Just EAT Takeaway.com – Just another roll-up or long term growth opportunity ?

Health Warning: This is not investment advise. PLEASE DO YOUR OWN RESEARCH !!!!!

Introduction

justeat

Just Eat Takeaway.com or “JET” is another of these stocks that popped up from different “high quality” sources. A few friends mentioned the stock, most recently Swen Lorenz featured JET (behind paywall). By coincidence I am also a relatively happy user of their service, especially since the lock downs started.

The company

A good starting point for an analysis is this write-up from a US based 2 bn USD hedgefund called “Catrock” which has invested ~30% of its NAV into JET and not surprisingly is very bullish. therefore I will only describe here what I find important.

Just Eat Takeaway.com or “JET” is the leading European Food delivery market place. The company was founded in the Netherlands in 2000 but especially in the last 2-3 years they managed to consolidate the market mainly in Europe and also in Canada to become the biggest player in a couple of mostly European countries such as Germany, UK, Netherlands, Poland, Spain, Italy and Canada. In 2020 finally they managed to take over US player GrubHub and added the US into their portfolio. This frantic deal making can be seen in this graph from their website:

JET

 

Business model considerations

JET “mostly” offers a market place model where users can select a restaurant and order meals but the logistics is fully in the control of the restaurant. In contrast, companies like Doordash or Uber Eats are running the logistics themselves.

The advantage of being “Only” a two sided market place is clear: One doesn’t need to deal with how to incentivise and steer drivers. This part is one of the biggest issues in ride hailing, including the question if drivers are employees or not. The disadvantage is that the market place doesn’t control the “full experience to the doorstep” and can only access restaurants with existing delivery operations.

From a restaurant perspective, the biggest difference is clearly that in order to participate on a pure marketplace, you need to have your own delivery service. If you don’t have that, you might rather go with a service that includes logistics.

One of the specifics of a food delivery platform is that similar to taxis, these platforms are  “Local marketplaces”. Both, the supplier and the buyer need a physical proximity as delivering a meal via DHL or UPS over wider distances  doesn’t make sense. Ebay for instance is a international market place. A buyer can order from a seller who is located anywhere. This means that competitive advantages are mostly restricted to specific metropolitan area and makes it potentially easier for a competitor to enter a market because they can do this gradually city by city to see if and how a market entry works. This could be seen nicely pre Covid-19 in ride hailing where for instance London became a battle ground for a couple of players trying their luck. 

Another example is Berlin, where Finland based Wolt has just entered after JET had kicked out or taken over all other competitors in 2018.

Another aspect of a “Local marketplace” is that it works best in relatively densly populated metropolitan areas and the app is able to aggregate a big enough amount of choices in its market place. In  a small town with maybe 2-3 restaurants, you don’t need an app.

Interestingly, JET runs a small logistic service named Scoober for Restaurants without own delivery, however that seems to be rather a “hedge” for them than an integral part of their offering.

JET is clearly NOT a “Tech company”, as the app as such is not that “high tech”. The value of the model clearly depends on being the leading market place with the right incentives to keep everyone on the market place.

Covid-19 impact

Covid-19 had a significant effect on both sides of the market place. Restaurants that saw their premises being closed needed to find new revenue sources, customers needed to find a replacement for going to restaurants or a work canteen. Obviously from a customer perspective, there are substitutes like meal kits, cooking or frozen pizzas or just call your favorite restaurant directly. However from a customer perspective there is clearly a value in have in choice and convenience. I wouldn’t want to have 10 different menus in my house, try to get through during lunchtime etc. etc. JET clearly benefited from that trend, although not to the same extent in all markets

Management / Supervisory Board/Investors

Founder and CEO Jitse Groen still owns (x%) of the company. Groen is a very interesting character and not the “adam Neumann” or “Elon Musk” type. He is only 40 years old and comes across quite humble for a self made billionaire. He paid himself 700k salary in 2019 which is pretty ok. Here is a recent interview:

One of the interesting aspects is that Groen is able to do deals in a relatively friendly way and seems to be able to retain key persons of the target company.

The Supervisory Board at first sight looks like a high quality board and not just some friends of the founder.

The biggest shareholders (pre GrubHub deal) are Jitse Groen (10,3%) and Delivery Hero from its swap of the German bsuiness (10%). Catrock owns 5%. AKO capital, another long term “high quality growth” investor owns 3% and it seems to be their 3rd largest position.

Extra assets

Kudos to Swen Lorenz who mentioned the “extra assets” JET has on its balance sheet. The most valuable is clearly their 33% stake in Brazilian market leader Ifood which last year was rumored to be worth up to 1 bn USD. Majority owner Prosus (Naspers) seems to be keen to buy Takeaway.com out. Such a transaction could be a small catalyst if and when it happens. Naspers in principle could be also one of these players who, at some point, might be interested in making a move on JET or maybe UBER or maybe Doordash with their insane valuation.

Issues/Problems

There are clearly a couple of issues which might explain the current valuation such as:

  • financial statements are not easy to read. there is no 2019 annual report, due to the mergers, there is only limited management accounting with adjusted numbers. The first “clean” financial statements will only be available after the GrubHub acquisition has closed
  • As mentioned above, being Number 1 in a local market place model does not prevent others to try their luck. This is happening currently in the UK where their market share is falling because of aggressive competitors and might happen as well in Germany
  • GrubHub: Entering the most competitive market via a share deal with Grubhub is clearly a risk. The competitors, especially Doordash and Uber Eats are super aggressive and Grub Hub has lost significant market share. 

Valuation:

At the time of writing, JET was valued at around 14 bn EUR with very little debt. However, one needs already to incorporate Grubhub, for which JET made an offer in 2020 for an all share deal. This adds another ~7.7 bn USD in EV.

JET clearly is not “Cheap”. Yes, you can compare it with overvalued stocks like Doordash then it looks relatively cheap but what I want to know is the following: Can I earn my required rate of return in a “reasonable” scenario ? For this I prefer a simple bottom up analysis.

This requires 2 inputs:  A reasonable scenario (based on some assumptions) and my required rate of return. As JET is clearly a relatively risky stock compared to my existing portfolio, I would require something like 15-20% on an annual basis for some period of time to make it attractive.

My “reasonable scenario” bases on the following assumption:

  • Total addressable market: For me, the TAM is restricted to Metropolitan areas in these countries where JET is currently No1. This also takes into account the different levels of Urbanization in Europe.
  • The relevant unit is number of households. Within a household, people tend only to order at one restaurant per meal
  • My heroic assumption is that in 7 years time, 50% of all Metropolitan households in their current No1 markets (ex US) will order once a week for a basket size auf 25 EUR
  • another heroic assumption is that the “take rate” is 20% and EBITDA margins are 40% and the exit multiple is 20xEV/EBITDA

This results in a total projected EBITDA of around 3 bn EUR in year 7. If I further assume zero value for GrubHub and zero value for Ifood and all non No1 markets, this would give me a 17% return p.a. 

As a sanity check, my assumptions would require them to have 4,4 mn clients in Germany in 7 years generating 230 mn orders, which is an implicit growth rate of around 13% p.a., for the Netherlands it would around 10% required growth but for instance for Canada 29%. Not that easy but also not totally unrealistic. 

Adding some value for Grubhub, Ifood and the other markets I come actually pretty close to my 20% requirement.

Now I could make things very complicated and try to incorporate other stuff but for me as a rule of thumb it always worked when my initial realistic scenario produces the required return without needing to tweak the model, then the risk/return of the investment should be OK. 

Is this a GARP stock ? Right now, based on 2020 numbers clearly not but based on 2021 numbers, I think the stock is clearly better value than many high flying investor darlings and in the long run it could turn out to be quite cheap.

Stock chart

A quick look at the chart shows that despite showing a decent uptrend, JET has not increased much in 2020 despite the clear tailwinds from Covid-19:

chart_all_Takeawaycom (1) delivery hero

However it is interesting to see how Delivery Hero, which is basically the EM version of JET has done a lot better in 2020 which might indicate that JET has some catching up to do.

Pros/Cons

As always a summary at this stage on what is good and not so good.

+ Founder/Manager led, 
+ shareholder structure OK, good supervisory board
+ good marketplace business model, good economics when No1 position is achieved
+ Covid-19 tailwind, permanent shift of behavior
+ potentially long growth runway due to shifts in consumer behavior
+ currently not easy to understand (incl. extra assets)
+ significant “real options” / event triggers (Ifood)

 – risky US expansion via GrubHub deal
 – only city by city  market place economics
 – risk of potential market entry by well funded competitors
 – substantial integration effort still to be made after “Roll up”
 – potential massive change in Restaurant industry more chains, cloud kitchens etc.)
 – loss of market share UK, US

Game plan:

I will start relatively small with a 2% position that I was able top buy last week for and average of ~93 ER per share.

My main focus areas will be to check how Grub Hub develops, how much market share they lose in UK and if growth rates remain in my target corridor especially starting with Q2 2021. If this is the case, I would gradually add to the position. If GrubHub for instance turns into a loss(negative CF situation or a competitor would launch a full scale attack in several markets, I would rather sell sooner than later.

For the time being it is more an “opportunistic” investment. JET is expected to post first 2020 numbers on January 13th, the stock could become volatile in the next days.

Money management:

As my cash percentage is now too low for my personal preference at around 7%, I started selling some shares of Naked Wine (0,5% of Portfolio) and Siemens Energy (0,5%) and will also sell smaller amount of other “high beta” stocks in my portfolio to fund this investment and keep cash closer to 10%. This is clearly a risky investment and I will need to make sure that my share of potentially volatile stocks is within my risk appetite limits.

 

40 comments

  • One thought on London/UK: I think JET wants to make it clear that competitors will not get market share easily from them, also as a lesson for other big cities.

    That might be expensive in the short term but hopefully good in the long term.

  • In this context:

    CEO answering questions on Twitter

  • Like the idea and due to valuation overall underweight such companies. So might be a good addition.

    Scoober adds fixed cost (employees) compared to variable cost via third party drivers | orders 100% variable
    How can they ensure utilization of scoober and avoid “stranded” capex?

    “not going to be highly profitable“
    grocery delivery makes no sense as logistics is a means to lock-in restaurants and not generate profits

    “delivery fee, as you know, is somewhere between EUR 0 and EUR 1.50 for logistical orders in most of our countries.”
    predatory pricing? Lawsuits from regulators/competitors?

    Q4 GMV was 4bn and revenue 720 – 740 million, that is 18.25% take rate? Is there potential to increase this?

    Overall, I would like to see like-for-like/organic growth numbers.

  • Great analysis, very thorough. Only one point of disagreement, the CEO. He might come across as humble, but he is not at all. He has changed his discourse over time, without any admission that he has done so, which in my experience is one of the negatives in any company. JET has gone from discrediting delivery to going in fully. Admittedly a necessary step, but he did not read it well and I would have preferred him admitting it.

    • mmhh, I have less a problem with that. I think the pandemic has shake up things a lot in the whole restaurant business and JET has reacted to it.

      And to my knowledge he always mentioned that Scoober is the tool to ramp up delivery if they need it. Which seems to be now.

    • I watched a few interviews with Jitse Groen, also older ones in Dutch, e.g. this one apparently from 2012

      and my impression is, that his narrative is very consistent. I think he knows what he’s doing.

      Disclosure: not invested (yet)

  • Thanks for the idea. A couple of questions if I may

    1. GrubHub used to be a very profitable two sided marketplace until they started their own delivery operations. In the “Operations and Support” line of Grub’s income statement one can see the impact this investment still has. The objective of the shift to a three sided marketplace is to strengthen the competitive position by providing an additional option to diners and restaurants. Management was most likely aware of the fact that without this decision the business model would not be viable over the long term.

    As you write that ” JET “mostly” offers a market place model where users can select a restaurant and order meals but the logistics is fully in the control of the restaurant.” I am wondering whether the “pure” marketplace model will stay competitive in JET’s markets? We might see a development comparable to GrubHub, which would be challenging to your assumptions (i.e. 40% EBITDA margins).

    2. “My heroic assumption is that in 7 years time, 50% of all Metropolitan households in their current No1 markets (ex US) will order once a week for a basket size auf 25 EUR” What are your assumptions concerning JET’s market share?

    • Thanks for the comment. Indeed, for the time being, won logistics seems to be necessary. Groen made quite a few comments on that in today’s call. However in the long term, the 40% EBITDA margin should still be achievable. They achieve a lot more in their most mature market, the Netherlands.

      With regard to 2: High. (70-80%). Maybe more in some markets (Gemrany, Netherlands), a little less in others (UK).

    • Jitse sounded very bullish indeed but he’s up against deep pocketed rivals in the logistics game. Since the update, stock is down 12% which is obviously driven by the EBITDA miss but my guess is a few of the investors are exiting due to the change in strategy.

      There is a takeout scenario with stock around Eur80 with Prosus making an offer although I don’t think Jitse is looking to sell soon.

      • Thanks for the comment. Indeed my timing was not optimal and the market seems to have interpreted the 12M numbers and the update very differently. A stock like JET clearly is also a lot more volatile. Let’s see how it develops but for me there is no reason to panic (yet)…

  • Zoltan Tibor Takacs

    Hi,
    how can you invest in a company that is not sharing anything but revenue/GMV in their annual results?
    This leaves a ton of questions on the real value of the company.

    • good question. I mentioned in the post that the reporting is relatively difficult to understand. The best information is to be found in the investor presentations. For me, this is one possible reason why the stock is relatively cheap but of course, I could be totally wrong. That’s why I also started with a small position. This is not a “high conviction fat pitch” at this stage.

  • Copyright buster

    Are you also the owner of Valuewalk MMI?
    Or did you allow they to copy your blog post?
    Or did they plaggiarise?

    https://www.valuewalk.com/just-eat-takeaway-long-term/

  • I never used any home delivery, and don’t plan to immediately. My perspectives on the game are accordingly lower. I wonder if the delivery slaves will get eventually some protection from Hubertus Heil, same as with the slaughter immigrant workforce. At least I wish them better lifes.

  • It’s fascinating the fantasy writing of some investors. Good luck, my friend !

  • I find it very strange that TKWY didn’t benefit at all from COVID, when all the other work-from-home stocks exploded. I have used the service in a few countries, usually the selection is not amazing and Wolt has access to a lot better restaurants.
    And btw, Swen Lorenz does write some very entertaining content but his long term track record is not really good. If you look at Web Archive or wallstreet-online.de you can find his picks of the last 10 years and many of them were very bad for the investors. Few examples are IVG, CAMECO, BSG Billing Services Group, BCB British Caribbean Bank. Even SBM which he boasts about since 2007 went down and then nowhere for many years. Of course on his site he only shows ideas from the last 2 years (he had 2 sites in the past which he closed down, arguably to rebrand himself and distance from the bad picks)… So I’d recommend to really double check his ideas. Just to clarify I got nothing against Swen personally, he writes some great content, but when you look at the bottom line it’s not looking good.

  • I would add “tech” to the cons. JET is perceived as the evil player that takes out the competitors in local markets (e.g. Germany) and makes the customer experience even worse (foodora -> lieferando). Compared to Wolt, there is 0 investment into the customer experience (App & Web). This means that using the product is purely out of necessity (e.g. because there is no other player on the market) and 0 stickiness with customers. Not having a sticky customer experience will cripple growth and will decrease the CLV. For example, it took a very long time for the company to implement tips for drivers and it’s a completely separate solution (separate page with need to re-enter CC details) without an integrated experience to the regular flows.

    Not taking tech seriously is also a problem due to GDPR. There was a dataleak from foodora that repeated itself [1,2,3]. Due to the acquisition, delivery hero, and now takeaway take care of the data and need to be contacted, but they claim they can’t do anything as old accounts “were migrated”. In 2020, the same old data leaked again. My account was affected and I started to get even more spam in 2020.

    [1] https://www.databreachtoday.com/delivery-hero-confirms-foodora-data-breach-a-14435
    [2] https://www.infosecurity-magazine.com/news/foodora-data-breach/
    [3] https://twitter.com/haveibeenpwned/status/1272713357120815105

    P.S. Some editorial glitches:

    > Another example is Berlin, where Finland based Volt has just entered after JET had kicked out or taken over all other competitors in 2018.

    Wrong V – it’s Wolt.

    > Here is a recent interview:

    The link is missing

    • Thanks for the comment. Correct, it’s Wolt and the link got lost somehow….should work in 5 seconds..

    • This is not correct. JET discloses cohorts in their presentations. Users are sticky out of habit.

      • I would even argue that there is some “Negative churn” on existing users. At least for me personally, I use it more often than when I started using it as during the lock down the range of options in my area became better.

        • Just to add on the churn dynamics in UK (I presume it is similar to other markets). Uber Eats and Deliveroo are heavy on promo codes – once these promo codes have expired, customers go back to JET’s platform to order due to better restaurant selection as well as cheaper prices.

          One thing to keep in mind, which will become clearer during March call, is JET’s investment in UK over the past few months. They’ve onboarded a lot of new restaurants (McDonalds – used to be exclusive with UberEats, and Greggs to name a few) during this period. Pie is definitely increasing and JET should be the major beneficiary of this.

          Full disclosure: long JET on multiple instruments in the capital structure

        • thanks for the comment. Although I assume that the chains might only sign up at lower take rates,

        • That is indeed the case. Order frequency seems to trend up as cohorts mature.

          Tomorrow’s release is going to be interesting as JET usually does not do webcasts after trading updates.

  • Thanks for the nice link!

    I have forwarded your email to the CEO and the head analyst of Cat Rock Capital, hopefully they’ll now join your readers.

    >

  • Sound logic, I like your thinking. Two questions:
    – is a take-rate of 20% sustainable without delivery?

    – how do you come up with an exit multiple of 20x Ebitda after the company has already grown tremendously?
    Maybe a weird comparison but a mature growth company like Google trades on 14x today!

    • Take rate: It is an assumption that I made. Maybe it is right, maybe it is wrong. However once a platform dominates a market, fees usually go up over time.

      20xEBITDA: That was again an assumption. A 15x Exit multiple would lower the returns by ~5% p.a. Maybe you should buy Google ? ,-)

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