Just Eat Takeaway - DD - Stocks n trades

Profile:

Just Eat Takeaway.com NV, is a company based in the Netherlands that provides an online food delivery service (Just Eat provide their own riders to deliver the food) and an online food delivery marketplace (a marketplace that allows restaurants to deliver food with their own riders for a fee). The Company focuses on connecting consumers and restaurants, and allows users to order food from nearby restaurants and have the food delivered to their homes.[1] They operate in 4 key regions: North America (41% of Business), Northern Europe (26%), UK & Ireland (23%), Southern Europe & ANZ (10%). The company started solely as a marketplace, but has since evolved to provide their own service, while maintaining the original model as well.

Opportunity:

Just Eat Takeaway has had a turbulent past year. Like many food delivery stocks, they benefited greatly during lockdowns as people were forced to stay at home and order food online rather than go to restaurants. This created a surge in demand for their services. Since then, there has been a culmination of macro-economic changes that directly affect profitability and performance of delivery companies: European delivery stocks dropping after the EU announced changes in regulation around gig workers, North American delivery stocks dropping after NYC and Canada imposed caps on commission[2], and a rising interest rate environment. The troubles don’t end here with TKWY as there is a market view that they overpaid for Grubhub and is overreaching by shifting focus away from their core EU hub. Additionally, there has been miscommunication on strategy with the CEO changing his mind on grocery delivery.[3]

Since all of this Just Eat Takeaway has dropped 70% since the highs in October 2020 and perhaps the stock market is too pessimistic about it. At current levels, the stock is looking very attractive and there exists a possibility to purchase a company at a very low valuation. In this report, I lay out why despite all the downside, the stock is now a great buying opportunity.

Valuation:

At current valuation, their EV is around 8.1bn Eur. In their annual report of 2020, management has mentioned that their 33% stake in the company iFood has received multiple offers including one for 2.3bn Eur[4]. Assuming that it is still accurate, that puts the remaining value of the company at 5.8bn Eur. In 2021, the company paid 7.3bn USD for Grubhub, which in turn translates to 6.45bn Eur. Accounting for a current net debt position of 0.7bn Eur the current price puts the remaining operations of Just eat at -1.3bn Eur. Meaning you are being paid to take on the European business with 16bn+ Eur GMV. (GMV – gross merchandise value/volume, also referred to as GTV – gross transaction volume)

An argument can be made that recently these valuations for Grubhub and iFood are quite high and do not meet reality. If we assume a 60% reduction in value for both cases, that comes to a remaining EV of 4.6bn Eur for the entire European business. This still comes at the low end of its historic multiples. On the other hand, if the stake in iFood and/or Grubhub has since increased, valuation could be even cheaper.

Trading at historic low valuations:

Just eat is trading at the same price it traded in May 2017. Since then, it has grown revenue from 166 million Eur to over 3 billion Eur and GMV from 1.3 billion to 28.2 billion Eur[5]. It perhaps traded too highly in those previous periods, nonetheless, a return to a fraction of these valuations would present an opportunity to make returns of 100%+. It should also be noted that since then, a lot of M&A has occurred, meaning shareholders have had their shares diluted. Thus, comparing the two valuations is not so straight forward and should be taken with some scepticism.

In Netherlands and Germany, the company has proved that it can generate 5% net adjusted EBITDA on GMV[6]. If (and big if) they are able to achieve this steady state, then that would imply EBITDA of 800mn Eur on their European business. After 20% tax rate, that is 640mn Eur earnings assuming negligible D&A and with current balance sheet debt holding at very low values. A conservation 10PE ratio would put that at 6.4bn which already is higher than the current market share at which the entire company is trading at right now (excluding iFoods).

Long-term best-case scenario could include that GMV will continue to grow at mid teen digits[7] (assuming 15%) for 5 years –> 1.15^5= 200% over 5 years. Therefore, GMV would be around 56bn. A 4% Net Income margin would assume earnings of around 2.2bn Eur.

It should be noted that this assumes they will be able to achieve the promised land of 5% adjusted EBITDA to GMV as well as no execution risk or any other risks involved. On the other hand, it is a conservative ratio potentially implying a higher valuation.

Furthermore, as market trend moved from very bullish on food delivery companies and paying several multiples for GMV to now paying only a fraction for GMV, the trend could reverse, and these companies could see renewed upside. Trading at 1 GMV would imply a 300%+ upside.

Such a recent large sell off in their stock could be proven to be an overreaction and a great opportunity to buy a company selling below intrinsic value. “Large amounts of money aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates.” – Howard marks.

Other Funds positions

Cat Rock is particularly bullish on them with a sizeable position as well as Baupost[8]. Cat Rock has released a few presentations with how they can unlock a huge amount of value by partnering with certain companies and tapping into the same day delivery market. Additionally, they propose the sale of Grubhub (the US part of operations)[9], and go into more depth on growth, app ratings, addressable market, independent restaurants, etc.

Other points, risks and bear case:

The company is loss making

a. As the company is focussing on growth, it currently is investing heavily and trying to grow market share and revenue. Management said long term goals is to achieve >5% adjusted EBITDA margins on GMV. [10] For 2022, they are expect to come in the range of approx. -1.2% of GMV with this year being the biggest losses. For next year they are aiming at -0.6% to -0.8% EBITDA margin to GMV. It is still to be seen if they can achieve their long-term profitability. This is perhaps the most significant downside as you are paying for promised earnings in the future rather than current earnings with other companies.

It is trading at an elevated PS multiple compared to the market

a. Trading at about 1.75x PS ratio[11], argument can be made that Just Eat is somewhat under-priced compared to the SP500 and major indices.[12]

Growth will slow down in 2022 and beyond

a. Growth will decrease in the following years, however, they are still expecting to grow in the mid teen digits.

b. Additionally, it is expected that food delivery is just another pandemic trend that will decrease. The company is still expecting growth in this sector as well as some news sources[13], as habits have formed. Even as people do go back to restaurants and eating out during weekends, with working from home staying, certain habits will remain. The extent of this is still to be seen.

Regulation will hurt margins

a. Just Eat will in fact significantly benefit from the recent regulatory changes in Europe. Europe wants to recognise gig workers and riders as workers (so that they get benefits, sick leave, etc.) which would hurt many food delivery business models.[14] However, Just Eat already employs their riders as workers in most European cities and is one step ahead of regulation. This change will in fact benefit them as it could force some competitors out of business as they will not be able to keep operating at such low costs. This is perhaps one of the most significant potential upsides this company has over competitors in Europe.

Highly competitive market

a. A key advantage for Just Eat over Deliveroo, Uber and others is that Just Eat started and continues to operate a marketplace as well to employ riders unlike the competitors. Many restaurants still deliver with their own network of riders rather than paying the fees for hiring the platform, which means that Just Eat can take a cut of the GMV which is at a much higher margin. Therefore, they have a comparative advantage compared to other companies where they can offer logistics solutions that others do not.

b. That being said, the market is very crowded, and the competition is fierce with many companies investing significant amounts of money to capture market share.

c. This presentation with slightly outdated values intended for Deliveroo inadvertently highlights the cheapness of Just Eat before an increase in GMV and decrease in market cap.[15]

Rising interest rates will hurt growth and their “promised earnings”

a. Rising interest rates will hurt their long-term prospects of the value of their earnings and potential to raise capital. However, an argument can be made that the market has already priced that in, especially after a 60%+ drop and bond yields elevated.

Short term – Russian Ukraine conflict

a. This conflict though can be serious, but will unlikely lead to WW3 and all nations joining in. This will be primarily limited to Ukraine/Russia where the target market is minimal/non-existent. Potentially, a recent market overreaction.

Disclaimer: this is opinion, not financial advise and I am not a financial adviser. Speak to your financial adviser before making decisions.

[1] https://markets.ft.com/data/equities/tearsheet/profile?s=TKWY:AEX

[2] https://www.ft.com/content/d63d4453-62e0-40e8-a303-2ee483c1d792

[3] https://www.bloomberg.com/news/articles/2021-12-01/jitse-groen-just-eat-takeaway-ceo-buying-food-delivery-apps-bloomberg-50-2021

[4] https://s3.eu-central-1.amazonaws.com/takeaway-corporatewebsite-dev/10-03-2021-press-release-just-eat-takeawaycom-fy-2020-results.pdf

[5] https://s3.eu-central-1.amazonaws.com/takeaway-corporatewebsite-dev/28-02-2018-press-release-fy-2017-results.pdf

[6] https://s3.eu-central-1.amazonaws.com/takeaway-corporatewebsite-dev/21-10-2021-Presentation-Just-Eat-Takeaway.com-Capital-Markets-Day.pdf (page 72)

[7] https://s3.eu-central-1.amazonaws.com/takeaway-corporatewebsite-dev/12-01-2022-Press-release-Just-Eat-Takeaway.com-Q4-2021-Trading-Update.pdf

[8] https://www.bloomberg.com/news/articles/2021-10-19/klarman-s-baupost-boosts-stake-in-just-eat-takeaway-com

[9] https://justeatmustdeliver.com/

[10] https://s3.eu-central-1.amazonaws.com/takeaway-corporatewebsite-dev/12-01-2022-Just-Eat-Takeaway.com-Analyst-Presentation-Q4-2021.pdf

[11] https://www.gurufocus.com/term/ps/OTCPK:TKAYF/PS-Ratio/Just-Eat-Takeawaycom-NV#:~:text=Hence%2C%20Just%20Eat%20Takeaway.com,Ratio%20for%20today%20is%202.80.&text=During%20the%20past%209%20years,And%20the%20median%20was%2012.26