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The next Ocado or another Aston Martin? Online retail group The Hut Group (THG) plans to float on the London Stock Exchange. This is a major boost for the London market with the £4.5bn tag making this the biggest listing of the year.

A full seven banks/brokers are working on the deal, so good tidings all around the City. But what of the individual investor?

After a considerable ramp in tech valuations this year – eg, Ocado +100% in the last 12 months – this looks like a well-timed move, at least on the part of the founder who is due a bumper £700m payout should all go well and still remain very much in control. The question is whether this 10% margin business deserves a tech rating.

A standard listing makes it ineligible for inclusion on the FTSE index although its mooted market cap would be enough just to make the FTSE 100. Any standard listing raises eyebrows as it means no index inclusion and lower governance standards.

And we note that it’s another banker buffet – four of the same banks from Aston Martin’s listing are on the IPO – Goldman, JPM, HSBC and Numis (in addition to Citigroup, Barclays and Jefferies).

Indeed, Goldman’s Duncan Stewart and Anthony Gutman, named on the THG registration document today, were also down on the Aston Martin registration document in August 2018. Let’s hope THG enjoys a better time on the public markets than AML.

Is THG a tech company or a retailer?

THG describes itself as a ‘vertically integrated digital-first consumer brands group’, retailing its own brands in beauty and nutrition, including Myprotein and Lookfantastic, as well as third-party brands. It does this via a proprietary technology platform dubbed Ingenuity.

The business is divided into three core divisions – Beauty, Nutrition and Ingenuity. Whilst the Beauty and Nutrition brands have delivered strong growth, the real value in the shares may well come from the tech platform.

In 2019 THG achieved year-on-year revenue growth of 24.5% to reach £1.1 billion with adjusted EBITDA of £111.3 million. The float aims to raise £920m and would value the company at £4.5bn, which at c40x last year’s EBITDA and x4 sales doesn’t seem like too much to pay for this kind of growth….or does it?!

The answer rests surely on whether it deserves a techy or a retail multiple. Ocado trades in the region of x300 after an unbelievable rerating – but that is another story altogether. THG growth has accelerated in the first half of 2020, with revenue of £676 million, up 35.8% on the equivalent prior year period…but it’s all coming from the Beauty and Nutrition segments, not Ingenuity.

Ingenuity platform – a key growth driver?

Ingenuity has a capital-light, scalable licensing model that offers good revenue opportunity beyond the core retail division. Management are keen to stress that Ingenuity secured £215 million in life-of-contract revenue in the first six months of the year amid an uptick in demand.

Management view the platform as one of THG’s key growth drivers and as a fully scalable solution available to brands at a time of immense e-commerce growth – direct to consumer (D2C) in particular – it has strong potential. The prospectus outlines a target for overall revenue growth of 20-25% over the medium term, with Ingenuity forecast growth of 40% primarily as a result of increasing mix of e-commerce revenues as global brand owners accelerate their adoption of D2C strategies.

But revenues from Ingenuity remain relatively small – £61m in the first half of 2020, which was flat on last year and less than 10% of total group revenues. As a percentage of group revenues, the contribution from Ingenuity is going down. For the moment it looks like a retailer trying to pass itself off as a tech platform. Ocado has managed to pull this off – can THG?

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