THG shares remain in freefall and equity markets settle down after yesterday’s wobble

THG

“Capital market days are meant to be informative events, helping analysts and investors better understand a business. In THG’s situation it was eye-opening for the wrong reasons. It seems that attendees didn’t get the level of information they wanted, and messages were quickly fed back to HQ to dump the stock,” says Russ Mould, Investment Director at AJ Bell.

“Having joined the stock market with a lot of fanfare, the market now seems to be taking the view that THG was grossly overvalued and that breaking the business up creates more questions than answers.

“The shares initially rebounded on Wednesday after yesterday’s slump, but quickly went back into freefall. This creates a conundrum for investors. On one hand, sentiment is incredibly weak towards the stock and there is no point going against the flow if the market has decided THG is a dud. On the other hand, investors are now being given the chance to snap up shares in a business at a price where the original source of excitement is now essentially thrown in for free.

“One of the company’s divisions called THG Ingenuity was the reason why the market was initially excited about the business, a one-stop-shop that handles web selling and logistics, aimed at brands that wanted to sell direct to the consumer. Nestle is a key client, giving THG some credibility.

“A lot of product manufacturers now want to go direct to the consumer, which means the growth prospects for THG Ingenuity are theoretically good. In fact, Next is even going down this route as a rival provider of web services and logistics to third parties such as Victoria’s Secret and Gap in the UK via its Total Platform proposition.

“In May, Softbank bought an option to buy a 19.9% stake in THG Ingenuity that values the division at $6.3 billion or £4.6 billion at today’s exchange rate. With the shares now trading at 258p, the whole of THG is being valued at £3.15 billion, meaning investors can effectively buy the beauty and nutrition operations and get the technology and logistics bits for nothing. If that was the sales pitch when it floated, there would have been a large queue around the block to buy the shares.

“The big question is what each business would look like as a standalone entity, namely the cost base, capital expenditure and cash flow. THG has been criticised for not being open enough about the financial breakdown. Until it starts providing some answers, the shares could well remain under pressure as it’s very hard to properly value this business without all the right information.”

Markets

“Equity markets look to have stabilised after a patchy showing earlier this week, however it does feel as though investors remain slightly nervous.

“The FTSE 100’s biggest fallers in index point terms were a mixture of defensive and cyclical stocks, so investors are clearly not falling on one side of the fence. Pharmaceuticals, consumer goods and miners were among the stocks in negative territory.

“Housebuilders enjoyed a boost from Barratt Development’s latest update, putting that stock at the top of the FTSE 100 risers and lifting Persimmon, Taylor Wimpey and Berkeley Group in the process.

“Forward sales have been good at Barratt and the company remains upbeat. There had been some nervousness towards the housebuilding sector that it would be negatively impacted by ongoing inflation in raw material prices and more recently from elevated energy prices.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.