THG investors start to question Matthew Moulding’s ambition

Latest attempt to seize online opportunities falling flat as founder pursues corporate gymnastics

Last modified on Tue 5 Oct 2021 17.39 EDT

When your share price falls by a third in the three weeks after a big announcement that was supposed to reveal hidden value within your company, you’ve got a problem. This is Matthew Moulding’s predicament.

The founder and boss of THG, the business formerly known as The Hut Group, was hailed as the nation’s gift to e-commerce retailing during last year’s £4.5bn flotation, but his latest attempt to seize the supposedly “unparalleled” opportunities that exist online is falling flat.

THG’s shares stood at 650p before mid-September’s news of a plan to spin off the beauty operation that owns the Lookfantastic cosmetics website. Price now: 418p, down another 5% on Tuesday. The stock is thinly traded, not least because Moulding owns 22% and his super-charged voting rights disqualify THG from stock market indices, but outsiders are clearly rattled.

Moulding doesn’t help himself with his hyperbole, but the heart of the problem seems to be an addiction to deal-making. Why does THG want to demerge its beauty division – its largest by revenue – only a year after going public itself?

The line about the need to focus investment on “key growth areas, including own-brand portfolio expansion” read like an advertisement of the need to buy more brands in a hurry. The beauty division, ran the thinking, is undervalued compared with US peers, so separation would deliver a sky-high valuation and a new acquisition currency.

If only life were that simple. Instead of applauding the idea, investors seem to have concluded that THG will require far more capital, or more share dilution, than previously assumed. That impression was reinforced when Moulding immediately began talking about a follow-up demerger of the nutrition division that sells protein shakes and suchlike.

THG raised £920m at float and another £770m via a placing in May that brought in SoftBank of Japan as an investor. Isn’t that enough capital for the time being to pursue the dream of global expansion? Remember, THG has yet to report a bottom-line profit.

Part two of the demerger pitch to shareholders arrives next week when Moulding will set out the path to break up by detailing operating margins within THG’s three divisions, including the key Ingenuity platform. More transparency may help, but the safer option at this stage could be to shelve the demerger. Take a hint from the fading share price and leave the corporate gymnastics for another day.

Morrissey raises red flag on China

Dame Helena Morrissey, the City grandee and these days chair of the investment platform AJ Bell, asks a good question: why don’t China’s human rights abuses get mentioned in ESG debates? Surely they’re the definition of the “S” within the world of environment, social and governance investing.

“How can one set of fundamental principles – our human rights – be cast aside simply because it might be inconvenient in the fight against climate change? Or because they might get in the way of a very short-term financial gain?” she asked an event at the Conservative party conference this week.

It would be “very naive”, she argued, to think western investment in Chinese companies brings any form of influence. It’s impossible to disagree. HSBC, one of the firms in her firing line, showed as much with its pusillanimous utterances during the crackdown on rights in Hong Kong.

It is also, unfortunately, naive on Morrissey’s part to think a revolt by “small pension holders” against managers who put them into Chinese stocks will turn the tide. The investment industry is wedded to its Chinese exposure, which is why Evergrande’s property pack of cards receives infinitely more scrutiny than Beijing’s suppression of the rights of the Uyghur people in Xinjiang. But her point stands: ESG investing has brought benefits, but is full of hypocrisy on China.

Chip shortage drives car cancellations

The supply chain statistic of the day came from Melrose, the engineering company that bought the aerospace and automotive group GKN in 2018: in a normal month “in-month cancellations” in automotive run at 1%, but now customers, mainly big car and vehicle manufacturers, are cancelling at a rate of 20%-25%.

The problem is the global shortage of semiconductors, which has a knock-on effect on the production process. It’s a supply issue, rather than a demand one, so Melrose and its peers can still expect a whoosh of orders when the blockages clear. Its shares fell only 1%. The wider tale, though, is that chip shortages are getting worse, which wasn’t meant to happen.

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