BofA Merrill Lynch reiterates 'buy' on THG

The bank, which has a 125p price target on the shares - implying around 90% upside potential - said first-half results delivered improved profitability, with adjusted EBITDA up 45% year-on-year at £47m and at the top of the pre-released range, although they disappointed on revenue growth.

"As a result, management reiterated their adjusted EBITDA and neutral free cash flow guidance but cut FY23 growth expectations to flat to -5% (from low-single digit positive), sending shares down 20% on the day and de-rating circa 25% on FY24 EV/EBITDA since the print."

Bank of America said it views the current 6.3x FY24 EBITDA - around 25% below their 2022 12-month forward average - as an attractive entry point "as the margin and cash flow improvement stories are playing out as intended".

Merrill said FY23 targets look achievable, as does a return to growth in 4Q23 and 2024.

"While the revenue decline in 1H23 was greater than expected - especially in the Beauty division - the worst now appears to be behind us," Merrill said.

"In the UK, the two largest headwinds - falling online penetration and low consumer purchasing power - began to show signs of improvement for the first time since 2021 this summer. Management called out positive growth in Beauty starting in August, and we expect group level growth to turn positive again in 4Q23 as Beauty improves with manufacturing revenue picking up again."

The bank said it sees reasons for optimism in all three divisions.

BofA said that in addition to a return to positive growth in August, the beauty division should see improved margins in 2H23 as the margin-accretive manufacturing business ramps back up following industry-wide destocking throughout much of 2022 and 2023.

It also noted that the adjusted EBITDA margin in the nutrition segment rose 560 basis points to 13.8% in 1H23 thanks to falling whey prices.

"Given current prices, input costs should remain a tailwind for the division for 2H23 and 1H24, allowing the flexibility to re-invest in pricing to drive growth," it said.

"Ingenuity’s strategic shift continues as THG exits smaller, less profitable contracts. Although growth was negative in 1H23, the division remains on track to add £1bn GMV (gross merchandise value) in new contracts in FY23, announced a new partnership with L’Oréal in North America, and was recognised in the Gartner Magic Quadrant for digital commerce."

At 1430 BST, the shares were up 5.9% at 69.48p.