Analysis: Will The Hut Group’s IPO float or sink?

Yesterday, after the best part of a decade, one of the great City will-they-won’t-they stories finally reached a conclusion when Manchester-based online retailer The Hut Group (THG) confirmed its intention to float on the London Stock Exchange. 

The retailer’s target valuation has been set at a £4.5bn, an eye-watering number for a business that the average consumer may not have heard of. The etail group’s websites specialise in health and beauty, though it also runs nutrition and fashion businesses. Its businesses include Lookfantastic, MyProtein and Coggles as well as a host of product brands such as Espa and Illamasqua.

The IPO launch comes off the back of “strong growth” in the six months to June 30 this year, with sales rocketing 35.8% year on year to £676m. This follows an impressive 2019 when THG grew sales 24.5% to £1.1bn. 

But it is not just about retail growth at THG. It has also developed its own ecommerce warehouse and tech platform that it outsources to other businesses, much like that other pureplay-turned-tech titan Ocado. THG clients include Boots, Procter & Gamble, Nintendo, Nestle and Mercedes Benz.

The group hoping for an Ocado-style valuation. At three-times revenues and 10-times EBITDA multiples, £4.5bn could prove a tall order, particularly with markets still reeling from the effects of the pandemic. 

Can THG meet its price tag and why has it chosen now to float in the first place?

The price is right

The valuation may be punchy but, as Shore Capital analyst Clive Black points out, it is well researched. The online group has been working with seven different banks as IPO advisers since July. “They’ll have done some pilots and I’m sure will be at least quietly confident they can achieve that aim,” he says. 

While its valuation is based on revenue and EBITDA margins, analysts believe the success of THG’s IPO lies elsewhere.

Peel Hunt analyst John Stevenson says its delivery platform THG Ingenuity will be a big part of its sales pitch to would-be investors. 

“I’m sure THG sees itself as more of a tech company with a platform that enables them to drive traffic, market directly to consumers and drive engagement,” he says. “They’d probably argue that after that, the product itself is almost ancillary”. 

Independent retail analyst Nick Bubb agrees and says “much will depend on how good the City thinks THG’s technology and software is”. 

However, he worries that THG’s diverse portfolio of brands and dramatic transformation from a business that originally sold CDs online, when chief executive Matthew Moulding, founded it in 2004 may play against it.

“I’ve always thought the biggest issue with The Hut Group is how it has changed shape so much since it started,” says Bubb. “First it was a CD and video etailing business, which dabbled in clothing, before moving, a little randomly, into nutrition and beauty.”

One deals expert agrees. He says the group structure is “very complex” and wondered whether that had already turned off private equity buyers. As well as its many retail websites and technology platform, the sprawling group also includes several hotels and country clubs and its own airline, THG Air, to transport goods.

“The public markets are more forgiving around complex groups because they’re used to conglomerates, whereas with private equity the temptation is to break up. I wonder if that’s one of the reasons why it’s decided to an IPO,” he says.

However, Stevenson disagrees. He believes the complex structure of the current group may have put investors off five years ago, but the market understands ecommerce much better now. 

“Investors are more interested in consumer dynamics in terms of acquisition cost for customers; how they shop: and the granularity and visibility on the growth they are trying to deliver,” he says.

Seize the moment

THG and its banking gang of seven may be confident of hitting its valuation, but the middle of a pandemic, which has left international markets in turmoil and seen the UK plunge to the deepest recession since records began, seems a strange time to try for a float. 

However, Black believes the timing makes perfect sense. 

“There’s investment appetite out there,” he says. “This appetite has been generated because central banks and governments have pumped hundreds of billions, even trillions, of pounds into markets and consumer tech is a safe haven at the moment.”

He says that THG will have looked at the “big valuation premiums” of the likes of Ocado and will be seeking to benefit from the recent strong performances of tech-driven goliaths such as Amazon and Apple.

Bubb points to the recent growth of online retail stock such as Asos, which he says will help THG’s IPO. Since its last £200m fundraising round in April, Asos’ market cap has grown almost fivefold to £4.95bn.

“THG has been on the brink of this for several years, but obviously online valuations have gone through the roof during the pandemic,” he says. “They will be particularly mindful of the huge rally in Asos’ value in recent months.”

The deals expert agrees: ”It’s positioning itself as an online retailer and a platform for other online retailers at a time when everything is going online due to the pandemic. Also, no one else is listing right now. Now is the perfect time to do it because they’re a sexy, tech thing that people can actually invest in right now.”

It would appear the time is finally right for THG and UK retail could have a new multibillion-pound power player.