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The Analyst said such deals have been red flags in its previous coverage of firms such as Wirecard and NMC Health, the former FTSE 100 private hospitals operator also embroiled in a fraud scandal.
Its report highlighted concerns around dilution related to a bumper share scheme for Moulding, which he can already cash in. The value of those shares has fallen from about £900 million to £640 million following the recent rout.
Another controversial move was transferring the company’s property assets to Moulding upon the float, giving him annual rental income of about £22.5 million. The portfolio includes its Manchester airport base and the Hale Country Club & Spa in Altrincham, Cheshire. A source close to the company insisted that the move was pushed by big shareholders including US investment giant BlackRock and British venture capital firm Balderton. They are understood to have been keen to offload the properties to Moulding, seeing them as a drag on a company pushing more into technology.
Big spending
Moulding has wasted little time since floating and has continued on the acquisitions trail, including US skincare brand Perricone MD for $60 million, beauty retailer Dermstore for $350 million, nutrition product suppliers Claremont Ingredients and David Berryman for £60 million, and Cult Beauty for £275 million. The Analyst said: “We have several concerns on THG’s capital allocation.”
The report from The Analyst also raised queries around free cashflow — the amount of cash left in the business after expenses have been met — which has been deteriorating in recent years. It also looked askance at more than £500 million of exceptional items in 2020. Stonehouse said these were red flags that signal underlying margins are “considerably less” than the adjusted earnings margin presented by the company.
THG said: “Since our IPO, we’ve delivered substantial sales growth across all divisions, upgraded guidance and acquired and integrated a number of value-enhancing capabilities and businesses. Furthermore, we’ve created 3,000 jobs.”
As Moulding prepares to face investors on Tuesday, he will be carefully scripting his answers to assuage their concerns — and arrest the share slump.
Cosy club
THG’s senior management is a close-knit group of friends. Moulding and Gallemore worked for Phones 4U owner John Caudwell. When he sold up, Moulding, who was director of Caudwell Group’s distribution arm, made a small fortune. He used the cash to set up THG with Gallemore, who was head of finance at Caudwell’s international trading business.
Another member of the Caudwell cabal was Darren Rajanah, who joined the duo at THG in 2008 as chief commercial officer before quickly becoming finance director. However, Rajanah was put on gardening leave after a fraud was uncovered in 2011 by auditor PwC.
Details of the fraud emerged in a High Court battle from 2014 between THG and Oliver Nobahar-Cookson, the founder of Myprotein. He sold the company to THG in May 2011 for £30 million in cash and £28 million in shares, which he had hoped to sell when THG floated. The judge said the “discovery of the losses concealed by the fraud” derailed the float plans at the time, and he ordered the company to pay Cookson £10.8 million.
The judge said Rajanah was not “personally fraudulent”, but said he “had to take some responsibility for an atmosphere within the finance department which allowed fraud to flourish”.
Rajanah went on to become chief executive of Ingenuity in 2016 before handing over to Gallemore in 2019.
What shocks many — including The Analyst — is that Rajanah still plays a key role at THG as senior vice-president at Ingenuity, where he is, in essence, the main salesman. A source close to THG said Rajanah remained at the company because he was a top salesman and understood the company.
Private deals
When THG floated, it faced criticism for handing Moulding a golden share, which allows him to block a takeover bid for its first three years as a listed company. But The Analyst has honed in on the tycoon’s personal borrowing against shares after he set up a Guernsey-based company, FIC Shareco, when THG floated. Moulding and his wife Jodie, 38, used their shares in THG as collateral for a £100 million loan from Barclays for FIC Shareco.
data storage, marketing and customer service. The idea is that customers pay it to do all the work.
It is still very early days — Ingenuity was launched properly only after The Hut Group floated — and yet it has already become Moulding’s main focus. THG, which is still loss-making, stunned the market last month when it announced that it would split off the beauty business, which owns retail sites such as Glossybox and Lookfantastic, and float it separately. That will leave shareholders with Ingenuity and the nutrition arm that owns Myprotein and other sites.
Earlier this year, Japan’s SoftBank invested $730 million (£540 million) in THG, with an option to invest £900 million to take a near-20 per cent stake in Ingenuity at a £4.5 billion valuation.
The Analyst report said it doubted whether Ingenuity would live up to expectations. It estimated that the tech division, which generated just £85 million in revenues in the first six months of the year, accounts for half of THG’s entire valuation. This means that if there is any sign that the nascent division is failing to live up to lofty expectations, the share price will plummet.
It also questioned the size of the market for Ingenuity and claimed that it was a “smaller player in a crowded market where scale is key to profitability”. The Analyst note queried the number of companies using Ingenuity for their main site.
A source close to THG said that the average customer launches four different websites — either in different countries or different brands — through Ingenuity.
ngenuity’s business model is opaque but it is based on revenue sharing. That means the more a customer spends on a site it has built and manages, the more money THG makes. Those going for the full whack — warehousing to customer service — are thought to spend £150,000 a year on average. THG has grown the number of clients using Ingenuity from 60 at the start of the year to about 140.
Yet some of the recent deals, such as building sites for Toblerone and soft drink brand Vimto, have had some observers scratching their heads about the potential for growth. How many customers are going to go direct to Vimto and Toblerone for their drinks and chocolate, instead of the supermarket?
The first anniversary of The Hut Group’s stock market float should have been a celebration for Matt Moulding. Instead, the muscle-bound entrepreneur watched on as shares in his Manchester-based beauty and health retail empire, which listed in September 2020, soon went into freefall amid growing doubts over the business and its increasing focus on its recently launched tech arm, Ingenuity.
Moulding’s vision was ripped apart earlier this month by an influential research firm that expressed doubts over Ingenuity and raised questions about The Hut Group’s culture and corporate governance, as well as concerns over free cashflow and a series of acquisitions.
The Analyst, a firm founded by Mark Hiley, a former equity analyst at funds giant Fidelity, circulated a note among its fund manager and hedge fund clients, advising them to short the shares — in other words, bet that they would fall.
Shares in The Hut Group (THG) were changing hands for 684p just over a month ago. After the recent slump, they are languishing at 452¾p, still valuing it at about £6.2 billion. Jack Stonehouse, the analyst behind the THG short report, predicted the shares would dive to 260p within two years. His gloomy prediction coincided with a sector slide as investors dumped shares in online retailers such as Boohoo, Asos and AO World, which all trade on high earnings multiples.
The Analyst has a decent record, having previously said that shares in Debenhams and construction company Carillion were worthless; both later collapsed. It was also one of the early critics of Wirecard, the German payments giant brought down by a massive fraud.
On Tuesday, Moulding, 49, faces his day of reckoning as THG is holding a capital markets event. This is typically an occasion for companies to set out their strategy, but Moulding’s task will be to convince shareholders to ignore the concerns in The Analyst report and keep the faith. So what are the arguments in play?
Moulding’s masterplan
The ultimate goal for Ingenuity is running automated warehouses. THG has just launched FIR/ST, which stands for Fulfilment & Inventory Retrieval/Storage Technology. THG, founded by the once-Instagram-friendly Moulding in 2004, hopes to automate logistics in the same way that the online grocer Ocado has automated groceries. A source close to the company compared it to “taking the Ocado model and putting it on acid”.
Tuesday’s online event is centred on this business. Moulding and his right-hand man John Gallemore, who runs Ingenuity and is chief financial officer of THG, will spend a great deal of time explaining what Ingenuity is and why they are moving away from running health and beauty websites and into outsourcing. Their pitch will go something like this: while most large rivals, such as Salesforce and Shopify, help companies to build websites, Ingenuity will help companies outsource everything. That means operating warehouses and distribution, building and running e-commerce websites,