When your stock price drops by a third within three weeks of an important announcement that purports to reveal hidden value within your business, you have a problem. This is the predicament of Matthew Molding.
The founder and boss of THG, the company formerly known as The Hut Group, was hailed as the country’s gift to online retailing during the £ 4.5 billion IPO of last year, but its latest attempt to seize the supposedly “unprecedented” opportunities that exist online falls flat.
THG shares were at 650p ahead of the announcement in mid-September of a plan to split the beauty operation that owns the Lookfantastic cosmetics website. Price now: 418p, down 5% Tuesday. The stock is lightly traded, not least because Molding owns 22% and its overburdened voting rights disqualify THG from stock indexes, but foreigners are clearly shaken up.
Casting doesn’t work out with its hyperbole, but the heart of the matter seems to be addiction to chord making. Why does THG want to merge its beauty division, the largest in terms of turnover, just one year after its IPO?
The line on the need to focus investments on “key growth areas, including the expansion of the private label portfolio” reads like an advertisement for the need to buy more brands in a hurry. The beauty division, according to the reflection, is undervalued relative to its US peers, so the separation would offer exorbitant valuation and a new acquisition currency.
If only life were that easy. Instead of applauding the idea, investors seem to have concluded that THG will require a lot more capital, or more dilution of the shares, than previously assumed. That impression was reinforced when Molding immediately started talking about a follow-up split from the nutrition division that sells protein shakes and the like.
THG raised £ 920million free float and an additional £ 770million via a placement in May that brought in SoftBank of Japan as an investor. Isn’t that enough capital for now to pursue the dream of global expansion? Keep in mind that THG has yet to report a net profit.
The second part of the split-up talk to shareholders will arrive next week when Molding charts the way forward by detailing operating margins within THG’s three divisions, including the key platform Ingenuity. More transparency can help, but the safest option at this point might be to suspend the split. Take note of the drop in the share price and leave the corporate gymnastics for another day.
Morrissey raises the red flag over China
Dame Helena Morrissey, the big city and now president of the AJ Bell investment platform, asks a good question: why are human rights violations in China not mentioned in ESG debates? They are certainly the definition of the “S” in the world of environmental, social and governance investing.
“How can a set of fundamental principles – our human rights – be put aside just because they might be awkward in the fight against climate change? Or because they could hinder very short-term financial gain? She asked for an event at the Conservative Party’s conference this week.
It would be “very naive,” she argued, to think that Western investment in Chinese companies brings any form of influence. It is impossible to disagree. HSBC, one of the firms in its sights, showed it with its pusillanimous remarks during the crackdown on rights in Hong Kong.
It is also, unfortunately, naive of Morrissey’s part to think that a revolt of the “small retirees” against the managers who put them in Chinese stocks will turn the tide. The investment sector is tied to its Chinese exposure, which is why Evergrande’s property card deck is under much more scrutiny than Beijing’s suppression of the rights of the Uyghur people in Xinjiang. But his argument is valid: ESG investing has brought benefits, but is full of hypocrisy about China.
Chip shortage leads to car cancellations
Today’s supply chain statistic came from Melrose, the engineering firm that bought aerospace and automotive group GKN in 2018: In a normal month, “monthly cancellations” in automotive work at 1%, but now customers, mainly large cars and automakers, are canceling at a rate of 20-25%.
The problem is the global semiconductor shortage, which is having a ripple effect on the production process. This is a supply rather than a demand issue, so Melrose and her peers can always expect a surge of orders when the bottlenecks are resolved. Its shares fell only 1%. The bigger story, however, is that chip shortages are getting worse, which was not supposed to happen.