The THG (LSE:THG) share price has fallen 92% since the company floated on 16 September 2020.
But investing is all about looking forwards. As billionaire investor Warren Buffett once said: “If past history was all that is needed to play the game of money, the richest people would be librarians.”
So what could the future hold for the price?
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Financial prospects
The company’s preferred measure of financial performance is adjusted EBITDA (earnings before interest, tax, depreciation and amortisation).
It’s not yet reported its results for the year ended 31 December 2023 (FY23), but its most recent market update says profits are expected to be “above £117m”.
For FY24, analysts are predicting £153m.
| Financial year | Adjusted EBITDA (£m) | Adjusted EBITDA margin (%) |
|---|---|---|
| FY18 | 90.6 | 10.0 |
| FY19 | 111.5 | 10.0 |
| FY20 | 150.8 | 9.3 |
| FY21 | 161.8 | 7.4 |
| FY22 | 64.1 | 2.9 |
On the face of it, the company appears to have turned the corner. Or has it?
Taking a closer look
To answer this, it’s necessary to delve a little deeper into the company’s financial statements.
EBITDA’s popular because it’s intended to assess the operating cash flow of a business. It removes the cost of servicing debt, as well as depreciation and amortisation which are non-cash accounting entries. However, for THG, the ‘I’, ‘D’ and ‘A’ are significant.
The company’s FY22 accounts report an interest charge of £56m. Depreciation and amortisation were £94m and £109m respectively. To keep things simple, I’m going to assume all three will be unchanged during FY23, at a combined £259m.
If I’m correct and EBITDA is £117m, the company’s pre-tax loss for FY23 will be £106m.
And with a forecast margin of only 5.6%, it would take another £1.9bn of revenue (turnover was £2.2bn in FY22) to break even.
It therefore appears to me that the company’s a long way off from being profitable at a pre-tax level.
And I think that’s an important milestone because THG must pay interest on its debt, and even though depreciation and amortisation are non-cash entries, the company’s assets will need to be replaced at some point. To quote Buffett again, “does management think the tooth fairy pays for capital expenditures”?
Therefore, until there’s a clear path to profitability, I can’t see the share price changing very much.
Possible changes
In 2021, the company said its strategy was “to provide each division with its own growth and capital platform, through individual public market listings or partnerships, with THG retaining significant majority ownership“.
One of the company’s biggest shareholders agrees, claiming that the company would be worth more if it was split into its operating divisions – beauty, nutrition and its e-commerce platform.
However, progress to date has been slow. But if a restructuring programme was implemented, I think it could help lift investor sentiment.
And there are other reasons to be positive. The company now has twice as many active customers as it did in 2019. And the value of its average basket size is getting bigger. Also, the company plans to raise its margin to 9% over the “medium term”.
But even if it managed to achieve this, it would still be a long way from covering its interest, depreciation and amortisation charges.
For this reason alone, I suspect the THG share price could continue to disappoint.
