THG valuation seems very generous but analysts see huge opportunity

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THG PLC’s (LON:THG) third profit upgrade since its September initial public offer has propelled its shares to almost £8bn and easily big enough to jump into the FTSE 100 when its time comes.

The latest update from The Hut Group was on the back of an even stronger performance in December than anticipated at the start of the month and an acquisition agreed just after Christmas.

Investors and analysts were impressed, with the shares shooting up 4% to a new high of 837p in early trading, though losing some territory back to 800p to profit taking as the session wore on.

Having floated at 500p in the autumn, this 60% gain puts its shares on a pretty hefty valuation multiples – though modern investors such as those that have backed Tesla do not seem to care about those any more.

For the full year, sales are now expected to be around £1.6bn for 2020 and the group also upped its guidance for 2021 to 30-35% growth, which would mean revenues topping £2.1bn.

According to updated forecasts from broker Liberum, this means underlying profits (adjusted EBITDA) will be around £154mln for the past calendar year and roughly £201mln for this year, or around 1p earnings per share.

A p/e ratio of 800 would put even Tesla in the shade.

But the Liberum analyst target price, which was increased to 885p on the back of the upgrades, is not based on p/e.

“While all parts of THG generate a positive EBITDA, we use the EV/Sales multiple to value the company given the significant growth and expansion opportunities available,” he explained in a note to clients.

“The sum-of-the-parts approach gives us a market cap of £11.3bn and a share price of 8850p, a 12% upside from the current price.”

While nutrition and beauty peers average a p/e multiple of 2.5 and 2.6, Liberum applied multiples for THG of 5x and 3.5x sales to reflect its higher nutrition profit margin and strong growth.

As for THG’s Ingenuity Commerce platform, which contributed £137.1mln out of the £1.6bn of group sales, while peers command a multiple of over 20, Liberum applied a 80x multiple of this “small but highly valuable” business, “reflecting the huge opportunity” and margins four times higher than competitors.

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