RBC Capital ups rating on THG to 'outperform'
By Abigail Townsend
Date: Tuesday 25 Jan 2022
(Sharecast News) - RBC Capital Markets upgraded THG on Tuesday, arguing that it saw "fundamental value" in the shares.
Shares in the e-commerce specialist, formerly The Hut Group, have lost 40% so far this year, and are now down more than 80% over the last 12 months.
THG specialises in selling beauty and nutrition products as well as providing e-commerce services for other companies. But the stock has suffered as investors questioned its corporate governance, strategic technology and the valuation of its core business, THG Ingenuity.
The firm also warned last week that it would miss full-year profits guidance following fluctuations in forex and commodity prices.
But in a note published on Tuesday, RBC said: "Amid the controversy around THG, we see fundamental value in the shares. Our analysis of Ingenuity's potential suggests SoftBank's valuation might indeed be reasonable, rather than fair-fetched.
"With the shares down a further 60% in the last three months, top line earnings expectations reset and catalysts ahead, we see risks skewed to the upside from here."
RBC upped its rating to 'outperform' from 'sector perform'. It left its price target unchanged at 500p.
As at 1200 GMT, shares in THG were ahead 3% at 124.55p.
In May 2021, THG struck a $2.3bn deal with Japanese conglomerate Softbank. Under the terms of the deal, Ingenuity will be spun into a separate company with Softbank having the option to acquire a 19.9% stake for $1.6bn, which values the unit at around $6.3bn.
A number of analysts and investors have since challenged that valuation, however, with some sceptical the deal will complete.
RBC said: "We sympathise with the challenge in valuing Ingenuity. Indeed, it is what previously kept us on the sidelines.
"However, its momentum in the 2021 full year - we believe its site order book more than doubled - and improved disclosure have been overlooked.
"We project that Ingenuity Commerce could increase tenfold to £0.5bn of revenue in five years, with at an EBITDA margin of around 60%, drives our discounted cashflow valuation for the segment of £4.4bn. Yet the market is attributing no value at all."
RBC added that it did not expect Softbank to walk away.
It also pointed to "notable steps" THG had taken to improve its structure, including the removal of chair and chief executive Matthew Moulding's special share rights and a commitment to split his roles.
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