Liberum thinks some of the criticisms levelled at Just Eat PLC (LON:JE.) by activist investor Cat Rock on Monday have some merit but is still of the opinion that bosses are broadly following the right strategy.
The City broker made its case in a research note, in which it repeated its ‘buy’ recommendation and punchy 1,250p price target – more than double the current price 578p.
US-based Cat Rock published an open letter yesterday calling for change at the online takeaway marketplace given the share price slump (-28%) so far in 2018.
The investor, which claims to hold 2% of the stock, put forward three main suggestions:
1. The setting of three-year financial targets with at least 20% organic revenue growth per annum and an EBITDA per order of £0.79 (the same as H1 but lower than the £0.97 of 2H17).
2. The changing of remuneration targets away from revenues and being aligned with the three-year plan.
3. The sale of the 33% stake in the iFood business in Brazil and possibly non-European assets (Liberum thinks Australia, which has come under attack from Uber Eats, is most at risk).
“Some of Cat Rock's comments have logic. For example, there is an argument that Just Eat should not have committed to pegging Marketplace (i.e. the core of the business where restaurants do their own delivery) revenue growth to growth per order, meaning the commission rate is not raised,” said analyst Ian Whittaker.
“Other food classified groups have raised the commission rate to offset the EBITDA cost of Delivery. We would also not be disappointed if Just Eat exited Australia which is somewhat unique because its high population concentration means it is vulnerable to attack.”
Whittaker thinks management has adopted the right strategy of grabbing as much of the market as possible whilst telephone still accounts for around 40% of take-out orders.
“In the medium-term, once dominance is established, Just Eat can aggressively push up margins.”
Takeover on the cards now?
Despite his backing for chief executive Peter Plumb and his team, Whittaker does acknowledge that a takeover is now more likely.
“The news raises the possibility that Just Eat is the latest of the online classified portals to be taken over / or which seeks to become private.
“Private equity interest in the space is strong with ZPG having been acquired by PE firm Silver Lake who is also rumoured to be a potential buyer for German online classified portals group Scout 24, which is reportedly exploring options.”