THG Holdings (LSE: THG), or The Hut Group as it’s best known, listed on the London Stock Exchange through an Initial Public Offering (IPO) in September. UK investors got very excited about The Hut Group shares. It was the UK’s biggest technology IPO as well as the largest London listing since Royal Mail in 2013.
Three months since listing on the stock market at 500p, the The Hut Group shares are trading at 661p. That’s a gain of 32% for those who invested at the fixed IPO price.
So what now for the company? Let’s consider the investment case in detail.
The business
Founded in 2004, the Manchester-based company has become an important e-commerce player. The Hut Group has three divisions, two of which are THG Nutrition and THG Beauty. These two segments operate various wellness, sports nutrition and beauty brands such as MyProtein, LookFantastic and GlossyBox.
Through its third division, THG Ingenuity, the company develops and operates third-party e-commerce websites using its in-house software. Ingenuity’s growing list of big-name partners includes Nestlé, PZ Cussons and L’Occitane.
Growth drivers
I like that 50% of THG’s beauty and wellness sales are from its own products, as the margins are likely to be higher than from third-party brands.
I expect the beauty and nutrition divisions to grow organically and through acquisition. It recently announced the purchase of the luxury skincare brand Perricone MD.
But the real jewel in the crown and one key driver of The Hut Group shares is the Ingenuity software, which I see as having great growth potential. The software business model is close to the Amazon Web Services solution, but on a much smaller scale and it’s only concentrated in the e-commerce space.
Over the past few months, the company has secured new partnerships with reputable brands such as Frasers Group‘s Jack Wills and Vita Coco. Technology giant, Microsoft, has launched its Rare gaming merchandise website using THG Ingenuity.
The fact that the company is securing these contracts shows that its software is well-respected in the industry. This in turn should increase and further diversify its reliance on beauty and wellness products and boost The Hut Group shares.
Trading update
The company’s recent trading update was positive and its strong sales performance was supported by Singles’ Day, Black Friday and Cyber Week. The company now expects significant out-performance for both Q4 and FY20 versus previous guidance. It will report next on January 12, and I expect any positive news will boost the The Hut Group shares from their current price.
Corporate governance
Not all investors share the enthusiasm around the firm’s future prospects though. Some are concerned over founder Matthew Moulding continuing as both CEO and Executive Chairman. He also retains control of the structure via a founder share for the next three years.
This concentration of power in a single person is very unusual for a listed company. Despite this quirk, I’m not overly concerned. And the company continues to get support from institutional investors such as BlackRock.
I think The Hut Group shares will continue to be high-growth as the business seems to be doing all the right things. Its IPO timing was ideal as it rode the coronavirus online shopping boom. I think the market is undervaluing its true potential and as a long-term investor, I’d buy.