 Huddled Group (HUD.L) - 2.8p, £9.0m market capitalization.This note is intended as a short summary of my trade thesis for Huddled Group. (Myles McNulty)Have built a starter position in the stock between 2.4p and 2.8p, I am looking for the share price to climb over the coming few months into at least the 5-7p range. If the company continues to deliver rapid top line growth and on its goals to turn profitable and cash flow positive later this year, I will consider holding the position for the longer-term. Huddled's current revenue represents only a tiny fraction of its addressable market in the UK, and as such there is a huge opportunity for the company to multiply its revenues and valuation over the next several years..........OverviewAIM-listed Huddled Group is a direct-to-consumer e-commerce business. Over the past 18 months, it has spent a little over £5m on acquiring three brands focused on fast-moving consumer goods. They sell food, beverages and cosmetics products online to their customers at deeply discounted prices to the standard retail values of those products. The group is growing rapidly: in 2024, it recorded revenues of over £14m, an increase of 485% year-on-year. My view is that Huddled will move into profitability at the group level, in H2 this year.I believe the shares are significantly undervalued at 2.8p, and that such an opportunity exists as the story has developed very quickly (multiple acquisitions in a short time period), thus making the company's progress difficult to follow. Moreover, no equity analysts have been covering the stock, and there has been very little promotion to or amongst retail investors. I think that as of this week, management will be upping its efforts to address these issues, and that the shares are set to rerate..........The Business ModelThe company's mission is to stop surplus goods from going to waste. Huddled purchases products at various points throughout the value chain that would otherwise be destined for waste, at substantial discounts to their retail value. Through its three online brands, Huddled then sells those products to its own value-conscious customers at a mark up price, but which still presents a deep discount to retail value.Huddled acquires goods from a wide range of participants across the value chain: manufacturers, wholesalers, distributors, retailers, airliners and cruise liners, etc. It is able to purchase certain products at such steep discounts due to them being:- End-of-line goods, such as:o Discontinued products (items no longer being produced);o Old packaging versions (products being rebranded or packaged);o Overstocked items (excess inventory that didn't sell as expected);o Seasonal goods (items tied to specific seasons or promotions);- Goods nearing their Best Before Date;- Good with damaged packaging.Its business model is highly attractive to both suppliers and to customers. The former recoups at least some money from products that otherwise would have generated nil revenue (indeed, in most instances, companies would have to pay to dispose of the products); and the latter enjoys substantial price savings on buying products from the Huddled brands..........The BrandsHuddled acquired its first brand, Discount Dragon, in August 2023 for £3.95m, paid entirely in consideration shares issued to the vendors at 2.64p per share. Discount Dragon specializes in branded fast-moving-consumer goods such as food, alcohol, cleaning products, etc.In April, 2024, Huddled acquired the Food Circle which it rebranded as Nutricircle for £0.2m, with a further £0.1m payable after 12 months subject to certain performance targets being met. Nutricircle is focused on foods, drinks and vitamins for healthy and specialized diets.Finally, in July 2024, Huddled acquired an initial 75% stake in its third brand, Boop Beauty, for a modest undisclosed sum ("roughly equivalent to the value of stock on hand, with a commitment to inject further capital for growth"). Huddled acquired the remaining 25% stake in December 2024, for £0.1m (paid in consideration shares at 3.08p per share). Boop sources and sells end-of-life personal cosmetics such a make-up, perfume and skincare products..........The OperationThe three brands all operate out of a single, leased warehouse in Leigh, Great Manchester. In Q4 last year, the businesses fulfilled over 110,000 orders in total, approaching the limit of orders that the operation can handle. As such, Huddled reached an agreement with the property owner to redesign its current warehouse floor, as well as open an additional floor. The expansion should complete by end of this month, which should as much as double Huddled's total monthly capacity, from 36,000 to 40,000 parcels per month, to up to 80,000 parcels per month..........FinancialsOn a revenue basis, Discount Dragon is currently by far the largest of the three brands. In 2024, it generated revenue of £10.8m, an increase of 112% YoY. In Q4 alone, revenue was £3.1m, or £12.4m on an annualized basis. The average order value ('AOV') at year-end had reached circa £40.However, the other two brands are also growing sales extremely quickly, particularly over the past several months. Nutricircle generated revenue of £0.70m in Q4, up from £0.55m in Q3 and from only £0.35m in Q2. AOV is currently around the £34 mark. Having been relaunched by Huddled in September, Boop Beauty generated sales of £0.5m in Q4. To put that inaugural quarterly result into context, when Huddled made its initial investment in Boop, the brand had just recorded only £22k of sales in Q2 2024.Given that firstly, two of the three brands were acquired in the middle of last year; and secondly, Huddled has now integrated all three businesses into a single warehouse analyzing margin performance across the group is difficult, and the latest information that is available (from H1 2024) is not particularly helpful for predicting future performance.In Q2 2024, Discount Dragon achieved a basket margin of 20.9%. The "basket margin" is revenue less all costs associated with product purchase, packaging and payment processing. Besides the basket price, the other cost lines included in the cost of sales (i.e. within the gross margin calculation) are 1) warehouse personnel; and 2) marketing costs for the particular brand.In H1 2024, Discount Dragon delivered a negative gross margin of 2.2%, but Nutricircle delivered a positive gross margin of 15.2%.I am working on the assumption that the average basket margin across the three brands going forward will be circa 25%. [My gut feeling is that Nutricircle and, in particular Boop, will far outstrip Discount Dragon's basket margin.] Once the expanded operation at the Leigh warehouse has been scaled up (say to >60k orders per month), I believe that after warehouse personnel and marketing costs, gross profit margin will come in at around 13-15%.I assume general, administrative and PLC costs to be circa £2.5m per annum. So: were Huddled to process 60k orders per month with an AOV of £40, the business would be generating annualized revenue of £28.8m, gross profit of £4.0m and EBITDA of £1.5m. If it can build out the operation to 80k orders per month (the approximate capacity of the newly enlarged operation with the additional floor space), that would lift annualized revenue, gross profit and EBITDA to £38.4m, £5.4m and £2.9m, respectively. [To reiterate, these are solely my own estimated numbers.]As at 31 December, Huddled had £1.6m cash on its balance sheet, and no debt. This was down from £2.0m at 30 September 2024, and £3.3m as at 30 June 2024. Evidently, cash burn is dropping rapidly as the company drives its three brands towards profitability. In a year-end trading update last month, management reiterated that it is "confident that the Group has sufficient resources to take the business into profitability." In a video update published last Friday, management once again repeatedly stressed that the existing cash balance was strong and more than enough to achieve a cash flow positive position. [1][To note, Huddled does have a legacy business on its books, Let's Explore, which I will not be covering in this brief note. Whilst Huddled should be receiving a £0.4m cash inflow from Let's Explore this quarter, I believe the business will shortly be wound down / sold for a negligible amount.].........The Growth OpportunityI will not waste precious lines delving into the cost-of-living crisis in the UK, other than to say that it's very much still present. There's no shortage of cost-conscious consumers around right now! I would urge readers to visit the websites of Huddled's three brands to see the sizes of the discounts they are offering, and decide for themselves whether those product ranges could attract significant volumes of new and repeat customers. [2]In last week's management video, CEO Martin Higginson stated: "What we do know and we tested this in January with a new marketing message is we know that customers love what we're doing. We know we can get the customers. That's not an issue. This is all about doing it in a controlled manner."He also pointed out continued explosive growth in January from Nutricircle. Following TV and radio marketing campaigns, total orders in the month leapt to 13,400. Using the Q4 '24 AOV of £34, that's a revenue figure of circa £0.46m for January alone, versus the £0.70m generated throughout the three months October to December. That January figure puts Nutricircle on an annualized revenue run-rate of circa £5.5m. Remember that Huddled acquired this business for a mere £0.2m, only 10 months ago.Boop Beauty also appears to be growing rapidly. In November, circa 2,500 new customers placed orders through the website. In January there were circa 3,400 new customers an increase of 36%, despite January being a quiet month for retail, certainly relative to November. Huddled also launched Boop Beauty on TikTok in January, so that its product range is for sale directly on the TikTok platform. The customer reviews are superb. Moreover, having searched "Boop Beauty" on the TikTok platform and watched a load of creators' videos of themselves opening Boop products and commenting on the amazing value, I think there is serious potential for the brand to really take off, to go viral.In the UK alone, over 10 million tonnes of food go to waste each year, at an annual cost of £19 billion. Over 90 million beauty products are also thrown away, at a cost of £3.5 billion per annum. This should give readers some idea of the size of the total addressable market that is there for the taking, for Huddled's brands..........ValuationHuddled's three brands generated a combined £4.3m in sales in Q4 2024, which is £17.2m annualized. Towards the end of the quarter, it was constrained by warehouse capacity. Following expansion of its operating space at the warehouse (to complete this month), I feel that the business should be able to rapidly scale to 60k orders per month and certainly hit that on a monthly basis before the end of this year. As mentioned above, based on an AOV of £40, the business would be generating EBITDA of circa £1.5m on revenue of circa £29m.Given just how quickly the business is growing I think an EV/EBITDA of at least 15x is reasonable, which equates to a market capitalization for Huddled of £22.5m, or 7.0p per share. That is my own fair value for the business, as of today. That target valuation would almost double, if Huddled could reach 80,000 orders per month and EBITDA of £2.9m (the upgraded max capacity at its warehouse). Of course, were the company to surpass my expected gross margin of 13-15%, then those target valuations could rise substantially further.On a relative valuation basis, we must also consider Nordic peer, Motatos. Having launched in 2014, Motatos generated revenue of 68m in 2021, 76m in 2022 and 90m in 2023. In 2022, it raised 38m in equity at a post-new money valuation of over 300m despite being lossmaking in each of 2021 and 2022. The investors in that funding round were happy to pay upward of 3x NTM Sales.Personally, I think Huddled will generate at least £25m in revenue over the next 12 months. Were the company to be attributed the same valuation rating as Motatos (i.e. 3x NTM Sales), then its market capitalization and share price would be £75m and 23.4p, respectively. Clearly, Huddled trades at a very substantial discount to this recent precedent transaction..........Why does the Opportunity Exist?At present, not a single equity analyst in the City covers Huddled Group. There are no forecasts available in the market. Neither has any stock commentator in the retail space written in depth on the company. In my view, this has resulted in substantial value building up in the business, under the radar without the share price having reflected this surge in intrinsic value, whatsoever.I believe that investors looking at the company have been put off by the dwindling cash balance throughout 2024, as well as the negative gross margin reported for the first half of the year. In this note, I have attempted to explain why the group gross margin should now not only be positive, but steadily improving over the next 1-2 years; and that the cash burn should in my view, at some point in H2 reverse, as the business becomes cash flow positive.Companies on the LSE have been brutally and persistently undervalued in recent years none more so than the nano-caps and micro-caps of AIM. However, the mood is shifting, and quality companies are enjoying sharp share price reratings. As Huddled continues to grow its top line rapidly and transforms into a profitable company this year, I believe the market will begin to attribute a fairer value to it..........Risks to the TradeIn the near-term, for those swing traders reading this, I believe that the largest risks are in the company failing to build a positive gross margin, and in the cash balance dwindling faster than management anticipates. That could spook the market into assuming that an equity raise could be required which, in the current environment, invariably negatively impacts the share price. Mitigating factors for this? Given the relative proximity to profitability, modest debt of some form could likely be sourced, to bridge any funding gap that might emerge. Additionally, if in fact debt was not an option and an equity raise was required, I believe it likely that management (supported by a concert party in control of approximately half of the total voting rights) and the company's institutional investors would ensure any raise were achieved at an attractive price for existing shareholders.For long-term investors, there are plenty more risks to consider not least, the low barriers to entry for future competitors, and Huddled's lack of IP and moat. Given that this is not yet a large long-term investment position, I will not be covering those risks at this point in time..........[1] www.vimeo.com/1056856221[2] www.discountdragon.co.ukwww.nutricircle.co.ukwww.boopbeauty.co.uk |
Article By Myles Huddled Group #HUD has been creeping up over the past week, and now sits near the top of the range that it's been trading in for the past 18 months. I think a breakout is imminent.@huddledgroup owns three direct-to-consumer e-commerce businesses, all of which specialize in buying surplus stock from their respective industries of focus at extreme discounts to the retail price, and then selling that stock at (slightly less) deep discounts to their own customers.The businesses acquire stock through taking on items that are approaching their "Best before" dates (that supermarkets would not take on): that are held in large surplus in the supply chain (be it by producers / packagers / wholesalers / retailers); that have incorrect or damaged packaging; that may have undergone a brand change after entering the supply chain, etc.The three businesses are as follows:- Discount Dragon (discountdragon.co.uk) - acquired for £3.95m (100% of consideration paid in shares at 2.64p) in August 2023. Specializes in branded fast-moving-consumer goods (food, alcohol, cleaning products, etc.).- Nutricircle (nutricircle.co.uk) - acquired for up to £0.3m (up to £0.2m cash, £0.1m shares) in April 2024. Focused on foods for healthy and specialized diets.- Boop Beauty (boopbeauty.co.uk) - 75% stake acquired, for a modest undisclosed sum ("roughly equivalent to the value of stock on hand, with a commitment to inject further capital for growth") in July 2024.Discount Dragon is currently the largest of the divisions, accounting for circa 80% of group revenue at the present run-rate. As at end September, that run-rate was circa £1m per month; and the division had just move into a modest operating profit in the last two weeks of that month. DD is growing sales at an extraordinary rate: in August 2022, it recorded sales of only £75k for the month; this had increased to £450k by August 2023.In FY 2023, Nutricircle (formerly known as Food Circle, before HUD rebranded it) recorded revenue of £1.24m, and a net loss of £46k. In just the month of September 2024, the division recorded revenue of £225k and moved into a "modest operating profit".The final division, Boop, was relaunched on 12 September, and recorded £25k in sales in the three weeks to month-end.The approximate annualized revenue run-rates at end-September for the three businesses were therefore: £12m for DD; £2.7m for Nutricircle; £0.5m for Boop; £15.2m for the Group.All three divisions have now been relocated into a single warehouse in Leigh, UK, which will result in significant synergies and resultant margin boost.Presently, the operation can deliver up to 40k parcels per month. Assuming an average order value of £40, that's annual revenue of up to £19.2m pa. Evidently, the combined businesses are rapidly approaching max capacity, and so it is very welcome news that HUD has secured an agreement with its landlord to double the operational space at the warehouse, with expanded operations commencing February 2025.DD and Nutricircle had both achieved subsidiary level profitability (albeit very modest - presumably 1-2% in EBIT margin) by end September. Net cash stood at £2m, and inventory £1.8m. Management was keen to stress that those existing cash resources will be sufficient to take the company through to cash flow positive next year, and that it does not intend to raise further cash via equity for the foreseeable future.Given the recent transitions to profitability at operating level in its larger two subsidiaries, I suspect that HUD would be able to secure access to a sizeable revolving credit facility from a bank, if required to accelerate expansion (notably, purchasing of inventory).[Confidence in the company's future (and in the strength of its balance sheet!) was also strongly demonstrated by the CEO making multiple open market share purchases totaling £177k over the last 12 months, including £103k worth acquired only two weeks ago.]......The value?The doubling of warehouse capacity - which comes online in 2-3 months - and assuming a £40 AOV, could push sales at max capacity to close to £40m pa.Assuming a gross margin (including fulfillment costs, advertising expenses and warehouse personnel) of 12.5% to 15.0% (mgmt's stated target), that'd result in a GP of £5m to £6m. Less circa £3m for G&A and other PLC costs... and suddenly that EBITDA figure of £2m-£3m versus HUD's current mkt cap of £11.2m (and enterprise value of only £9.2m) looks highly appealing!On a relative valuation basis, we must also consider Nordic peer, Motatos. Having launched in 2014, it hit revenues of 68m in 2021, 76m in 2022 and 90m in 2023. In 2022, it raised 38m in equity at a post-new money valuation of over 300m - despite being lossmaking in each of 2021 and 2022.With regards to HUD, we can see that those investors in Motatos were happy to pay upward of 3x NTM Sales.Even if we were to use a multiple of only 2x, that would suggest an enterprise value for HUD of £50m to £70m (I'm assuming sales grow to anywhere between £25m and £35m next year).Clearly, HUD trades at a very substantial discount to this recent precedent transaction. |
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