Why buyers are back at this fallen tech star

THG shares are off the floor thanks to Hut Group founder Matt Moulding’s optimism, but can the revival last? A big City bank sees reasons for encouragement.

Heavily sold THG Ordinary Share (LSE:THG) continues to divide City opinion after more downgrades were today offset by a US bank’s note highlighting five reasons to buy the e-commerce stock.

Bank of America’s analysis sees a potential 80% upside for shares, adding that out of extreme bearishness the Hut Group business could offer one of the highest returns in online retail.

A trading update and the signing of additional lending facilities worth £156 million helped shares to jump 18% on Tuesday, but at this afternoon’s level of 57.8p they are still a far cry from 2020’s 500p float price and the 207p seen at the start of this year.

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Yesterday’s rally came as THG’s founder and chief executive Matt Moulding said the beauty and nutrition products retailer was well placed for a significant uplift in demand around Black Friday trading, having made a positive start to the fourth quarter.

He left guidance untouched and backed the business to grow market share in 2023, with the margin outlook set to be supported by lower commodity prices. Sales in the third quarter were 2.1% higher, but broker Liberum said this compared with expectations of 9%.

The broker cut its full-year forecasts and said it struggled to see growth in the fourth quarter recovering to low double digits in order for the bottom end of THG’s guidance to be met.

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Liberum’s price target currently stands at 45p, having slashed this from 380p in September. Among the City firms moving their recommendations today, Barclays lowered its price estimate by 5p to 50p and JPMorgan went to 38p from 39p previously.

As well as trading through its Beauty and Nutrition divisions, THG’s Ingenuity platform provides a direct to consumer e-commerce service for brand owners. Under a new chief executive, this division is now more focused on larger, higher contract value clients.

THG shares currently trade on about six times forward earnings, representing a 50% drop since the beginning of the year and a 20% discount to online apparel retailers.

Bank of America believes this is unwarranted and should reverse in the coming months, particularly as it regards THG as having a stronger balance sheet and a longer runway of five years at the current rate of cash burn.

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It is cautious about consumer discretionary stocks but notes the beauty sector, which accounts for 50% of THG sales, has historically shown higher resiliency of demand through recessions. Inventory is also less seasonal than in apparel, so less prone to discounts.

Other positive factors include the recent decline in price of whey, which is the key component of protein powder in the company’s nutrition division. THG’s margins were squeezed by a 90% rise between January 2021 and April, but having absorbed the cost inflation as the industry price leader THG should now benefit with whey down 25% from its peak.

The bank’s analysts also believe the recent sale of a 7% stake by Japan’s SoftBank has removed an overhang for the stock. Qatar Investment Authority bought most of it, with Moulding picking up the rest in a move that fuelled the City’s management buyout talk.

The company was the subject of outside takeover interest in May, when THG’s board rejected a proposal of 170p at a 40% premium to the previous day’s share price.

Bank of America’s base case is that shares should be 55% higher at 85p, while a note from US bank Jefferies yesterday highlighted a target price of 95p as it expects margins in the second half of 2022 to improve to 5.4% before 6.5% next year.