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Are THG shares a dirt-cheap buy after their 50% crash?

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After a nightmare month for THG (LSE: THG), shareholders have seen the value of their stock fall by 50%. But THG’s share price is rising today after founder Matthew Moulding said he would give up his ‘golden share’ in a bid to secure a premium listing on the London Stock Exchange.

This move could open the door for THG — a tech group which sells beauty and nutrition products online — to join the FTSE 250 next year. I reckon this might help to deliver a recovery in the group’s share price.

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What’s changing?

I’ve stayed away from THG shares so far. One reason is that I’ve had concerns about the company’s corporate governance.

When THG floated on the stock market last year, the company chose what’s known as a dual-class share structure. This prevented the stock from getting a FTSE listing but allowed Moulding to have a so-called special share. This gave him the right to block takeover offers for the company, regardless of the views of ordinary shareholders.

THG says that Moulding has now agreed to cancel his special share rights “in furtherance of good corporate governance”. The board also plans a wider review of corporate governance arrangements. I reckon this is good news for shareholders. Here’s why.

Big funds could start buying

Why does all of this matter? THG’s dual-class share structure means it’s only allowed to have a standard listing on the London Stock Exchange. This means it can’t be listed on either the FTSE 100 or FTSE 250.

As a result, index tracker funds, which follow indices such as the FTSE 100, can’t own THG shares. These days, index trackers form a big part of the market for large stocks. Excluding these potential buyers isn’t ideal.

By cancelling Moulding’s golden share, THG will be able to apply for a premium listing on the LSE. If it’s successful, the company will be eligible to join the FTSE indices. Based on THG’s current market-cap of £3.7bn, I’d guess it would probably be added to the FTSE 250. That would immediately force FTSE 250 tracker funds to buy the stock.

THG share price: not a miracle cure

When index trackers buy into a company, it can lift the share price. But improving a company’s corporate governance doesn’t automatically make it a good investment. I still have several concerns about THG that might prevent me buying the shares.

Although I’m impressed by the company’s 45% sales growth during the first half of this year, I’m concerned about its profitability. Broker forecasts suggest that THG will report sales of £2,218m this year, but only generate an operating profit of £46m. That’s an operating margin of just 2.1% — lower than I usually target in my portfolio.

I also think THG shares look very expensive. As I write, the stock is priced at around 100 times 2022 forecast earnings. A large part of this valuation seems to be tied to the group’s Ingenuity business, which aims to sell its tech and logistics services to other retailers.

Ingenuity might be a big business one day. But it only delivered £86m of revenue during the first half of this year. Right now, THG shares still look too expensive for me to buy. I plan to stay on the sidelines for now.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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