THG announce Beauty IPO

THG (THG) announced mixed interim results, with the reported figures overshadowed by the announcement that the group’s THG Beauty division will be spun off and listed as a separate entity during the first half of 2022. The ecommerce group recorded a loss of £82m for the six months to 30 June, worse than last year’s £48m negative, despite total revenues being up 45 per cent to £959m on a constant currency basis and outperforming analyst estimates. 

THG Beauty is the group’s largest division by revenue levels (it posted £461m in the period) and the fastest-growing (year-on-year growth was up 56 per cent). It focuses on premium skincare and beauty lines, including brands such as Cult Beauty and Lookfantastic. The move should not come as too much of a surprise to the market: the group’s corporate restructuring briefing in May announced the aim of splitting up major divisions. The nutrition, technology and logistics divisions could soon follow suit. 

Analysts think the rationale behind the move is the belief that divisions can garner higher valuations as individual entities. Management argues that “a separate listing for THG Beauty will position the business very well to focus investment in its key growth areas, including own-brand portfolio expansion”. Barclays thinks that valuing the division “looks a bit challenging without disclosure of standalone margins” and has an estimate of around £4bn. 

The Japanese conglomerate SoftBank, after its involvement with THG’s initial public offering (IPO), retains the option to purchase a 20 per cent holding in the THG Ingenuity division. Analysts expect this to happen after the beauty IPO. Ingenuity delivered 40 per cent year-on-year revenue growth in the period to £89m, with its ecommerce stream rising 166 per cent. Barclays sees “quite encouraging” signs in SoftBank’s involvement. 

The increased operating loss was explained by management as being driven by “adjusted items not related to the underlying performance of the business”, such as £13m of acquisition-related professional fees and £16m of costs around Covid-19 and new facilities. This is a fair enough point, but ultimately doesn’t change the bottom line. 

Brokerage Jefferies has downgraded its estimate of adjusted earnings per share for the full year to minus 0.4, and has also reduced its figures for 2022 and 2023. While revenue growth is impressive, we think it wise to wait for more details of the beauty IPO and clarity on what this will mean for shareholders before taking further steps. Continue to hold for now.

Last IC view: Hold, 661p, 15 Apr 2021