Shares in THG have plunged today, as a warning that profits would be at the low end of forecasts took the shine off plans to split the e-commerce giant into two separate companies.
The group revealed this morning it was actively working on a spin-off of its Ingenuity platform.
Its beauty and nutrition divisions would continue to trade on the London Stock Exchange following a demerger of Ingenuity, with the two consumer businesses “highly profitable, cash-generative and capable of paying dividends”, according to a statement from THG.
It is a continuation of the group’s efforts to strengthen its balance sheet and reinvigorate the embattled stock, which has suffered a torrid time in recent years.
“After extensive discussions with shareholders over the past 12 months, THG is progressing options to demerge THG Ingenuity, leaving our highly profitable and cash-generative global beauty and nutrition businesses within THG plc,” said CEO and founder Matthew Moulding.
“The appropriate tax clearances have been received, while the necessary separation work has previously been undertaken.”
However, half-year results for the six months to 30 June, reported separately, warned markets it now expected EBITDA for 2024 to be towards the lower range of analyst consensus.
THG is struggling with fluctuations in the yen in Japan, which is the second biggest market for its Myprotein brand.
The issues contributed to an 11% fall in revenues in the nutrition division in the half, with a major rebrand of Myprotein also causing problems as old branded stock was sold off on promotion.
Group revenues fell 3.6% to £934m in the first half, but pre-tax losses narrowed from £133m a year ago to £118m.
Adjusted EBITDA at the group rose in the half by 3.6% to £48.8m.
Shares in THG sank by 12.4% to 56.3p as investors reacted to the results.
Dan Coatsworth, investment analyst at AJ Bell, questioned if there would be potentially interested buyers for Ingenuity, which helps partners such as Coca-Cola, Nestlé, Kraft Heinz and Holland & Barrett with DTC operations.
“Investors may be wondering if the business is worth significantly more as a standalone entity than bundled in with the broader THG group,” he said.
“There are plenty of unknowns regarding this separation, such as how Ingenuity would be funded without the cashflow from the beauty and nutrition divisions, and whether it would be sold to a third party rather than listed on the stock market.
“THG’s miserable share price chart over the past five years would imply there may not be a big queue to own Ingenuity as a standalone entity, and being sold to a private equity player with deep pockets seems a more logical route.”
Panmure Liberum added that things are “never simple” at THG.
“No detail has been provided on how Ingenuity, which loses significant cash every year, will be funded for the next five or so years as it scales,” analyst Wayne Brown said.
“We believe free cashflow from the plc will not be called on, but this does not mean there won’t be any debt recourse. So it is potentially very good news, but we can’t form a full view until financing questions are answered.”
The move to spin-off Ingenuity would simplify the group, and comes alongside other plans announced this morning to recategorise its shares on the newly reformed premium segment of the London Stock Exchange.
It would enable the shares to be considered for inclusion in the FTSE UK Index Series, which means funds can add the stock to portfolios. THG said it would improve passive investment flows and liquidity.
THG has struggled since a blockbuster £5bn IPO in 2020, with shares collapsing from a peak of 769p to lows of 36p in 2022 thanks to a string of profit warnings and governance issues centred around Moulding’s ‘golden share’, which the founder relinquished in 2021.
In 2022, Moulding turned down an approach from Belerion Capital and King Street Capital Management that valued the group at more than £2bn.
Shares made a partial recovery in 2023 after activist investor built a stake in the company and pushed for a break-up, and global PE firm Apollo explored taking the group private again.
Ultimately, talks between THG and Apollo ended over disagreements on valuation.
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