The Hut Group: to buy or not to buy?
As investors piled in, driving the share price up more than 30% at one point today, it’s got more red flags than Tienanmen Square.
Here’s a few: every banker in the City seems to be advising or broking the float, so you’ll struggle to find an independent view; corporate governance is all over the place; and one of its biggest shareholders, KKR, is selling 100% of its stake – rarely an endorsement.
On the other hand, unlike other floats with similar issues which later tanked – think Aston Martin – there are no obvious problems with the business and its strategy.
It is, in short, a fundamentally far better business.
And, unlike that other turkey, Funding Circle, it has been around for more than 15 years, so we know it works whatever the weather.
Given that most people will never have heard of it, a quick explanation.
THG has many disparate businesses but all revolve around the super-hot work of flogging goods direct to the public over the Internet.
It has two main online retailers of its own – Lookfantastic in beauty and Myprotein in sports nutrition.
It also has an Ocado-like e-commerce outsourcer called Ingenuity, which runs online sales for big businesses: think Procter & Gamble and Coca-Cola. It’s a full service - from designing your website to taking the payments and delivering your goods. It even manufactures if you want.
While the retail brands have been the biggest engines so far, it is Ingenuity that gets my vote as the most exciting prospect.
It is growing at 60% in a market massively accelerated by Covid and seems to have no problem winning big new clients.
Margins at Ingenuity are huge – 70% in its core operation compared with around 10% for the group as a whole.
Given the huge variety in the mix, valuing the whole is extremely difficult. Particularly at a time when tech stocks are so volatile.
On a comparative bases with other stocks, as AJ Bell’s Russ Mould points out, the retail bits should be valued at perhaps 1.7 to 2 times annual sales.
But Ingenuity is far harder to gauge. As Mould says: “well, think of a number.”
Taking Boohoo as a comparison, it should be 2.7 times sales, but against Ocado, it’s 9.
At today’s price, THG is 3.6 times. So, if you think Ocado is a bubble, stay away. If not, pile in.
For my money, at this price, it’s too risky today. Let it settle for six months and then take a view.