Kelso hails THG strategy as investment community warms to online retail giant

Activist investor Kelso believes the analyst community is beginning to appreciate the value of Manchester online retail giant THG.

It also reiterated its call for THG to embark on a share/debt buyback programme to demonstrate its own confidence in the group.

Kelso owns eight million THG shares, after acquiring five million shares in January this year.

It believes THG is significantly undervalued, particularly its Nutrition division’s main brand, MyProtein, and has urged the board to up its corporate game, particularly its PR efforts and its relationship with the investment community.

THG founder, Matt Moulding, has constantly decried the calls of some analysts, but, in an update to the stock exchange this morning (July 13) on its THG investment, Kelso said it believes the investment community is gradually realising the potential value of THG.

It hailed THG’s progress this year, including its recent positive trading statement, with management expecting H1 EBITDA to be approximately 41% up year on year, but, particularly, its improved communication to the stock market, improved corporate governance with new NEDs, early release of Moulding’s golden share last month and reiterated commitment to joining the premium London Stock Exchange index, which Kelso said it hopes will occur in the first half of 2024.

This month marks the one-year anniversary of the announcement of the THG ‘Separation’, which occurred almost two years after its IPO, and, importantly, allows each business division to be independently managed and reported on.

It also facilitates possible third-party investment into any of the divisions and potentially for any of the divisions to be sold partially or in full. Importantly, Separation gives THG significant strategic optionality, and Kelso said it welcomes THG management’s openness and desire to explore these opportunities.

Kelso said: “This approach encourages stock market analysts to value THG on a sum of the parts basis, given the distinct nature of the various divisions.

“It is pleasing to see this change gradually occurring in the analyst community and we believe this will ultimately lead to the stock market better appreciating the fundamental value of THG, shifting away from pure e-commerce benchmark valuations.

“Liberum, the independent broker, continues to re-emphasise its 225p target value, over two times the current share price, but it is also encouraging to see other analysts increasingly refer in their research to higher potential price targets centred around the sum of the parts valuation.”

Kelso has identified My Protein as an undervalued asset of THG, arguing it should be valued as a global consumer brand, given near $1bn sales, double-digit EBITDA margins and its increased product innovation in the current year.

It said: “This division alone continues, in our view, to be worth more than the market capitalisation of THG.”

My Protein fits the trend for global brands shifting the balance of their product portfolios away from sugar and chocolate products to more healthy and nutritional ones.

To this end, Kelso highlights two industry developments in the past few weeks when, on July 5, Mars Wrigley announced the acquisition of Kevin’s Natural Foods for $800m. A business founded in 2019, Kevin’s Natural Foods reportedly generated approximately $140m of revenue in 2022 up from approximately $100m in 2021, which implies a 5.7x historical sales multiple.

This sales multiple is not dissimilar to other recent sales multiples on acquisitions in the nutrition sector.

Secondly, on June 22, Tesco reaffirmed its commitment to support healthy affordable diets. Tesco announced in this statement its target of boosting sales of healthy products to 65% as a proportion of total sales by 2025.

In April this year, Kelso referenced global investment institutions demanding that food brands declare what percentage of their product portfolio are ‘healthy’. Kelso said it believes the combination of retailers, such as Tesco, targeting healthier products, coupled with institutional investors equally wanting to understand the healthiness of the product portfolios of the global food brands better, should leave THG’s MyProtein in a strategically advantageous position as it further expands globally.

Kelso said: “THG appears to be in a much steadier and improved position year on year. With THG’s net debt to EBITDA ratio now approaching 1.0x, Kelso would like to see THG buying back some of its equity or debt, demonstrating the improved confidence that they have shown in recent announcements.

“Kelso continues to encourage THG to deliver on a sum of the parts realisation and is very pleased that the company are open to driving this change forward.”

It said it eagerly awaits THG’s interim results in September with, hopefully, some corporate strategy update which could serve to further explain and support why the recent Apollo bid was rejected, when THG broke off potential takeover talks, claiming the US private equity investor undervalued the business.