Deliveroo PLC (LSE:ROO) has “limited upside potential”, said Citigroup as it downgraded the fast-food delivery service to a 'neutral/high risk' rating, while also cutting Purplebricks Group PLC (AIM:PURP) due to "current unsupportive market conditions".
According to the investment bank, Deliveroo's first half trading update was in line with previous expectations, with first-half underlying earnings (EBITDA) ahead of expectations leading to forecasts being raised for full-year gross profit margins and EBITDA margin.
However, cash burn in the first six months of the year was worse than expected, resulting in Citi increasing its full-year capital expenditure assumptions.
The results showed the takeaway food delivery group boosted turnover by 12% in the first half to over £1bn, as orders on its platform grew 10% and the volume of transactions rose 7%.
However, the pace of growth in orders slowed in the second quarter, to 2% year over year, compared to a rocketing first quarter in which its orders rose by 12%.
Deliveroo’s pre-tax loss deepened to £147mln in the first six months of 2022, compared to £95mln in the same part of 2021, despite narrowing sequentially, adding to the company’s recent woes.
Citi maintained its target price of 110p.
For Purplebricks, following its recent results, Citi removed its target price and downgraded its rating to 'neutral' as progress is awaited on new management's turnaround strategy.
"With the cost saving actions now largely implemented, it will be the return of top line growth that takes the group back to profitability, with cash generation expected to restart in H1 FY'24."
The analysts said "there is undoubtedly long term value" in the shares, with opportunities for the newly reorganised business to refocus marketing spend, focus more on the buying side of customer behaviour, focus more getting a pricing 'sweet spot'.
But, the big kicker is, "these gains will take time given the current unsupportive market conditions".