16th Sep 2022 19:14
(Alliance News) - Despite a narrowed loss and revenue growth, THG's most recent interim results have led to a ratings downgrade from Liberum, who instead see a growing pile of broken promises and a further lowering of the company's future guidance.
For the first half of 2022, the Manchester-based online beauty products company reported a narrowed pretax loss to GBP22.3 million from GBP66.7 million, on revenue which grew 12% year-on-year to GBP1.1 billion from GBP958.8 million.
However, THG also noted a gross profit margin drop to 42% from 47%, reflecting "the strategy to partially shield consumers from adverse macro-economic conditions and a period of unusually high raw material costs".
In addition, attention was more on the group's outlook, where adjusted earnings before interest, tax, depreciation and amortisation is now expected to come in at a range of GBP100 million to GBP130 million, including a revenue growth of around 10% to 15%, up from GBP2.18 billion in 2021.
Earlier this year, it had been expecting adjusted Ebitda of GBP161 million, in line with the previous year.
"This is driven primarily by continued pressure from higher commodity costs which are expected to continue in 3Q'22, and the company’s decision not to pass all of it through to the end consumer. The company also noted a negative impact from energy cost inflation," said Wayne Brown of Liberum.
Shares in THG closed 0.2% higher on Friday in London, however the stock has plunged 93% in value over the last 12 months. In addition, broker Liberum has downgraded the group's rating to a Hold from Buy, and has reduced its price target to 45.0p from 80.0p.
"We struggle to see upside in the near term as there remain downside risks to 2022E guidance, outlook for next year is clouded and the group is now back in debt," Brown added.
As well as the drop in future guidance, Liberum also highlights several promises made by THG since listing which it has failed to deliver.
In September last year, THG announced plans to spin-out THG Beauty, its biggest unit in terms of revenue as a separate listing in the first half of 2022. However this spin-off has failed to materialise, and Liberum said THG has given up on these plans, considering the current macroeconomic environment.
In October, THG announced its intent to list on the Premium segment of the London Main Market in 2022. However on Thursday, these plans have been delayed to 2023, and even then this depends on the outcome of a UK Financial Conduct Authority review for a reform of the listing regime expected in 2023.
Also, there is THG's promise that it would land large "whale" Ingenuity Commerce clients with gross merchandise value potential in the hundreds of millions. Despite the capacity to deliver GBP14 billion of GMV, Liberum said it has set to see any such clients signing up.
"In the current macroeconomic environment, we feel the strategy to refocus efforts away from expensive growth into sustainable profit and cash flow generation. However, we think management has not yet shared a vision of where the profitability and cash flow generation of the company could get to in the long run," Brown continued.
Looking ahead, Liberum said that in order to recover, THG will need to give a clearer picture on what its long-term profitability and cash flow generation of the business could look like, once its segments have grown in scale.
In addition, THG will need to deliver some of its "whale" clients for Ingenuity Commerce, and explain clearly what they do for the economics of the business.
"Till then, the share price could struggle to improve and move ahead of the market. There are tailwinds for margins due to the rolling over of input costs. But we think achieving double digit growth in 2H'22E is very difficult but if the management do in fact target their H2 guidance for 10-15% growth, then they may have to sacrifice some of the margin gains thereby leaving profit growth languishing," Liberum said.
By Dayo Laniyan; [email protected]
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