The next stock market Money spinner: Hut Group has zero profitability and shady corporate governance… so why are investors getting so excited?
Savers will next week be able to buy shares in The Hut Group, the latest blockbuster company to hit the London Stock Exchange.
There has been a lot of noise around The Hut’s float – perhaps unsurprising given that it is one of the biggest firms to list on the London Stock Exchange in years, and has chosen to list during a particularly dry spell.
Several investment platforms have already seen a flood of interest from savers. The shares began so-called conditional trading on Wednesday morning, meaning people could begin to buy and sell them – though not through an ISA or SIPP. Full trading starts on Monday.
The Hut Group listed at a value of £5.4billion, and has made its founder Matthew Moulding (pictured with wife Jodie) a billionaire on paper.
But in the two days after conditional trading started, The Hut became the fourth most-bought stock on AJ Bell’s platform during those 36 hours.
On Thursday afternoon it was the seventh most-viewed stock on Hargreaves Lansdown’s platform. And Interactive Investor also reported a significant amount of interest from its customers.
By close of trading on Friday afternoon the shares were at 592p – up 18 per cent from the initial offer price of 500p.
The sums involved in the initial public offering immediately grab the attention – The Hut listed at a value of £5.4billion, and has made its founder Matthew Moulding a billionaire on paper.
But just as much attention has been directed towards the company’s governance, which is shaky at best.
Savers will be faced with a quandary come Monday – should they steer clear of The Hut due to its laissez-faire approach to governance? Or will they be missing out on the next Ocado-style money spinner?
The Hut has enjoyed a meteoric rise since it was founded in 2004, when Moulding bought a CD over the internet and was inspired to set up his own online empire.
It now spans all areas of ecommerce. It owns a nutrition line called Myprotein, make-up brands such as Eyeko and Illamasqua, online make-up department store Look Fantastic and make-up subscription service Glossybox.
It also owns two boutique hotels in Manchester and the Hale Country Club and Spa in Cheshire.
On top of brands, the company also owns warehouses and production facilities in the UK, the US and Poland.
And the part that investors are perhaps getting most excited about, and which has led to comparisons with Ocado, is The Hut’s Ingenuity division. This part of the company develops online ecommerce technology which it licenses to the likes of Asda and Argos to run their websites.
Russ Mould, investment director at AJ Bell, points out that The Hut is growing its revenues ‘very rapidly’.
He says: ‘Its websites, warehouses and delivery network bring a big sprinkle of ecommerce magic dust to the company, especially as it licenses its Ingenuity logistics technology to major consumer giants like Nestlé, Procter & Gamble and Johnson & Johnson.
A similar strategy has driven Ocado to share price highs and generated substantial capital gains for investors.’
But there are setbacks. The company’s free float – or the proportion of shares which are available to trade and are not being held by long-term investors – is limited. This means the shares may not be easy to buy and sell in a hurry. Profitability is weak.
Mould says: ‘Cumulative net losses exceeded £100million from the start of 2017 to June 2020, and ongoing investment does not guarantee that revenue growth will turn into profits.’
Perhaps most worrying is the number of red flags which governance experts have raised.
Moulding is both chairman and chief executive – a practice banned by corporate governance codes, which the company has chosen to shun, since it reduces independent oversight in the boardroom.
He is also the The Hut’s landlord – he has bought its properties and is leasing them back for at least £19million a year. And Moulding holds a ‘golden share’ in the company, giving him an inordinate amount of influence over any big decisions.
The Hut insists this structure allows the company to retain its ‘entrepreneurial’ spirit which has served it so well, while it says hiving off the properties will help to reduce the debt pile.
Cliff Weight, director of private shareholders’ group Sharesoc, says: ‘I wouldn’t invest my money in this. There’s just too many alarm bells.’
Many savers will choose to plough their money into The Hut anyway, dazzled by the success of Ocado and other tech stocks. But those who do should be aware of the risks.