viewJust Eat Takeaway.com NV

Just Eat dips as doubts grow over the cost of international expansion

Orders via apps accounted for 54% of total orders, up from 46% in the first half of 2017

Chinese food
Competition from Uber and Deliveroo is beginning to bite

Investors had no appetite for Just Eat PLC (LON:JE.) after the couch potatoes’ favourite saw earnings growth ease off.

The operator of an online hub for takeaway food ordering said underlying earnings (EBITDA) in the first half of 2018 rose 12% to £82.7mln from £73.6mln the year before, in line with consensus.

READ: Deliveroo vs Just Eat: is the market big enough to accommodate both?

Profit before tax fell 3% to £48.1mln from £45.9mln the previous year, reflecting costs associated with the acquisition of rival Hungryhouse.

Revenue rose 45% to £358.4mln from £246.6mln the previous year as the number of orders processed rose 30% to 104.4mln from 80.4mln, implying an increase in the average revenue per order. The consensus forecast for revenue was £337.3mln.

Canada the star of the show but the hybrid model in Oz is experiencing teething problems

Revenue in the UK rose 30% year-on-year (yoy) but this was put in the shade by the 212% increase in Canada, following the group’s acquisition of delivery service, SkipTheDishes.

In contrast, revenues were down by 28%, or 2% on a constant currency basis, as the Australian business makes the transition to a hybrid order taking-delivery model.

International revenue up 36%, or 35% on a constant currency basis, driven by strong order growth in Italy, Spain and Mexico.

Revenue guidance for the full-year was raised to between £740mln - £770mln, up from £660mln - £700mln. Underlying EBITDA guidance for the full-year remained unchanged, however.

Cash generated by operations was up 13% to £77.2mln from £68.1mln the previous year.

"The Just Eat Group served 24 million customers with 104 million takeaways through the group's platforms around the world,” said Peter Plumb, the chief executive officer of Just Eat.

“Our increased investments in technology, brand and delivery are on track to make our service even easier to use, whilst expanding our customer's choice. I'm pleased with the strong start to the year and excited by our opportunity to help many more people enjoy more of their takeaway moments through our platforms," he added.

The dash for international growth is dividing opinions

Neil Wilson at markets.com said the group’s earnings were looking “suitably well nourished”, but as feared, “costs are rising and the question marks over the pivot towards offering delivery remain”.

“Revenues rose 45% to £358.4m, which matched the pace of growth seen last year. Underlying earnings growth before nasties was softer than last year though, reflecting the costs associated with expansion and acquisitions. Underlying EBITDA rose 12% to £82.7m, with the pace of growth slowing from the 42% registered over the whole of last year,” Wilson noted.

“Acquisition and integration costs are starting to bite – profits before tax slid 3% to £48.1, which the company says is down to the acquisition of Hungryhouse. Longer term this acquisition is a huge positive,” Wilson suggested.

The group increased its investment in technology to £46.7mln in the first half of 2018 from £35.6mln while marketing spend rose 29% year-on-year to £69.6mln from £54.0mln, prompting Wilson to observe, not for the first time, that global expansion is coming at a cost.

“It is becoming a difficult task in managing growth and building out scale without eroding margins. Heavy investment in its own delivery network may not be the right option but management is sticking to its guns and will invest more heavily in delivery,” Wilson said.

In a similar vein, with group revenues beating the market’s expectations, Artjom Hatsatjurants of Accendo Markets asked rhetorically: what’s not to like?

“The key, as usual, lies with the outlook. Just Eat management was confident enough to raise FY revenue guidance (+12%), but left the profit outlook unchanged, suggesting lower margins for the year and leaving investors with a sour taste in the mouth,” Hatsatjurants explained.

“Positive results so far this year certainly give Just Eat enough slack to increase investments into streamlining customer and partner experience (both important for long-term growth), with CAPEX increased ~20% for the rest of the year (from £50m to £55-60m range), and the highly aggressive sector competition (from the likes of Deliveroo and Uber Eats) appears to be forcing Just Eat to keep investing in growth,” the analyst continued.

The first quarter update saw the board singing a similar tune and the shares rose 4% on the day.

Significant raising of FY revenue expectations

“This time, however, concerns over price competition appear to outweigh the positives,” Hatsatjurants said.

The shares were down 2.4% at 826.2p in the first hour of trading but that did not stop Liberum Capital Markets from enthusing about the interims and “a stellar beat” versus the first half consensus revenue expectations.

“More importantly, there is a significant (10%+) raising of FY [full-year] revenue expectations,” Liberum noted.

“Some bears may say that the fact Just Eat has kept its FY18E underlying EBITDA at £165mln-185mln and the raising of longer-term investment from £50mln to £55mln/£60mln is a negative - we disagree. Fundamentally, Just Eat is pursuing exactly the right strategy as this is a very high growth market and effectively what Just Eat should be doing is grabbing as much share as they can as quickly as they can to consolidate its number one position,” Liberum asserted.

“Another positive is that c. 70% of the estate is now in tier 2-5 cities, where competition is not only lower but also harder to set up and the fact that its Orderpad - which is a very effective tool for consolidating Just Eat's position in its existing restaurant base by its functionality and size - has more than doubled its reach yoy to 34.300 (1H17 = 15,400) is also a plus,” the broker said as it reiterated its ‘buy’ recommendation and 850p target price.

--- Adds comment from Accendo Markets ---

Quick facts: Just Eat Takeaway.com NV

Price: 7165 GBX

Market: LSE
Market Cap: £4.38 billion

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