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Just Eat: Time to tuck in or throw out?

Published: 13:12 07 Mar 2017 GMT

picture of takeaway
Too rich? Maybe not

Is takeaway app specialist Just Eat (LON:JE.) cheap at twice the price or as appetising as a day old pizza?

The City is divided, as is the Proactive office, so in best fence-sitting traditions here are the key arguments from both sides.

Growth untamed: Three reasons to buy Just Eat

In  2016, orders grew 42% to 136mln with the online food delivery market place processing more than £2.5bn worth of orders in the period.

As a result, profit before tax more than doubled to £91.3mln (2015: £34.6mln) on increased revenues of £375.7mln (2015:£247.6mln).

So what say the bears, that’s history and the order trend is down.

Sure, but step back and look at the numbers. Some companies will need a decade to see sales income rise by that much.

Chief executive David Buttress is also still pretty bullish in targeting revenues of more than £480mln (up 28%) and underlying earnings of at least £157mln in the coming 12 months.

Remember that’s even with companies such as Uber and Amazon targeting the market, but they’ve made little impression so far and it’s hard to see why that would change.

Ok, but what if the UK slows

True, the UK accounts for two-thirds of revenue so that might make it vulnerable but the company is not standing still and waiting for the competition to catch up.

Just Eat said that while the UK remains its largest and core market, it is “excited” by the growth it is experiencing in its international businesses which are “much less penetrated” than at home.

The company has acquired several of its smaller peers in Italy, Spain, Mexico and Canada, while it is also in the process of taking out its main rival, hungryhouse, here in the UK.

Buttress – who is stepping down at the end of this month because of “urgent family matters” – said the spending spree will likely continue in 2017.

Net revenues in Australia and New Zealand tripled to £36.8mln last year, while net revenues in established markets (which include France, Ireland and Canada) jumped to £75.5mln from £55.8mln in 2015.

Similarly, net revenues in developing markets (Italy, Spain and Mexico) shot up by 175% to £26.2mln.

Shares gained more than 5% in early deals to trade at 543p and it’s not hard to see why.

Who’s to say international markets won’t eventually replicate what’s happened in the UK.

The app works, Just Eat has proven expertise and if it needs to build share quickly has shown it has the firepower to buy if necessary.

Quality will out

Even if revenue growth slows to 25% annually, in the three year’s time sales will be £750mln and the sales ratio 5 with an earnings ratio of 19 if profits move in step.

Value investors will baulk at that even then presumably, but in most cases you get what you pay for and if Just Eat can get anywhere those numbers in three year’s time the share price will be a lot higher than it is now.

 

Great business but past its best: Three reasons to sell Just Eat

A 36% year-on-year (like-for-like) increase in order growth would seem a healthy position to be in, but the impressive figures begin to look a little less impressive when you dig further.

In 2014 – the year in which Just Eat listed – the company posted like-for-like order growth of 50%. That then slowed to 46% in 2015, before the downward pattern continued into 2016.

Although today’s order numbers remain impressive, they do show that Just Eat’s growth isn’t exponential. Indeed, ever since it listed back in the Spring of 2014, Just Eat’s order growth has only ever slowed.

Not only that but guidance for this year is broadly in line with market consensus, whereas it’s been way ahead in recent years.

Increased competition

The slowdown in order growth at Just Eat comes at a point in its history when competition among its peers is at its most intense.

For years the company was then only real player in a market which very few thought would be as mainstream as it is today.

Now though, there are the likes of Deliveroo, Amazon and UberEATS competing in the same field.

As the businesses begin to grow – and given the backing behind the latter two, you have to assume that will happen – margins and market share will come under pressure at Just Eat.

Key departures

Chief financial officer Mike Wroe left the company after eight years running the money side of things at the online food delivery specialist.

Just Eat said it itself: “[Mike] was instrumental in growing Just Eat from a small private company with a big vision, to a large public business with even greater ambitions.”

His absence will no doubt impact the business, but the departure of chief executive David Buttress will be more keenly felt.

Buttress has been with the company for more than a decade, before most people had even heard of Just Eat, and he’s been the head honcho there since 2013.

Jefferies analyst David Reynolds described the chief executive, who is due to step down at the end of the month, as one of the “stand out entrepreneurs of the last decade”, adding that his leaving would be a “profound loss to the business”.

Two big blows to its senior management in the space of a few months can only weigh on Just Eat’s progress.

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