Just Eat Investors can smell the kitchen for profit

James Gard: Welcome to Morningstar. Today, we are talking about Just Eat Takeaway, which has just published its annual results. With me today is Ioannis Pontikis, who is an equity analyst for Morningstar. He just got on the phone with Just Eat Takeaway and he has an instant reaction to the results.

What’s the first line, Ioannis?

Ioannis Pontikis: So broadly in line with FY 2021 results, both for revenue and adjusted EBITDA lines. Management reiterated guidance for fiscal 2022, GTV and order growth. The performance was already reported in January with the fourth quarter trade update. Three main takeaways here. First, EBITDA losses in North America and the UK above expectations, which could be a sign of less competitive intensity in these markets. In North America, the main industry-wide headwind is the ongoing hiccups in New York and San Francisco, which have significantly dampened Grubhub’s profitability. Second, the announcement of market exits in Portugal and Norway is another sign of a gradual transition to a more normalized rational market environment. As a reminder, Deliveroo recently announced that it was leaving Spain. We believe this is a slow but sure way to fix the market in food delivery, with companies essentially reassessing capital allocation frameworks focusing on markets with a higher chance of to earn. And third, a strong balance sheet and plenty of options thanks to the iFood stake, which we estimate is worth around 3.5 billion euros, basically a strong cash position is of paramount importance these days- ci, as raising capital is becoming increasingly difficult and costly in today’s capital market environment.

Gard: Sure. Thanks very much. I mean, as you mentioned, the company has hinted that its profit margins will increase this fiscal year. I mean, they said that was the peak loss year. Are you satisfied with these forecasts? You think the $1 billion loss they made last year, do you think that’s as bad as it gets?

Pontic: Sort of, yes. I mean, this is the year of big investments. In reality, 2021-22 will be essentially half of that in terms of margins. And then, in 2023, we expect the group to gradually start to have a positive performance in terms of results. Bear in mind James here that in food delivery it’s really important – profitability is really a function of what the competition is doing and whether the competition is doing rational things in terms of capital allocation or no. Otherwise, if the competition is irrational and you have a strong cash position, I think the best strategy for the future is to keep investing for growth, because when we talk about food delivery businesses, it’s This is a network effect activity. You must therefore increase your turnover in order to strengthen your network effects.

Gard: Sure. So you think the company’s dominant position will continue to work in its favour. I mean, I know it’s always been one of your favorite picks in this industry. Do you think this will continue?

Pontic: Yes. In fact, Just Eat Takeaway is our top pick in this space. We believe the sector is generally undervalued, and this is likely a cyclical effect and a function of interest rate tightening and the outlook for interest rate tightening. Typically, long-lived stocks like food delivery companies are penalized in these environments. But Just Eat Takeaway is actually our top pick, a significant upside implied by the current estimate of fair value.

Gard: Sure. Do you think there would be a change in your fair value estimates after the latest results? Or is it too early to tell?

Pontic: No, it was – as I said, because it was largely in line with the orientations that were reiterated. We believe there is no need to change our estimate of fair value.

Guard: I get it. Agreed. And do you think investors just need to be more patient with companies like Just Eat Takeaway?

Pontic: Yes, although we do see some near to medium term catalysts that will help unlock the value that we believe Just Eat Takeaway has. We believe this is a very high return, low risk situation for patient investors.

Guard: Do you really think these stocks have outgrown the idea that they are pandemic stocks? People, once they try them, will continue to use them, even if there is no lockdown.

Pontic: Well, what we’re seeing in terms of download data, (usage) and growth rates in terms of order growth and GTV in the food delivery space is that behaviors related to the pandemic continue even after the pandemic, albeit at a much slower pace, but this company will continue to grow at double-digit rates for the foreseeable future, in our view.

Guard: Great. Thank you very much for your ideas, Ioannis. For Morningstar, I’m James Gard.

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