- THG has received takeover bid from Apollo
- EBITDA for 2022 meets downgraded guidance
- Slow start to 2023, second half weighting worries hit shares
Online consumer brands group THG (THG) rallied more than 40% yesterday (17 April) after the beauty and nutrition products retailer revealed it has received a takeover bid from private equity giant Apollo Global Management.
Yet shares in the Lookfantastic and Myprotein websites owner tumbled 8% to 88.2p today after THG reported a slower start to trading in 2023.
And while adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) for the year to December 2023 is expected to be in line with consensus estimates, investors were spooked by THG’s warning of a ‘significant weighting’ to the second half of the year.
This implies the retailer has an uphill task in terms of achieving its full year numbers.
Guided by CEO Matthew Moulding, THG delivered adjusted EBITDA in line with downgraded guidance for the year to December 2022 at £64.1 million, a sizeable drop from £161.3 million a year earlier, on group revenue up a modest 2.7% to £2.2 billion.
THG, whose Ingenuity division helps other retailers sell online, also racked up operating losses of almost £500 million last year due to weaker sales and non-recurring costs.
Inflation was a factor in that poor performance, with the company choosing to absorb some of the higher costs it faced to protect and retain customers for the long term.
‘These costs are expected to be partially transitionary in nature and are showing promising signs of abating as we move into 2023’, insisted THG.
SOFT FIRST QUARTER SALES
THG also reported a disappointing 5.6% drop in continuing sales to £457.4 million for the first quarter to March 2023, reflecting the tough market backdrop for online channels and the group’s focus on higher margin sales.
However, Liberum Capital stressed that the exit rate has improved and cost inflation is annualising, which has ‘given confidence on achieving market expectations for FY23 revenue and EBITDA’.
WHAT DID THE CEO SAY?
‘While FY 2022 adjusted EBITDA was not where we planned at the start of the year, this was largely the result of our strategy to minimise the impact of inflation upon our customer base,’ explained Moulding.
‘This investment in their retention, and longer term growth, was the principle driver behind the reduction in gross margin.’
Moulding added: ‘The challenging macro and inflationary environment required decisive action across the business with around £100 million of efficiency savings delivered. A much-improved outlook on many key cost inputs gives us confidence in an improved financial performance as the year progresses.’
EXPERT VIEWS
Liberum Capital, which upgraded its recommendation from ‘hold’ to ‘buy’ and its price target target from 55p to 220p following the Apollo bid news, said the private equity powerhouse’s reported approach ‘brings into light the sum-of-the-parts (SOTP) valuation’ of THG.
‘While there is no certainty a deal will transpire, we highlight just how cheap the shares are,’ said the broker.
‘There is no doubt the shares have been hit hard due to numerous factors and the current market cap, despite yesterday’s circa 40% jump, is still significantly below what our SOTP suggests. If there was no potential deal, then the focus should be on free cash flow where there are now several positive signals.’
Julie Palmer, partner at Begbies Traynor (BEG:AIM), said: ‘THG was a lockdown darling thanks to booming online retail but adjusting to a normalising world has proved a painful process for the business. There are positive signs this year with revenue edging up and Apollo may have recognised this in its search to bag a bargain.’
Palmer added: ‘THG founder Matt Moulding has made no secret of his dislike of life as a listed business and the controls it brings. Should Apollo’s approach turn into a firm offer, then it could be a relief not only for him, but also THG’s long-suffering shareholders.’
