Shares in THG [THG] have tumbled 74% this year as investor sentiment has turned against the former tech darling. The Manchester-based company’s stock sank to a 52-week low of 50.72p during intraday trading on 5 September, representing a more than 90% decline from its closing price of 654p on 3 September last year.
The past 12 months have seen a spectacular fall from grace for the health, beauty and nutrition retailer, which was once a UK tech unicorn – a privately held start-up valued at more than $1bn.
The e-commerce company, formerly known as The Hut Group, listed in London to much fanfare on 16 September 2020, raising £920m in the city’s biggest IPO since Royal Mail in 2013. On the day of the floatation, strong investor demand inflated the shares to a high of 658p, 32% above the initial 500p listing price that valued the company at £5.4bn.
THG – which in addition to selling nutrition and beauty products online also markets its technology and logistics expertise to other retailers – was billed as a British success story. As James Gard wrote in an article for Morningstar in November 2021, “IPO investors were hoping that THG would become the UK’s Shopify, the Canadian e-commerce giant now worth nearly $200 billion, whose shares have risen 5,000% since its float in May 2015”. But things didn’t quite work out that way, as concerns over THG’s governance and strategy have dragged the share price sharply lower since September 2021.
Ahead of THG’s half-year results on Thursday, we investigate whether the stock can bulk up to its former weight.
What went wrong for THG?
At first, investors in THG were not deterred by the company’s unusual corporate governance setup, which saw founder Matthew Moulding occupy the roles of both chairman and chief executive, putting the company at odds with a 2018 UK code that called for a separation of the two jobs. Furthermore, Moulding held a “golden share” that allowed him to veto takeover bids. These governance arrangements meant that the company had to pursue a “standard” rather than “premium” listing on the London Stock Exchange, making THG shares ineligible for inclusion in FTSE indices. At the time of THG’s listing, Phil Drury at Citigroup, the joint co-ordinator of the IPO, told the Financial Times that investors were “comfortable with founders using such devices to maintain a degree of control”.
However, roughly a year after the dust had settled on the IPO, these governance arrangements and signs that THG may have become overvalued began to spook large investors.
On 16 September THG reported its half-year results, which showed that the company’s technology and logistics platform, Ingenuity, notched up revenue of just £85.8m, forcing investors to question the $8bn valuation of the unit that had been implied by an agreement that gave Japanese tech firm SoftBank the option to buy a near 20% stake in the division for $1.6bn.
Then, on 12 October 2021, THG’s shares fell 35% in a single day after a strategy presentation by Moulding created unease among professional investors. In response, the company promised to overhaul its corporate governance structures and Moulding vowed to relinquish his golden share.
However, those promises seem to have been deemed insufficient by BlackRock, THG’s largest institutional investor at the time. On 2 November 2021, Blackrock halved its roughly 10% stake in the company, sending THG’s shares down 9% that day to a new low of 197.40p.
Analysts remain optimistic
Although revenue growth and a governance overhaul have failed to prevent the THG share price’s 74% slide this year, analysts continue to hold a positive view on the company amid bid interest.
To address investors’ governance concerns, in March THG appointed former ITV boss Charles Allen as non-executive chair, freeing Moulding to focus on his role as CEO. Meanwhile, the company’s most recent annual report, released in May, showed that group revenues increased 35% to £2.18bn in 2021, with solid growth across all divisions. Adjusted EBITDA rose 7% year-on-year to £161m.
Later in May, THG shares rose by a quarter after the company revealed that it had rejected a £2bn bid from investment companies Belerion Capital and King Street Capital Management. Belerion’s founder and chief investment officer, Iain McDonald, is a non-executive director at THG. However, Moulding and his board turned down the offer, saying it “undervalued the company and its future prospects”.
Although that share price rebound proved short-lived, analysts are optimistic about the company’s prospects. According to the Financial Times, of 12 analysts offering ratings on THG in September 2022, four rated the shares a ‘buy’, four gave them an ‘outperform’ rating, and four considered them a ‘hold’. Of the 10 analysts providing a 12-month price target, the median target was 212.50p, representing a 299% increase on the 9 September closing price of 53.26p.
Softbank ditches investment option
Shares in THG have dipped further in recent months after SoftBank called off plans to buy a $1.6bn stake in THG’s technology division in July, denying the retailer what would have been a valuable cash injection. THG issued a statement saying that “in light of global macroeconomic conditions, the option and collaboration agreement has been terminated by mutual agreement among the parties with immediate effect”. The news came as little surprise to investors and analysts. At £672m, THG’s entire market value is now less than half the amount that SoftBank had previously agreed to pay for a fifth of one division of the company.
Sales of stakes in Ingenuity or THG’s other businesses cannot be ruled out moving forward, especially as the online retailer has now completed the separation of its trading divisions into discrete legal entities. But in the near term, having been deprived of fresh funding, THG may need to take on more debt to finance its operations. An update on the impact of Softbank’s decision may be provided when THG announces its half-year results at 7am on Thursday 15 September.