Is THG Plc a Buy at 46% Undervaluation? Stress-Testing the Discounted Cash Flow Case

The question of whether THG Plc (LON:THG) is undervalued by nearly 50% hinges on the reliability of its discounted cash flow (DCF) analysis—and how sensitive that valuation is to changes in growth, risk, and strategic execution. Recent refinancing moves, insider buying, and a restructured corporate strategy add layers of complexity to the case. Let's dissect the numbers and weigh the risks.

The DCF Case: A 46% Discount, but at What Cost?

THG's DCF-derived intrinsic value of £0.43 per share (as of June 2025) suggests its current price of £0.23 is undervalued by 46%. This calculation assumes:- Revenue growth: Expanding from £1.75 billion in 2024 to £2.58 billion by 2034 (3.9% CAGR).- Profitability: Net margins improving from -10% (2024) to 3% by 2034.- Discount rate: A weighted average cost of capital (WACC) of 7.9%, factoring in THG's beta (volatility) and debt levels.

Stress-Testing the DCF: What If Assumptions Are Wrong?

The model's sensitivity to inputs is critical. Let's test two scenarios:

Scenario 1: Pessimistic Growth (2% CAGR vs. 3.9%)

• Revenue in 2034: £2.06 billion (vs. £2.58 billion).
• Terminal Value: Drops to £522 million (from £961 million).
• New Fair Value: £0.27 per share—eliminating the undervaluation.

Scenario 2: Higher Risk (Discount Rate Rises to 10%)

• Present Value of Cash Flows: Falls by 20%.
• New Fair Value: £0.34 per share—still a 39% premium to the current price.

The takeaway? THG's valuation is more robust to discount rate hikes than to slower growth. This underscores the importance of its ability to deliver revenue expansion and margin improvements.

Strategic Moves: Management's Confidence or Desperation?

Recent actions signal management's belief in long-term value:

1. Debt Restructuring:
2. THG reduced its debt/equity ratio from 220% to 197% in 2025 via a £68 million insider buy and a £22 million equity raise.

3. Lower leverage reduces refinancing risk, improving cash flow visibility.

4. Insider Buying:

5. CEO Tim Forde and directors purchased £130 million of stock since 2023, reinforcing confidence in the business model.

6. Strategic Divestments & Acquisitions:

7. Divested non-core assets (e.g., OnDemand division) to focus on high-margin segments like e-commerce and media.
8. Acquired City A.M. Ltd (a UK financial news outlet), diversifying revenue streams.

These moves align with DCF assumptions by trimming inefficiencies and boosting cash flow stability.

Risks to Consider

• Profitability Timelines: THG isn't expected to turn profitable until 2030, and even then margins remain modest (3% by 2034). Delays could collapse the valuation.
• High Volatility: With a beta of 2.18, the stock swings sharply with market sentiment.
• Execution Risks: Integrating acquisitions and reducing debt while scaling operations is no small feat.

Investment Thesis: Opportunistic Buy with Caveats

THG's 46% discount creates a compelling entry point if:1. Growth materializes: Revenue expands at 3.5%+ annually, and margins improve as planned.2. Debt stays manageable: Leverage doesn't escalate, preserving liquidity.3. Insider confidence holds: Management continues to backstop the stock through purchases.

However, short-term traders should steer clear. The stock's volatility and lack of profitability make it a long-term bet.

Final Verdict

Buy THG if you're willing to bet on its long-term vision and have a 5+ year horizon. The 46% discount provides a margin of safety, but monitor profitability milestones closely. For others, wait for clearer proof of execution—or a dip below £0.20 to widen the margin further.

Rating: Hold for now, but consider accumulating gradually below £0.25.