With inflationary concerns and a tech pullback hitting markets, THG has seen its share price plummet over the past six months. With several candidates lining up takeover bids over the past few months, the company has committed to restructuring and will be hoping its stock can pare significant losses.
The THG [THG.L] share price climbed 24.5% last week to close on Friday 20 May at 145p, continuing a recent surge that has seen the shares jump 105.7% since plunging to an all-time low of 70.49p on 7 March.
However, that only tells part of the story for this beleaguered ecommerce retailer. The shares remain 78.9% below the 52-week high of 687p recorded on 7 September last year, and even further back from the heady heights of January 2021’s all-time high of 838p. Year-to-date, THG shares are down 36.7%.
Some analysts believed the stock had moved into a consolidation phase, with worries over the company’s governance structure and what the future might hold. THG debuted on the London Stock Exchange in September 2020 with the year’s largest opening market capitalisation of £5.4bn — in contrast, its current market cap stands at just under £1.8bn.
But that was before last Thursday’s announcement that THG had rejected a bid approach worth £2bn, which sent its share price soaring. The stock opened 20.5% higher on Friday 20 May
Fresh takeover talk breathes life into THG share price
Alongside concerns over the company’s disclosure and governance, the owner of Lookfantastic, Cult Beauty and Espa has seen its share price suffer due to the malaise affecting growth and technology stocks globally, as well as an economy tightened by soaring inflation.
However, the company has announced that it is seeking to address its issues and has taken steps to reinforce corporate governance and improve transparency. Alongside this, a £200m investment in a new Manchester warehouse, as well as news that THG had rejected early-stage takeover bids, have helped to stem a freefalling share price.
And then came last week’s move, as THG shares leapt 24.52% on Friday after the company said it had rejected a bid from investment firms Belerion Capital and King Street Capital. In an unusual twist, the former’s founder and chief investment officer, Iain McDonald, is a non-executive director at THG.
THG prepares ground for premium listing
THG opened the path to a potential premium listing on the FTSE’s blue-chip index in October last year, announcing its intention to remove CEO Matthew Moulding’s special share rights — which allows him to veto any takeover bid — and by adding former ITV and Balfour Beatty CEO Charles Allen as non-executive chair, a move announced in March. The dual-class share structure prevented THG from listing on the main FTSE indices and attracting index-tracking investors.
A statement said: “Charles has a clear mandate to refresh THG’s Board and further strengthen governance and diversity”, while also enabling Moulding to “focus full-time on the business”. THG is also reviewing its corporate governance arrangements, so the company is aligned with the recommendations of the UK corporate governance code, and able to enter the main market.
Moulding underlined THG’s intentions last October, saying, “the appointment of two independent non-executive directors and four special advisers since IPO has been hugely beneficial to the board, and we have real optimism for 2022 with the step up to a premium listing on the main market of the London Stock Exchange, following the appointment of an independent chair.”
Lower profit margins dent outlook
Last month’s full-year results for 2021 showed adjusted earnings before interest, tax, depreciation and amortisation at £161.3m, missing analyst forecasts of £163m. THG expects profit in the current year to be “broadly in line” with last year, a downgrade from previous forecasts of £206m, after warning that rising costs would hit profit growth this year.
Encouragingly, THG expects sales to grow by 22–25% this year, though it has cautioned that profit margins will come under pressure from commodity price inflation and other cost increases, including increased investment in technology and logistics.
THG has already said group sales rose 17% in Q1 and expects margins to return to 9–10% in the medium term, up from 7.4% in 2021. However, Citi’s analysts predict margins will decline to 6% in 2022 before recovering to 8% in 2023.
What’s next for THG shares?
The 10 analysts offering 12-month price targets for THG have a median target of 262.5p according to the FT, with a high estimate of 700p and a low estimate of 80p. The median estimate represents a potential upside of 81.03% from last week’s close at 145p. The company also has a positive outlook overall from analysts following the stock, with three ‘buy’ and seven ‘outperform’ recommendations, along with three ‘hold’ and a single ‘underperform’ rating.
Concerned THG investors and wider global economic fears combined to send the company’s shares to an incredibly low valuation, encouraging significant interest and a number of takeover bids over recent months. And further interest is likely, with governance changes and Allen’s appointment helping to make the company a more attractive proposition for would-be takeover candidates. It remains to be seen what price would be acceptable to Moulding and THG, but it’s a safe assumption that it needs to be higher than the £2bn bid tabled.