Delivery Hero: The Mayhem Is Over, Clear Road To Profitability

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Delivery Hero (OTCPK:DLVHF) published their Q4 2022 trading update past week. In nan opening of 2022 I wrote astir Delivery Hero; while it seemed 'undervalued' astatine nan time, nan institution was nether important dilution risks.

At nan time, Delivery Hero banal had conscionable knowledgeable a immense diminution from €130 to €28 successful a mates of months, losing billions of marketplace capitalization and creating a batch of play astir nan company. Now a twelvemonth later DH seems to beryllium successful a overmuch amended position.

The bull case

Let maine soon reiterate nan bull lawsuit connected Delivery Hero. Delivery Hero manages nutrient transportation platforms crossed nan globe. The institution is peculiarly highly exposed to emerging markets (South Korea is simply a immense position) done countries successful Asia, Middle East, Europe and nan Americas. Generally speaking, these countries are considerably underpenetrated successful position of nutrient transportation and are apt group to person comparatively precocious economical maturation rates; a aureate operation for precocious gross maturation rates to come. Food transportation platforms embody highly charismatic economics; nan three-party web pinch restaurants, drivers and consumers is difficult to break. Particularly, nan largest level successful a state tin get customers astatine a importantly little CAC owed to businesslike trading investments. Recreating nan web of restaurants and to a lesser grade drivers is not an easy task either. Delivery Hero's precocious humanities maturation rates (66% changeless rate GMV maturation successful 2021) are partially a consequence of that.

One large logic for nan important banal diminution past twelvemonth was management's bad superior allocation:

• I do continue to beryllium captious of nan Glovo acquisition of DH; while I spot nan maturation imaginable successful Eastern Europe nan company is facing important regulatory backlash successful Spain. Spain and Italy made up astir a mostly of Glovo's GMV successful nan opening of 2022 and peculiarly Spain is Glovo's strongest position.
• Also, see nan finance successful Deliveroo (OTCPK:DROOF) - that presently has a antagonistic endeavor value. Last year, Delivery Hero acquired a important liking successful Deliveroo. Deliveroo is under important competitory unit from Just Eat Takeaway (OTCPK:JTKWY) and Uber (UBER) Eats; it is clear that nan CEO of Just Eat Takeaway wants to conquer nan UK and London. Deliveroo is nan marketplace leader successful London and Italy (where Just Eat is simply a adjacent second) - but it does not person nan financial intends to prolong those positions successful my opinion. The banal value reflects that. Just adding a quote from nan JET CEO from Q4 2021 call:

"We are going to put immoderate is basal to make judge that we are going to beryllium by acold nan marketplace leader successful London." Jitse Groen, CEO of Just Eat Takeaway

Management needs to person a amended superior allocation strategy going forward. I americium optimistic astir that.

One of nan largest exertion investors successful nan world, Prosus (OTCPK:PROSY) owns 25% of Delivery Hero. This puts much estimation nether nan finance lawsuit of Delivery Hero. Prosus is optimistic astir nutrient transportation arsenic a agelong word finance and intelligibly they spot Delivery Hero arsenic 1 of nan champion finance vehicles to benefit.

Market shares

Delivery Hero mostly operates marketplace starring aliases competitory number 1 position successful astir of its markets. 51% marketplace stock successful nan Philippines successful May 2022, 64% marketplace stock successful Hong Kong, 54% marketplace stock successful Spain (with important regulatory backlash) and a beardown marketplace starring position successful South Korea. Management stated successful nan caller telephone marketplace stock is expanding successful 'nearly each countries'.

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In Asia its biggest competitors are Uber and Grab (GRAB). Both Uber and Grab are nutrient transportation and thrust hailing platforms. These platforms are capable to waste nutrient transportation benefits and thrust hailing benefits successful 1 subscription. I americium not optimistic astir nan worth proposition of combining nutrient transportation and thrust hailing benefits successful 1 subscription. In nan US DoorDash (DASH) has importantly outgrown Uber Eats successful caller years and go nan clear marketplace leader successful astir areas. In Brazil, Uber besides mislaid massively to iFood - of which Just Eat Takeaway precocious sold its 33% liking to Prosus. Brazil is Uber's highest penetrated marketplace successful position of play progressive users for its thrust hailing service. Yet it near nan nutrient transportation marketplace astatine nan commencement of 2022 owed to iFood's dominance.

I do not spot these thrust hailing competitors pinch nutrient transportation platforms arsenic posing a important consequence to DH's communicative - peculiarly considering DH's starring position successful astir of its markets.

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Results

FY2022 results from Delivery Hero came retired strong. GMV of nan group grew by 17.5% successful 2022 pinch maturation slowing down successful Q4 2022 to 8.8%. Probably a important information of this driven by AOV description truthful nary outlook connected bid growth. Particularly noticeable is nan maturation astatine nan MENA and Europe businesses, these businesses grew their GMV by 18% and 19%, respectively, from Q1 2021 to Q1 2022, while nan Americas and Asia segments saw practically nary growth. These are really very bully results successful a 4th pinch very difficult comps: power crisis, economical uncertainty and eased lockdowns. The beardown capacity crossed nan committee strengthens nan lawsuit for reasonably beardown maturation astatine Delivery Hero going guardant into nan adjacent years.

The group accrued profitability massively, pinch nan adj EBITDA separator sitting astatine -0.3% successful Q4 2022 from Q4 2021. Annualized we are talking astir a €1.34 cardinal betterment successful adj EBITDA successful conscionable 1 year. This really shows really profitability successful nutrient transportation is very overmuch successful power of nan company's management. A slowdown successful trading walk and accrued attraction connected logistical ratio / value-adding orders tin easy adhd a cardinal successful adj EBITDA successful a year's time.

Considering nan institution burned €1.2 cardinal successful ttm 2022, this caller separator description looks group to importantly little rate pain going forward.

The institution is guiding for adj EBITDA separator to grow to 1% of GMV by H2 2022. Annualized pinch 15% GMV growth, this is astir €500 cardinal successful adj EBITDA astatine H2 2022. On this discussion, we person to wonderment whether Delivery Hero will beryllium returning immense amounts of EBITDA successful nan coming years. Listening to nan call, guidance intelligibly states they judge galore of their markets are underpenetrated and supply charismatic reinvesting opportunities. I deliberation we person to expect guidance to summation profitability to a level that takes distant immoderate important liquidity and dilution risks, but not further.

Advertising

Delivery Hero is optimistic astir nan traction successful advertising. It is charismatic that speedy commerce and restaurants tin walk an other subordinate connected advertizing to get much attraction for their offering, but I deliberation nan CEO of Just Eat Takeaway had a applicable constituent astir that:

'I do want to be aware connected nan optimism because I spot a batch of group constitute astir advertisement, et cetera. It's not that these restaurants person truthful overmuch money to play astir with, right? I mean it's still a marginal okay, I want to beryllium higher than my neighbour benignant of thing. You should not expect each of a abrupt nan committee gross to double arsenic a consequence of that. And I spot sometimes very optimistic views connected this successful nan expert reports. '~Jitse Groen, Q4 2022 Trading Update Call JET

The attractiveness of advertizing revenues is that it evidently is simply a package separator revenue. Excluding trading costs we are talking 90+% adj EBITDA present depending per company. If Delivery Hero tin make advertizing revenues 10% of semipermanent revenues astatine a 50% adj EBITDA separator that is an other €500 cardinal successful adj EBITDA astatine this year's revenue. But pinch 20% CAGR maturation rates successful nan coming years (which are likely) I tin easy spot advertizing lend a cardinal successful adj EBITDA successful a mates of years.

It makes maine wonder; what nan quality is betwixt advertizing and nan marketplace. In some cases, restaurants salary a package separator interest to get customers to bid nutrient connected a platform. If nan level has a moat and has nan astir customers, that is simply a sustainable gross stream. Why is advertizing hep and marketplace outdated? Frankly, I spot very small quality isolated from that marketplace restaurants run their ain transportation fleet, but that is simply a much applicable chat successful a Just Eat Takeaway article.

Valuation

Delivery Hero continues to beryllium importantly leveraged pinch a nett indebtedness of €2.6 cardinal and a full indebtedness of €5.7 cardinal (cash astatine €3 billion). On February 13, 2023, nan institution raised a convertible enslaved pinch a 3.5%-4% liking rate. The institution should beryllium capable to salary that liking complaint easy crossed its debt.

With a banal value of €42.10 nan marketplace headdress sits astatine €10.8 cardinal and nan endeavor worth astatine €13.4 billion

Below you tin spot a elemental exemplary pinch a 20% CAGR for GMV from 2023 to 2028 and a adj EBITDA separator of 3% astatine 2028. With an endeavor worth of €13.4 billion, this models implies 3.3 times existent EV / 2028 adjusted EBITDA. Maybe earlier that nan shareholders get immoderate rate flows from 2025 to 2027. Paying 3.3 times adj EBITDA for 2028 is not incredibly charismatic (with a 50% adj EBITDA to FCF conversion that is 6.6 times FCF), and truthful intelligibly adj EBITDA margins or/and gross maturation rates person to beryllium a spot higher. I deliberation DH could propulsion that disconnected pinch important probability of success. Particularly nan margins. Increasing adj EBITDA margins to 5% aliases 6% - which is really beautiful realistic - paints a very different image (1-1.5 times adj EBITDA becoming 2-3 times FCF). The banal still prices successful important pessimism. Considering caller separator description it is apt DH tin execute that mature authorities pinch small dilution and enslaved raises from now on.

Also, if you look astatine financials of Grubhub and Just Eat successful 2017 and 2018 nan EBITDA to FCF speech complaint becomes much for illustration 80-90% successful a mature state; arsenic these businesses are very superior businesslike and require small capex successful a mature form. With those speech ratios a 20% CAGR and 6% adj EBITDA margins leads to free rate flows of astir €7 cardinal by 2028.

Estimates for Delivery Hero coming years (Author)

Conclusion

Delivery Hero is well-positioned to use from nan take of nutrient transportation successful emerging markets, while nan banal whitethorn look costly astatine first glance, fantabulous operational capacity and superior allocation tin lead to a important summation successful nan banal price.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

Robert Vink has graduated successful Business Analytics astatine nan VU Amsterdam, and is presently pursuing a CFA. In his articles, Robert has mostly covered underfollowed European stocks and exertion / e-commerce stocks successful general. I americium unfastened to beforehand agency occupation oppourtinities successful finance for illustration finance analyst, equity investigation expert and finance banking analyst.