Hut Group owner THG PLC's (LSE:THG) plan to spin off its Ingenuity business should "release underlying value", according to analysts at Peel Hunt.
Last week the nutrition, beauty and financial publishing group said it has begun working on selling its digital and logistics arm, as well as tweaking its listing category on the London Stock Exchange so it can be included in the FTSE indices.
Peel Hunt considered the potential demerger of Ingenuity, focusing on the investment case for the remaining THG Consumer business.
Analyst John Stevenson estimated that THG Consumer could generate £2 billion in revenue, £138 million in EBITDA and £45 million in pre-tax profit by its 2025 fiscal year.
Ingenuity was valued at between £200 million and £300 million, based on a multiple of 8-10 times 2025 EBITDA.
At this lower amount, this "implies" a valuation of only £500 million for THG Consumer if the demerger occurs, Stevenson said, suggesting a 17% free cash flow yield, a metric that measures the return a company generates in the form of free cash flow relative to its market cap.
But based on the average free cash flow yield in the wider UK retail and consumer sector of nearer 6%, this would imply a THG Consumer valuation of around £1.4 billion, the analyst concluded.
"The initial outcome is likely to be somewhere in the middle, but whichever way we cut the numbers, we expect the demerger to release the underlying value here," he said, reiterating a 'buy' rating and a target price of 141p.