Description

TKWY was written up on VIC in mid-2020 and we agree with coyote’s analysis.  Today, the stock stands out even more starkly relative to other work-from-home beneficiaries, most of which saw their valuation multiples expand dramatically in 2020.  We think Just Eat Takeaway.com (TKWY.NA) is a value play in a growth sector, and at today’s valuation at less than 3x forward sales, we think it’s an attractive entry point.  We think the stock can do very well as the new normal settles out, the competitive environment in the U.S. begins to ease, and the company’s normalized growth trajectory becomes clearer.

The food-delivery industry has grown tremendously over the past decade, and after a race to build scale, the landscape has been consolidating to 2-3 players in each country that have the scale to offer consumers a best-in-class value proposition.  Takeaway.com has a market-leading position in almost every country where it operates, and in the Netherlands, it has virtual monopoly with 50% EBITDA margins and 30% avg. organic growth over 2015-2019.  This business is the paragon of the industry and shows how good the economics can be with sufficient scale and consolidation.  For those unfamiliar with the space, we recommend Cat Rock’s presentation on TKWY, here.

Over the last 2 years, TWKY’s EV/Fwd Rev multiple has compressed dramatically, from ~10x to sub-3x.  Part of this is due to the covid tailwind, which the market is not fully capitalizing, and the rest is likely due to its acquisitions of Just Eat in the UK and Grubhub in the US, both of which have been losing market share for years. 

TWKY multiple – roughly right for Grub acquisition

GRUB multiple – for historical perspective, and matches our estimate on pro-forma EV/Fwd Revs

The combined company is led by TKWY founder Jetse Groen, who has proven to be one of the best operators in the industry.   He won the Netherlands, bought his way into and then won Germany, and is now doing the same in the UK.  Key to his success has been a focus on the marketplace economics and on supporting / defending market share with delivery at near-breakeven profitability.  Under Jitse’s playbook, Just Eat has been investing more in selection and delivery to stem share losses. We think the same approach for GrubHub will show that its market share can be defended in at least some geographies, making it one of 3 long-term winners in the US.

The combined business has the #1 market position in >90% of its footprint, with a loyal, recurring customer base, attractive unit economics and a large opportunity to deploy capital at high returns.  It has an enviable position in a promising industry.  TKWY’s dominance in key markets should also prove to be an advantage as platforms collect data to personalize the ordering experience of its users. A survey done in 2015 shows that 80% never or rarely leave for another platform, which creates a winner-take-most dynamic than rewards the player with most existing scale.  These cohorts tend to be sticky for years/ forever and are obviously profitability on the marketplace side.

“.....there are some players in food delivery that are burning a lot of cash to try to push out very successful market leaders from their markets. It is pretty obvious to us that as long as we are large, EBITDA positive, and very dominant in the markets that actually matter, that cannot happen to us. And on top of that, we're going to push back". - Jitse Groen June 2020

In 2H20, TWKY continued to post solid organic order and revenue growth of ~40% and ~50%, which was solid but well below its cash-burning, logistics-focused competitors. We are OK with this and don’t mind owning a profitable company growing 15-25% at the right valuation.  DoorDash is guiding to 3% EBITDA margins in 2021 but we are not enamored with the margin potential of the logistics business (and we don’t see how current EV/Rev multiple make sense on mature margins).  We think TWKY is the clear structural winner in most of its European geographies, and we think it can reach consolidated EBITDA margins of 20-35% (including logistics revenue), making the current EV/revs multiple obviously cheap.

Background

The food delivery industry can broadly be divided into two categories - marketplaces and logistics companies. Marketplace businesses have an asset light business model, where the value proposition is to connect demand (people who are ordering food) with as many restaurants available. The two key drivers of success here is having better supply of restaurants and having better brand recognition from consumers. They typically charge a 12-15% commission on the order, and restaurants themselves provide the actual delivery (or customers pick it up themselves). Scale is crucial, and where marketplaces have dominance, historically EBITDA margins have been 50-60% (The Netherlands for TKWY has been at this state for several years now), so this is undoubtedly a very profitable business model IF dominance can be achieved (usually the dominant player is several times larger than the second or third player).

There are also logistics-based players, who have been stealing the headlines the past several years including UberEats, DoodrDash, and Deliveroo, backed by an abundance of VC money and investor hype. The main difference for the logistics-based players is that they own their fleets. For restaurants that can’t or won’t provide their own delivery, this seems like a great way to extend their business for more customers. The logistics-based players grew very quickly by subsidizing heavily (free delivery or even free meal), pursuing partnerships with QSR (UBER Eats partnering with Mcdondalds, for example), and targeting geographies that are less penetrated by the incumbent marketplaces. Recently, the industry is becoming less clear cut as marketplaces have been forced to invest in logistics business to compete against the fast-growing logistics-based companies, and the logistics-based companies have tried to develop a marketplace business. Investing in delivery feet is an expensive and difficult thing to do, and it is a cash drain unless the operator can achieve high rate of utilization (thus the importance of scale/market dominance).

Initially, as these logistics-based players grew aggressively, several of the incumbent marketplaces were too complacent and did not react swiftly. The logic was, why go into a barely profitable business of providing delivery when your legacy business is a cash flow machine? Both Grubhub and Just Eats made these missteps. Takeaway, however, responded quickly and built in-house delivery capability and defended their market share against entrants better. The lesson so for has been that delivery is a inferior business than marketplace, but it is still an important tool to expand reach and protect market share.  What is important to note here is that TKWY, still primarily a marketplace business, is in a structurally advantaged position in this war of attrition TKWY still have immensely profitable segments like their Netherlands and UK business, and those profitable segments provide TKWY with a “cash-engine” to fight this war of attrition in a much more sustainable way than the primarily logistics-based competitors with questionable unit economics that have to rely on external investments. 

Concerns for logistics-based companies are:

Unit economics – Dominoes Pizza recently noted that they’ve never made money on delivery, they make money selling pizzas.  Delivery-only economics may never be attractive.

Regulation - Having to categorizing delivery drivers as employers rather than contractors only raise the cost of growing and maintaining the logistics network. TKWY has been investing a lot into their in-house delivery with no/low fees, which forces logistics-based companies to have to match and thus worsen the already razor thin margins.

Cultural - Tipping is not a norm in European countries and cannot be considered as wage, so

QSR partnerships - UBER has been able to grow quickly with the help of partnerships with large QSRs like Mcdonalds. This is an easy way to instantly boost volume but this is a lower quality channel with low barriers to entry.

Growth opportunity

There are other sources online that can do a better job going through the current data on the penetration and the potential of how big this market can really get, so we won’t spend too much time on this, but we think it’s safe to say that there is still a long runway of growth left for years, even decades to come. We think the food delivery industry is in midst of a channel migration towards online, penetration still has plenty of room to grow. This is a similar pattern with what happened in the flight-booking category 10-15 years ago.

Covid

Covid has accelerated the adoption of online takeaway, and the entire industry has seen significant growth. Though there were some concerns around a steep deceleration post-covid, but recent quarter results through lockdown easing indicate that these benefits should last for a while.  Jitse Groen recently said that logistics was their fastest growing business during covid, but it also certainly see deceleration post covid, which would impact the logistics-only players far more than TKWY. 

Though growth will undoubtedly come down post-covid, surveys indicate that we are heading to a new normal. According to a Mckinsey survey, across Europe, 35-55% of existing online food delivery customers intend to continue using delivery more in the future. This is validated by strong q3 and q4 numbers from TKWY despite easing lockdown measures in most of their markets.

Valuation

At EUR 85, we think TKWY is trading at 3.0x forward sales, or 9-12x our estimate of mature EBITDA down the road, far too low for a key winner in global food delivery with a long growth runway ahead. We think Organic growth can sustain 20%+ levels, and though margins might be lumpy due to their continue investments in logistics, margins should inch towards 20% in 4 years (10% EBITDA margin in 2020).

We think this valuation is due to skepticism over GrubHub’s competitive position and uncertainty over how quickly the Covid-19 tailwind will fade or even reverse as life returns toward normal.  We don’t know precisely how the pandemic and vaccines will affect industry growth going forward, but we think the shares today offer us a 3-4% FCF yield (on 2022E) and growth of 15-25% for the next 4 years.  Add a 5-10% kicker from higher valuation and we’re looking at 20-35% total return, which is compelling for a business of this quality. 

We liken this to buying a cyclical after a fear-induced selloff like in 4Q18.  At some price, we’re willing to step in front of a recession because the valuation of a growth cyclical is cheap enough to give a high IRR through a downturn.  In 2018, there ended up being no recession.  The parallel here is with return-to-normal.  2021 may be very tough comps for ETSY and TKWY, or it may not.  We don’t know, but we’re willing to step in front of that at this price and grow from whatever base 2021 turns out to be.

Lastly, several investors have pointed out the merits of investing alongside owner-operators who are still under 40.  Jitse fits the bill and we’re happy to ride with him at this price.

Catalyst

2H21 comps not being awful