ingenuity the financial clout to run on a standalone basis and the rationale behind the demerger is for THG to focus on its knitting – concentrating on developing the group as a consumer beauty and nutrition provider. THG Ingenuity sits as an odd bedfellow to the other business units, given it is a ‘services’ business, offering e-commerce solutions, digital marketing, technology and fulfilment capabilities, as opposed to a ‘products’ business, that the other two business units are. The hive-off, management believes, will also improve THG’s group balance sheet, capital expenditure and cashflow profile.
THG Ingenity would then have to survive on its own merits, with no recourse to the THG group post-demerger. Management views THG Ingenuity’s equity value at around GBP100m. However, one would reckon that THG Beauty and THG Nutrition will, for the foreseeable future, remain THG Ingenuity’s biggest customers, but it is hoped that as a standalone business, with its own management and strategic plan that THG Ingenuity will start to win customers in the wider e-commerce market.
As a collective, THG Beauty and THG Nutrition generated sales of GBP1.9bn in FY23, had adjusted earnings of around GBP100m and free cashflow of around GBP75m. Should THG have demerged THG Ingenuity, management believes capex for FY23 would have fallen by GBP92m to around GBP35m. A significant proportion of THG’s group lease liabilities will be transferred to the new private company, although the group’s debt facilities will stay with the listed entity.
Positive market appetite
THG concluded its placement on 11th October, which was oversubscribed and uprated to GBP95.4m to accommodate a raft of new shareholders and increased appetite from existing investors. New shareholders included the Frasers Group LON:FRAS, which THG had an ongoing existing partnership with, subscribing to the tune of GBP10m. Retail investors added another GBP5.4m to the pot.
Although THG has not yet nailed-down a date for the THG Ingenuity demerger, it now seems to have the green light to proceed. Whether THG Ingenuity becomes a game changer, or is just a way of THG’s management getting a cash-draining outcast off the books remains to be seen.
