City stockpickers split over THG value as stocks continue to fall

The recent volatility in THG shares has left City stockpickers perplexed, with many analysts choosing to leave target prices unchanged at levels several times higher than the current share price.

Investors last week wiped out another fifth of the group’s value after the company issued a relatively mild warning that exchange rates would have a slight negative effect on the margins of its two main divisions. The drop came just weeks after an even larger drop.

THG shares are now trading at less than half of their 500p offer price.

A number of high-growth investment banks, including JPMorgan, Citi, Goldman Sachs and HSBC, helped bring the Manchester-based e-commerce group to market last September and have largely maintained a positive view of the market. business.

However, the target prices vary from the 347p set by Marcus Diebel at JPMorgan to the 900p derived by Catherine O’Neill at Citi. Shares closed 3% lower at 216p on Friday.

Numis’ Simon Bowler has the lowest target at 230p and is currently the only investment banking analyst with a negative recommendation on the company. Numis was the bookrunner at the time of the IPO but is not an advisor to THG. Barclays, Jefferies and Citi are condominium brokers.

There is also a wide range of estimates among those not involved in the float, with the 300p set by Charlie Muir-Sands at Exane BNP less than half of Wayne Brown’s 750p target at Liberum.

Brown said he was “mystified” by the 20% drop in the share price following the update and called an even larger drop after a day in capital markets last month as “unjustified”.

Many analysts assign a valuation to the estimated sales and profits of each of THG’s three main business units based on comparisons with publicly traded companies.

It’s relatively straightforward for Beauty and Nutrition, which are e-commerce operations selling brands like Espa and Myprotein directly to consumers and for which a wide range of online retailers could serve as a benchmark.

However, it’s more difficult for Ingenuity, the suite of e-commerce technology products and services that THG is bringing to market. He reported contracts won, but revenue is growing from a small base.

Ingenuity has been the focus of investors’ attention since May, when THG said it had granted funds linked to Japanese investment firm SoftBank an option to buy a 20% stake in the unit at a price that implied an enterprise value of £ 4.5 billion for all. of it.

Most analysts believe Ingenuity’s likely value is lower, in part due to uncertainty over whether the option will be exercised. At its current price, THG’s total market cap is £ 2.7 billion, significantly below Ingenuity’s implied value alone.

One analyst said that the inclusion or omission of the money the SoftBank payment will put into Ingenuity if it triggers the option significantly affects the valuation of the unit, as does the way the core costs are distributed among the different divisions.

THG has disclosed few details about the earnings of each of its business units, which makes this calculation more difficult. “It’s not easy to follow,” the analyst said.

Bowler’s assessment is that the Ingenuity is only worth £ 130million because there is so much uncertainty about its future growth. “Although the company has accumulated external revenue, we are struggling at this point to place any value here,” he said in a recent memo.

However, O’Neill highlighted the potential gains from new customers, for existing customers to take on more services or expand into more geographies, the efficiency gains in automation, and the changes in pricing for Ingenuity services. , to justify a valuation of £ 5.4 billion.

This compares to the value of £ 1.97 billion that Diebel attributes to Ingenuity and Brown’s estimate of £ 2.6 billion, which suggests that the debate over the value of the group as a whole does not will only be settled when SoftBank exercises its option or THG discloses more details about Ingenuity. profitability.


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