Activist investor, Kelso, increases its stake in THG

Specialist investor, Kelso, has upped its stake in Manchester online retailer, THG, today (April 21), and highlighted the value of its My Protein nutrition business.

The firm, headed by former Zeus chief executive John Goold, took a 0.4% stake in THG in January, acquiring five million shares.

At the time Kelso said THG is “a hugely exciting but significantly undervalued business”.

Last month it upped its shareholding to 7.4 million shares and today it confirmed it purchased further shares in THG through a Contract for Difference (CFD), taking its total economic interest in THG shares, held through a mix of ordinary shares and CFDs, to eight million shares.

It said one of the key drivers for its investment in THG was around the significant intrinsic value of the nutrition business, MyProtein, due to the shift in consumption away from chocolate and sugar to health and nutrition.

Kelso’s stock exchange announcement said: “We note yesterday’s public statement by the Healthy Markets Initiative, a group of 26 global institutional investors with assets under management of over $5.3 trillion as outlined by Alistair Gray’s article in the Food and Beverage section of the Financial Times and on the BBC website on 19 April 2023.

“These investors are engaging with the world’s largest food manufacturers to promote changes in their strategy away from an over-reliance on sales of less healthy products. The Financial Times article refers to potential ‘systemic risk’ to companies that are over reliant on sales of these unhealthy foods.

“This article encapsulates exactly what Kelso referred to as the ‘chocolate and sugar problem’ and the need for these companies to diversify their revenues into healthier products for long term success. In our view, this strategic shift is akin to the major oil companies diversifying into renewable energy and highlights the huge relevance and underlying value of THG Nutrition.”

Kelso said it has identified 12 global food and beverage companies1 that it believes could be deemed overly focused on sales of chocolate or high sugar content products. The average market capitalisation of the 10 listed companies identified is $96.1bn with an average revenue of $30.5bn, the remaining two businesses being private.

Kelso calculates that the average enterprise value to sales of these companies is 4.3x. THG has announced this week the sales of its nutrition business, including MyProtein, as being c$800m for the year ended 31 December 2022.

Kelso identifies two listed pure play global health nutrition companies, being Celsius Inc and Bellring Brands Inc. Celsius, with sales of $654m, trades on an EV/Sales of 10.8x and Bellring, with sales of $1.4bn, on 3.9x.

The statement said Matthew Moulding, the CEO and founder of THG, has consistently tried to explain the true value of the nutritional business. In addition, the food and beverage companies Kelso refers to above have vast offline global distribution networks that could significantly increase the offline sales of MyProtein. It added: “In return, we strongly believe, that MyProtein’s direct to consumer digital model would be highly attractive to many of these companies.

“Any forthcoming offers for THG as a whole must clearly reflect this underlying value and in the event that an acceptable offer is not forthcoming then a separation of MyProtein should be considered, alongside a potential partnership and minority investment from companies such as those highlighted.

“Kelso believes that THG’s nutritional business is likely ultimately to end up being owned by one of the large global food and beverage companies, all of which have already begun investing in nutritional, wellness and healthier assets to improve the mix of their sales between nutrition and chocolate or sugar products. All those transactions again support Kelso’s sum of the parts view of THG.”

Kelso was established in 2022 to identify, engage and unlock trapped value in the UK stock market and completed a fundraising of £3m in January 2023 from around 20 UK entrepreneurs.

Following a visit to THG’s Manchester and Warrington sites, Kelso issued a four point plan to increase visibility and value in THG stock.

It said THG needs to accelerate plans to move from the Standard List to the Premium List on the London Stock Exchange.

Secondly, the board need to provide “appropriate detailed segmental analysis, specifically including divisional contribution/profitability”, and details of how each division calculates tax losses. Analysts at Liberum said in a research note in February 2023 said the “sum of the parts” value would be 221p per share (actual price target was 55p).

Thirdly, to urge THG to consider a share buyback programme soon after the pending preliminary results announcement. THG can buyback up to 10% of its outstanding shares and has cash on hand of c.£470m, with £170m undrawn revolving credit facility, net debt of c.£200m. “We think such a buyback would demonstrate the board’s confidence in the business,” said Kelso.

Finally, the strategy note urged THG to up its PR game and improve communications with the investment community. Noting deals such as “a burgeoning relationship with Iceland”, the formalisation of a technology partnership with Autostore, the increased presence in several large German retailers and the move into the gym sector as examples of stories it had undersold.