The Hut Group listed on the London Stock Exchange for the first time today after its initial public offering (IPO). This is a pretty big deal, not only because it’s London’s biggest tech listing, but it’s also its biggest IPO in seven years since The Royal Mail floated back in 2013. So, what exactly does this company do and are The Hut Group shares worth buying?
What makes The Hut Group a tech company?
Superficially a beauty products retailer, THG actually owns a network of 200 websites, plus many of the brands it sells through these sites. And it controls its own warehousing systems and delivery network. It also makes money by licencing its technology to other businesses such as Nestlé, PZ Cussons and Nintendo.
It has gained recognition globally for its superior tech platform, which targets global consumers. Client companies love this because it offers a fully outsourced solution covering the entire e-commerce drive from customer acquisition through to product delivery. Meanwhile, the group benefits from a highly lucrative, scalable and cost-effective model of making money. In 2019 its sales exceeded £1.1bn.
Founder control
Launched in 2004, the company scaled up with private equity investment in 2011. It hoped to reach a valuation of around £4.5bn at IPO and after a successful pre-market fundraise of £1.88bn, it far exceeded this, reaching a £5.4bn market cap.
Following the IPO, founder Matthew Moulding keeps his positions as CEO and Executive Chairman. He also retains a founder share that means he can block takeovers and resolutions while retaining voting powers. This is an unusual structure for a listed company and means THG will not be eligible for entry to the FTSE 100.Â
Recent news reports stated Moulding will sell £54m of his shares to buy company property. While the founder selling shares at IPO doesn’t look good, buying the property reduces company debt by £200m.
Meanwhile KKR, a private equity firm that bought shares in 2011, has sold its entire stake worth £448m at IPO. This could be a warning that it doesn’t have faith in a profitable future for the firm, or simply a desire to bank profits. Other investment companies, including BlackRock and Merian, remain invested.
Leveraging the tech boom
Tech is the sector of the moment, as we’ve seen in the US, everyone loves a tech stock and retail investors have been going wild for Apple, Zoom, and Nvidia, to name a few. And it’s a real bugbear of many investors that there are no large tech stocks listed in the UK. This past week has seen computer chip designer and former stock market firm ARM Holdings sold to Nvidia and there’s a petition for the UK government to block this.
I think this strong desire for UK tech companies will help THG thrive. Its glossy advertising featuring high-end make-up brands, stylish protein packs and enticing lifestyle products, make this a company with widespread appeal.
Economic uncertainty remains a concern for investors and there’s worry that tech stocks are in an unsustainable bubble, but these reasons aside, I think the group looks a good investment. The founder is incentivised to drive growth as he will receive a considerable payout (shares worth £700m), if the company reaches a valuation of £7.25bn within two years. For these reasons combined, I think The Hut Group shares are worth buying.