Just Eat shares dumped on lighter guidance as delivery investments are stepped up

By Neil Wilson
ETX Capital

Just Eat delivered another firm set of numbers that displayed its increasingly pivotal role in the UK takeaway market, but expansion globally is coming at a cost. Having performed very strongly to date, there is a difficult task in managing growth and building out scale without seeing margins crumble. Heavy investment in its own delivery network may not be the right course.

Revenues were up 45% to £546 million, ahead of guidance for £515-530 million, on a 26% rise in orders to 172m. Earnings were also higher and marginally ahead of guidance, with underlying EBITDA rising 42% to £164 million, slightly above the top of the guided range of £157-163 million.

UK performance was very strong. It is the firm favourite in what increasingly looks like a winner-takes-all UK market. Having gobbled up Hungryhouse, the scale and network effects are bound to improve. Revenues rose 28% to £303.8 million, whilst uEBITDA increased by 28% to £155.4 million, despite investment in delivery capabilities that are of questionable value longer term.

But the group recorded a statutory loss before tax of £76 million, down to a £180 million provision in relation to the acquisition of its Australia & New Zealand businesses. Australia is a tougher market due to population distribution (or rather, lack of), with dense concentration in major cities making the market far more competitive. In order to compete in Australia it’s rolling out ‘a delivery capability’, but there is a question if it’s worth the investment, likewise UK and Canada, where it is increasingly building delivery scale of its own.

One of Just Eat’s big advantages over peers has been that it only handles the ordering side of the transaction, leaving the delivery to the restaurants. It does not face the associated costs with running a low margin delivery network. But it risks ceding this advantage.

The delivery-related business comprised 1.6% of total UK revenue, but investment is eating into profits. UK margins were held at 515 however as the £12.2m investment in this activity was balanced by increased profitability in the core market place business.

Canada is now its second largest market following the addition of SkipTheDishes. This contributed £50m in revenues on pro-forma growth of 264%. Investment to fund expansion into new cities and towns resulted in an underlying earnings loss of £8.5 million.

The company plans further investments into delivery in the UK, Canada and Australia & New Zealand – but there are doubts whether this will deliver for investors and there is a risk of becoming embroiled in a low-margin street fight with the likes of Amazon, Uber Eats and Deliveroo. Management notes dryly that ‘delivery-based activity has a different margin profile to our marketplace businesses’. There is a risk of management taking the eye off the ball by focusing on delivery instead of making the most of its status as the go-to platform and primary distribution channel for restaurants.

In terms of the medium-term outlook, management notes that the food delivery sector is evolving, with competition ‘intensifying in certain markets’: it clearly sees these investments as important in holding back competition, but it remains to be seen if this will boost profit margins in the longer term. The core marketplace business is expected to deliver uEBITDA of £215 – 235 million in 2018, but investments in building out delivery capabilities will drag group underlying earnings down to £165 – 185 million: £50m, or a quarter or so of underlying earnings. This is a little light and may be the reason investors are punishing the stock so badly this morning.

Overall when we look at it in the round, Just Eat is benefiting from the shifting trend in eating habits – more eating in, less eating out, insulating it from the kind of pressures on the high street that has affected chains like Byron and Prezzo – eg rising costs from business rates and minimum wage increase. Meanwhile the lower footfall on the high street as more spending occurs online is undoubtedly affecting volumes. All these trends look to be supportive for Just Eat.