It should come as no surprise that a beauty company manages to put a good face on things.
Nutrition, beauty and logistics group THG’s reduction in its profit margin outlook for this year came with something to embellish it: confirmation that it had received “indicative proposals from many parties” to buy undertaking, none of which had been deemed acceptable.
It’s a bit strange that it appears in the results statement. There have been repeated stories about the interest in the takeover, which might have prompted some clarification if the details were accurate and the situation meaningful. Yet despite receiving several proposals from some parties, according to chief executive Matt Molding, the company is “not currently receiving any approach”.
He slathered lipstick on what might otherwise have been a slightly lackluster results day for THG. In January, when it cut its 2021 EBITDA margin forecast to 7.4-7.7%, the stock fell nearly a tenth.
This time, a reduction in the margin outlook for 2022, from a similar level to closer to 6%, from its medium-term forecast of 9-10%, led to a drop in the consensus earnings forecast of around a fifth. Thanks to potential buyers rushing to THG’s door, the stock rose as much as 18%.
Stocks are of course volatile, having lost more than 80% of their value in the last year. And the pressure on margins was not totally unexpected given the inflationary environment. THG says it will take a big hit to protect the nation’s bodybuilders from rising whey prices.
The company always seems to have a lot going on. As shares began to slide last September, it had pledged to list its beauty division this year, about which there was no update on Thursday. It reconsiders its options with the arrival of a new president, Charles Allen.
Then there was the SoftBank deal in March 2021, where the dilution of a $1 billion capital raise was considered by free option granted to SoftBank to take a 19.9% stake in Ingenuity , the integrated e-commerce and logistics business that generated such excitement when the online retailer listed.
The price valued Ingenuity at $6bn (£4.3bn) in enterprise value terms, and the stock surged. THG’s total market value is now around £1.4 billion. The separation of Ingenuity from the rest of the business is expected to be completed shortly, a condition precedent to exercising the option. But it’s inconceivable that SoftBank would use it: for starters, the hedge fund unit SB Northstar that did the deal was liquidated within the Japanese conglomerate.
Will takeover hopes find a way to reality? A company that continues to invest in growth and is expected to be negative free cash flow of up to £200m this year seems a perfect fit for a traditional private equity buyer. Molding spoke of focusing on the “best environment” for the business. This (apparently) did not refer to public ownership versus private ownership. But that will do little to dampen speculation that he would like to escape the hordes of marauding short-sellers he blames for the stock’s woes.
It wasn’t all bad news. Sales growth forecasts remained unchanged at 22-25%, as did revenue forecasts of £108-112m for Ingenuity Commerce, the most prized part of its empire.
That leaves a lot of work to do. Revenue growth of 16% in the first quarter (admittedly off a high base during last year’s lockdown) was boosted by acquisitions, possibly suggesting organic growth of 2% according to Numis. Meanwhile, Ingenuity Commerce’s revenue fell quarter-on-quarter to £11.8m, as did THG’s annual revenue to £51m, which doesn’t appear to have happened at the time. course of the past three years. The company said its growing customer base and pipeline have given it confidence in its prospects.
Given THG’s real-world conversion rate and an undoubtedly challenging operating environment, some investors (and perhaps buyers) might want to see those hopes come to fruition.
For a global leader in end-to-end logistics, THG demonstrates a remarkable ability to underdeliver.