Lazy analysis says Britain is no good at tech – or, at least, that London is not very good at tech stocks.
The City can be too quick to hail a nascent success story and investors can too enthusiastically point into a fairly thin crowd and say ‘you’re the one to make it big’ whilst in California such a company would be, as they say, dime a dozen.
At the same time, halfway-in UK investors can also be quick to scepticism or shrug away nuance in the tech space.
On whichever side of the Pond you sit, it carries that a solid tech component is essential to landing a premium valuation, especially when you’re company that might otherwise be seen more boringly as a retailer or a services provider.
Executives will often aim for Palo Alto, even when their postcode is much closer to Bognor Regis.
Now, these are just loose lines. Idle meandering and vague sector commentary.
Frankly, as an outsider looking in, it is not clear whether THG’s tech offering stands up to scrutiny or not.
What is suddenly clear is that the City has become dubious of its credentials.
In the wake of its disastrous investor relations outreach on Tuesday, the City was so dubious that some GBP1.8bn was wiped off THG’s market value in a matter of minutes after the event ended.
The virtual conflab (well, er conference call) kicked off at 2:00pm and by market close at 4:30pm THG’s share price was down close to 35%.
THG envisaged the call as a ‘teach in’ to explain in better detail to analysts its Ingenuity e-commerce platform used by clients and partners. It was also pitched as an opportunity for THG to present its 2030 sustainability strategy.
After the event, the primary sustainability question was whether institutional investors could sustain confidence in the group’s plans.
“Ingenuity is critical in many ways, but feels increasingly nascent, opaque and lacking sufficient proof points to justify a significant valuation,” Numis analyst Simon Bowler said in a note.
Decisively, Bowler moved the broker’s rating down to ‘reduce’ and set a 230p price target some 15% beneath Wednesday’s freshly downtrodden market price of 273p.
For context, THG closed Monday’s dealing just above 436p.
“The capital markets event explained the theory behind Ingenuity, but it feels increasingly unproven,” Bowler said, justifying his downgrade.
“It is early days,” he caveats, whilst also noting that key proofs points for the Ingenuity business “don’t seem to be materialising”.
“With the route to monetising significant investment opaque, we move to considering the successful commercialisation of Ingenuity to third-parties as option value,” he added.
“Ingenuity is critical to the equity story.”
Bowler, it must be said, probably isn’t on his own in being critical; the lurch down of the share price suggests there are many more sceptics.
However, his analysis is insightful in assessing the underlying profitability and cash conversion of the business along with the cash being invested.
All of this comes into sharper focus if planned investment from tech investment giant Softbank does not materialise. This issue seems a particularly confusing element of the investor communications piece as delegates rang off from Tuesday’s call.
One press report cited comments from an unnamed City institution stating that THG had told investors that Softbank would not be exercising its option early to buy a 20% in THG Ingenuity (it holds an option that would, if executed, value the Ingenuity business at GBP4.5bn).
The context is not clear, and it may’ve related to a direct question.
But, unless one’s feet were put the fire, why introduce any unnecessary uncertainty into the conversation?
Whether or not SoftBank will take up their rights by the actual deadline envisaged in the deal remains to be seen, but certainly those comments did not go unchecked in the market.
At Numis, for example, the merits of the previously proposed spin-out strategy (which envisaged THG’s beauty retail operations being demerged to the leave the current PLC’s focus on e-commerce technology) are now seen as “less obvious”.
Valued without the tech premium, Numis reckons there would be no ‘upside’ for THG shareholders at current share prices.
“We worry enthusiasm for Ingenuity is likely to wane, whilst stalling momentum and concerns over the margin structure of the trading businesses offer only limited support,” said Bowler in an extensive note clients.
Responding to the precipitous share price fall in a stock market statement on Wednesday, THG tried to put its best foot forward.
The company has consistently delivered ahead of its targets set at the time of IPO, it said, whilst describing its first half performance as strong across all divisions. Group revenue amounted to GBP958.8mln which, as it highlighted, is up 44% year-on-year.
THG also said it has a very strong liquidity position ahead of the peak trading season, with GBP700mln available across three-to-five-year credit facilities.
On October 26, just under two weeks from now, the company releases its third quarter trading update – the hope, for them, will be that upon digestion the valuation case will stack up more convincingly by then.
And let’s hope what should be a positive message doesn’t get lost in translation.
