THG shows signs of improvement but doesn’t impress

Predicting an upturn in the fortunes of THG (THG), formerly the company known as The Hut Group, would tax even the most seasoned Roman augury, as the company’s ability to generate substantial losses on billions in revenue continues to test the patience of its investors. Fortunately, with over £600mn of cash and equivalents still to burn through it can keep chugging on for a while yet.

The fundamentals of THG’s problems are not difficult to understand: the company currently does not generate the margins to justify the cost of its existence, although there were signs in these results that some improvement is creeping in.

Cash profits, heavily adjusted, nearly doubled to £114mn to give a margin of 5.6 per cent – well above the depths of 2.9 per cent that THG plumbed in 2022. Comparisons were skewed by a one-off £275mn impairment charge in the prior year.

Other operating costs also seem to be going in the right direction; distribution costs – THG’s traditional bugbear – reduced to 14.6 per cent of revenue, on a reported basis, down from 18 per cent last time. Management seemed to place more emphasis on managing cash flow, rather than on investment, which reached near breakeven point during the year. This was helped by £55mn in asset sales, with a reduction in stock helping to improve working capital.

Broker Peel Hunt, which has just started coverage of THG, said it would like to see “more disclosure” of information from across THG’s three operating divisions. The broker forecasts an EV/ebitda ratio of 11 for 2024. All the same, we still don’t see much value here. Sell. 

Last IC view: Sell, 82p, 18 Apr 2023