- Hits breakeven early, on adjusted basis
- Margins moving in the right direction
- Share price has lost 75% since August 2021
A day after Just Eat Takeaway (JET) said its earnings were improving after having a sharper focus on profit, Deliveroo (ROO) rides up with a message that echoes much of that mood.
The food delivery platform, founded by chief executive William Shu a decade ago, says its annual core profit margin is expected to be higher than previous guidance after price rises and cost cutting helped ease the impact from a downturn in orders in the fourth quarter.
For 2022, GTV (gross transaction value) increased to £7.08 billion for all operations, including the Australian and Netherlands operations that were shut down in November. Significantly, second half adjusted EBITDA (earnings before interest, tax, depreciation and amortisation) is expected to be broadly breakeven, well ahead of previous management guidance of -0.5% to -0.8%.
In fact, strip out the now closed Australia unit, which made a rough £10 million loss in the first half to June, the overall adjusted EBITDA was positive in the July to December stretch. With further operational leverage expected in 2023, management expect margins to improve further.
LONG WAY FROM MEANINGFUL PROFIT
Deliveroo ‘still has a long way to go before it makes any big money, but at least it is travelling in the right direction,’ said AJ Bell’s investment director, Russ Mould.
Limited order volumes growth remains a concern, implying that the cost-of-living crisis is having a negative impact on takeaway demand. As restaurants push up prices to cover their own input cost inflation, it makes it more expensive for the consumer when they order a takeaway.
‘Deliveroo benefits from higher priced meals as it takes a cut of the order value, but many consumers will no longer be able to afford to get a curry or pizza sent to their house instead of cooking themselves,’ says AJ Bell’s Mould. Year-on-year volume growth disappeared in Deliveroo’s Q4, and if it goes into reverse over the coming months then the company might be less optimistic about its prospects.
EDGE OVER COMPETITORS
Financial discipline will be crucial, something the company or its peers have been great at, in the past. But it might have an edge over competitors.
‘With Deliveroo continuing to take market share, around £900 million of net cash, and lower cash burn, as a percentage of GTV), than peers, we see potential for a significant re-rating, particularly considering it trades at half the enterprise value to GTV multiples of its nearest peer,’ says Numis.
Deliveroo and others in the food delivery space must keep providing the evidence that they can turn the model into a reasonable money-making proposition.
Deliveroo’s share price has lost 75% since summer 2021, and as today’s flat response shows (at around 96p), the jury remains out.
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (Steven Frazer) and the editor (James Crux) own shares in AJ Bell.
