The Hut Group is aiming for a tech multiple but is it a just a retailer in disguise?
The Hut Group’s intended initial public offer would make the retailer big enough for the FTSE 100 on size, though there are some raised eyebrows in the City over its valuation.
A market cap of around £4.5bn and £0.92bn of new cash are the targets for the Manchester-based e-commerce company and its backers and banks, of which there are legion.
This valuation would be around 40 times the underlying profits of £111.3mln and four times the £1.1bn of net sales made last year.
THG, which is seeking a standard listing and so would not be it ineligible for inclusion on the Footsie, is formed as an umbrella company for a range of beauty, nutrition and other consumer-facing websites, including lookfantastic.com, glossybox.co.uk and myprotein.com.
On top of that, the company, which was founded in 2004 and last autumn raised almost £1bn in debt and equity, also owns Hale Country Club, King Street Townhouse Hotel and the Great John Street Hotel.
Most importantly for the valuation, it seems, is THG’s proprietary tech platform, Ingenuity, or as Matthew Moulding, co-founder, chief executive and chairman, says, “our differentiated proprietary direct-to-consumer e-commerce solution”.
As he goes on, “Ingenuity powers not just our brands but those of many other leading consumer brand owners around the world creating a highly resilient, vertically integrated business with significant growth opportunities”.
The platform is what the company has used to sell its own brands and is used, THG says, by over 1,000 third party brands, using a software-as-a-service licensing model, in addition to standalone services, including hosting, content creation and translation.
Clients of the platform have included Nestlé, Procter & Gamble, Walgreens Boots Alliance, Coca Cola, Johnson & Johnson, Clorox, L’Occitane, Homebase and PZ Cussons, says THG, which earlier this year snapped up two cargo planes for £80mln to ensure it could keep transporting goods overseas when conventional flights were grounded.
In the first six months of 2020, Ingenuity secured £215mln worth of contracts in the period in the half-year period but contributed £61.4mln of revenues, roughly flat year-on-year.
With group revenues surging 36% to £675.6mln in the first, this means the tech platform is contributing a smaller proportion of the total.
Is THG a retailer or tech company?
Strong international penetration with around two-thirds of sales from overseas last year, plus a combination of tech and retail growth drivers, means the float should be well backed, say retail analysts at broker Peel Hunt
Broker Shore Capital said that THG is “similar to Ocado” in licensing its intellectual property and systems to other companies to assist in developing their online operation.
However, analyst Clive Black says the timing of The Hut IPO is “hugely opportunistic, seeking to piggy back on the liquidity infused equity boom that has driven many consumer tech stocks into the stratosphere”.
“The Hut is a growing business that has been very good for the North-West of England, trading a number of its own brands like myprotein,” he adds. “However, it is no Amazon or Ocado, and its peers should be pure-play retailers like AO, Asos, Boohoo and Gear4Music. Its float and thereafter could be interesting, on 40x EBITDA it is not bargain basement stuff.”
Neil Wilson, an analyst at Markets.com, goes even further, saying the company “looks like a retailer trying to pass itself off as a tech platform…Ocado has managed to pull this off – can THG?”
After the considerable ramp in tech valuations this year, with Ocado doubling and the Nasdaq adding regular all-time highs, he says it looks like a well-timed move, at least on the part of the founder who could reap a bumper £700mln payout if the valuation keeps rising.
“The question is whether this 10% margin business deserves a tech rating,” Wilson says.
At 40 times EBITDA and four times sales, he says it might not seem too much to pay for the strong growth the company is targeting but this depends on whether the shares deserve a tech or a retail multiple.
Compared to Ocado’s and Tesla’s circa-300 earnings rating, it’s nothing too lofty, but Wilson notes that the growth is “all coming from the beauty and nutrition segments, not Ingenuity”.
“Ingenuity has a capital-light, scalable licensing model that offers good revenue opportunity beyond the core retail division,” he acknowledges, with the current immense e-commerce growth offering “strong potential”.
But with revenues from Ingenuity only a small part of the group and in 2020 becoming a smaller percentage of the total, Wilson has reservations of whether THG can be called a tech company and deserve a tech valuation.