THG, and the artwork of expectation administration | USAEMALL.com

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September 16 at 10.28pm:

Demerger! Exciting! It’s not so long since SoftBank put a $6.3bn valuation on Ingenuity, and THG’s market cap at yesterday’s close was £850mn, so on a sum of the parts basis . . . ah, wait . . .

As a simplified wellness and beauty brand owner, THG’s board is said to believe that it would also be an easier stock for potential investors to understand.

The prospective demerger of Ingenuity would probably see the technology and logistics division become a privately held, rather than listed, company, reflecting the difficult time that capital-hungry tech stocks have had on the London market.

Oh, right. It’s one of those demergers where an asset currently owned by shareholders is “demerged” into private ownership. The word for this is usually “disposal”, but potato/potato.

Still! Possibly probably great news for THG’s long-suffering shareholders! And even though the company has a habit of bundling together jam-tomorrow strategic announcements with profit warnings, it surely won’t . . . 

overall we expect [FY24] to be towards the lower end of the analyst consensus EBITDA range

Oh.

Maybe the good and bad news will balance out? Let’s check the brokers, starting with Citi:

FY24 guidance downgraded — Management now expects FY24 adj. EBITDA towards the lower-end of the consensus range, a c.-10% downgrade to current expectations (FY24 company consensus: Sales £2,098m, Adj. EBITDA £148m, range £133.8m-£156.5m; Citi FY24e: Sales £2,067m, Adj. EBITDA £147m). Management has moved from expecting FCF progression YoY, to having broadly unchanged Net Debt YoY despite a material c.£60m working capital inflow expected (Citi FY24e FCF: £16m vs. breakeven during FY23).

Implications — We expect a materially negative share price reaction to this update given the scale of the 1H24 adj. EBITDA miss, the FY24e adj. EBITDA guide down, and the scale back of cash flow generation expectations.

Oh.

How about Panmure?

THG does not do things simply – three key points to discuss. One positive, one negative and one with too many unknowns but potentially has significant positive upside. (1) Transfer to the equity shares (commercial companies) known as ESCC on the official list for inclusion in Dec’24 index review, (2) Interim results for HY’24, and (3) Option to demerge THG Ingenuity. What we think of each point: (1) should drive interest from passive and tracker funds – net positive, (2) Interims are disappointing with Nutrition profitability much softer than expected and Beauty growth slowing despite a favourable market backdrop. EBITDA guidance is now for the bottom of the range, so we cut by 14%. (3) Removing a business unit that has “clouded” the Plc equity value should focus investor’s minds on SOTP which equates to >120% upside. However, 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. We believe FCF 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.

Oh.

“Potentially very good news” though! Does that mean the shares might be on a recovery path to . . . .

Oh.

The inclusion of this thing to tracker and passive funds may not be a net positive for everyone.