Description

Using conservative projections, JustEatTakeaway.com shares (TKWY:NA, €14.49) are poised to return 339% over the next 5 years, or a 34% CAGR. This outlook results in the shares merely returning to 60% of their all-time high. TKWY’s history is a story of extremes. Phase 1 – its founding through 2019 – was a VC’s dream; an enviable value creation period during which its founder became a billionaire by the age of 40. This was followed by Phase 2, a value destruction period in which its share price collapsed by almost 90% from its peak to the current price. I believe TKWY has now entered Phase 3, a period of industry rationalization and a more modest value creation stage compared to Phase 1, but nonetheless a very attractive one. Investors have been so burned by Phase 2 that few seem to be paying attention to the hidden value of the company’s Northern Europe segment and to the rapid improvement in overall profitability taking place. TKWY has completed more than half of the €150mn (4.5%) share repurchase it planned for this year.

*I used the ADR ticker, JTKWY, as the European ticker was not available on VIC.

Business Overview

TKWY was written up on VIC twice as a long and its UK acquisition, Just Eat plc, was written up once as a short. I recommend those write-ups for more background on the company. Like all online food delivery providers today, TKWY operates as a hybrid marketplace and logistics business.  

Marketplace: A food delivery marketplace is a website or app through which consumers can order meals from various restaurants that do their own delivery. TKWY charges the restaurant a commission which is a % of the order value. Marketplace restaurants are typically independents/small chains which historically received delivery orders by phone. A marketplace business is a replacement business—online orders are replacing phone orders—and a marketplace is a high-margin, asset-lite business. Its biggest cost is salespeople who sign up restaurants. The business has powerful network effects as the greater the number of restaurants on a marketplace, the more attractive that platform is to consumers. The greater the number of active consumers on a marketplace, the more restaurants will want to be on the platform. Presence on a marketplace can replace advertising as restaurants can pay a higher commission rate for greater prominence. TKWY has been able to increase its average commission rate from 10% in 2015 to 12% in 2019 but has since stopped disclosing its take rate.

Logistics: Logistics providers operate a similar website where consumers can order from various restaurants, only these companies take care of the delivery for their restaurant partners. Restaurants that do not have their own delivery people are typically QSR and high-end restaurants. While these restaurants pay a higher take rate for the delivery service, a logistics business is, at best, low-margin and often unprofitable. This is because there isn’t enough margin in a restaurant sale to charge a take rate that covers the cost of delivery and a decent margin. Logistics providers need to subsidize the take rate with delivery fees charged to the consumer and tips that the consumer pays to the delivery person. Central Europe is a poor market for a logistics business as it doesn’t have a tipping culture and Europeans are not willing pay more than a very modest delivery fee. Logistics businesses are less challenged in North America where people tip and are often willing to pay a higher delivery fee, but they are still lower-margin businesses than marketplaces. In Canada, TKWY has one of the most profitable logistics businesses on the planet as it benefits from a generous tipping culture and the business is the #1 provider.  

The first food delivery businesses, such as Takeaway.com (the company’s predecessor) and Grubhub, were all marketplaces. Later entrants like Uber Eats, DoorDash and Delivery Hero started as logistics businesses to capture the parts of the TAM that the marketplaces ignored (i.e., restaurants that didn’t do their own delivery). The original idea of the logistics players was to squeeze out efficiencies through scale and technology and get to profitability in a lower-margin business. But as they gained scale, they were able to add-on marketplace businesses, threatening the marketplace players which then had to add-on logistics businesses to defend their high-margin marketplaces. Today, every player is a hybrid, and TKWY no longer breaks out separate data on its marketplace and logistics businesses. In recent years, offering grocery delivery became a must-have offering. This business is likely to always be a loss leader, but with so much VC money that flowed into this space in the last decade, once one player offered consumers more convenience, everyone else had to follow. The good news is that VC money has dried up and, in my view, the industry is now rationalizing.      

Company History: Founder and CEO Jitse Groen started Takeaway.com in 2000 as a college student in Enschede, Holland. The company grew to dominate the Dutch market where it generates its highest margins. It used the FCF from its home market plus VC injections to expand into Germany and other European countries organically and through acquisitions, and became a listed company in 2016. In 2018, it acquired Berlin-based Delivery Hero’s German operations, as DHER could no longer compete with TKWY, giving TKWY the #1 spot in Europe’s second largest takeout market (UK is #1). In early 2020, it acquired UK-based Just Eat plc in an all-stock deal and, a few months later, launched an all-stock bid for US-based Grubhub. TKWY is Europe’s largest online food delivery provider. It divides its markets into four segments: Northern Europe (the Netherlands, Germany, Austria, Belgium, Denmark, Luxembourg, Poland, Slovakia and Switzerland), UK & Ireland, North America (US and Canada), and Southern Europe and ANZ (France, Italy, Spain, Israel, Bulgaria, Australia and New Zealand).    

Market penetration: In its 2019 Annual Report, TKWY estimated that around 2/3rds of takeaway food was still ordered by phone or in-person at the restaurant. Covid provided a large boost to the industry, followed by a hangover in the reopening phase resulting in TKWY’s gross transaction value (GTV) being roughly flat for 3 years (2021A to 2023E). In 2022, TKWY’s average active customer ordered 2.8 meals a month. This compares to 2.9 in 2021 (a pandemic year), 2.6 in 2020 (pandemic), and 2.4 in 2019. In theory, full penetration would be 90 meals a month (3 meals a day for 30 days) but that is unrealistic. It remains to be seen where TKWY will hit a ceiling, but I believe going much above 4 (one meal per week per active customer) may be difficult. If 4 is a realistic destination, TKWY could see 43% growth in orders just through natural digitization and without any increase in market share.

A Winner-Takes-Most Business: In the early days, all of the food delivery players were in land grab mode, but as the business matured it became evident that the #1 player typically earns the vast majority of the profits in a market, leaving the #2 and #3 players with breakeven to modestly profitable businesses and little room for anyone else.

TKWY is the #1 player in the Netherlands and Germany where its market shares are in the 70%-80% range. In 2021, the company grouped these markets into its Northern Europe segment, but it’s worth looking back at 2020 results when these geographies were last presented separately. Note that the Netherlands’ margin declined in 2020 because the percent of low-margin delivery, or logistics, orders increased to 7.7% from 5.0%. Nonetheless, EBITDA grew by 17%. Germany’s margin jumped to 33% from 9% as TKWY acquired Delivery Hero’s German business, becoming the dominant player.

In 1H23, the Northern Europe segment generated a 5.0% EBITDA/GTV (formerly called “Gross Merchandise Value”) margin. Note that in 2020, the Netherlands had a 6.25% margin while Germany generated 5.0%, both before corporate allocation, and these margins have likely moved higher since. These markets remain TKWY’s two primary FCF generators and widest moat businesses.

Recent Developments

When it was founded, online food delivery was a typical venture capital business. It had low barriers to entry and being a first mover was a big advantage. In the early days, it was all about a land grab: sign up as many restaurants and users as possible onto your platform. Then it became a war of attrition against the competition. Since a moat can only be created through a dominant position, you need the competition to fold or sell to you as they can’t absorb any more cash burn. As Jitse Groen explains it, Takeaway.com achieved that in the Netherlands through sheer determination, getting UK-based Just Eat plc to sell its Dutch business to him in 2016. Adrian Blair, Just Eat plc’s COO at the time, recounts the story in his LinkedIn article “How Jitse Groen Won” (click here). Groen then poured all of the FCF from the Netherlands into Germany, ultimately getting Berlin-based Delivery Hero to sell its German business to him. Needless to say, breaking a competitor on their home turf, having another competitor write a glowing article about you and becoming a billionaire all within two years of going public made Jitse Groen a known entity to public market investors globally. His credibility at that point was at a peak and when something can’t go much higher, it often turns down.   

The Just Eat plc acquisition, announced in early 2020, was going to entail the same war of attrition playbook. This time Jitse had two FCF machines, the Netherlands and Germany, aimed at the UK and it looked like Uber and Deliveroo were poised to burn cash in that market until they surrendered to the Dutchman. But a few months later, TKWY announced the acquisition of Grubhub in the US, a far more competitive market, and it wasn’t clear if the company had enough FCF to fight two wars in large markets.

In 2020, TKWY generated $122mn in FCF before providing $55mn in additional funding to iFood (a Brazilian food delivery business it owned 33% of, which it subsequently sold for €1.5 billion). It has since burned cash due to its two wars, further exacerbated by fee caps imposed in the US during the pandemic which are still in place in NYC (Grubhub’s largest market). Cash burn was -€611mn in 2021, -€426mn in 2022 and -€138mn in 1H23. TKWY paid $7.1B for Grubhub and wrote down its value by $3.1B. Management recently stated that TKWY will achieve positive FCF before working capital in mid-2024. The balance sheet was recently strengthened by the sale of iFood, and TKWY has the potential to earn another €300mn depending on iFood’s performance. Excluding any further proceeds from iFood, TKWY’s net debt stands at €277mn and management has projected EBITDA of €275mn for 2023 (1.0x net debt/EBITDA).

The Unnoticed Start of Phase 3 – Industry Rationalization

The market has taken the view that Jitse Groen is an empire builder and that all he knows is the playbook that worked well in the Netherlands and Germany, which he’ll employ in the company’s three unprofitable segments for as long as it takes. This view has resulted in Northern Europe’s value being severely discounted within TKWY. I will show just how cheaply one is buying this profitable segment in the next section, but I first want to explain my view of Groen and whether he’s an empire builder or not.

Public market investors are familiar with mature businesses that have moats and professional CEOs. Founders who grow a business into a multi-billion dollar public company are rare. While public market investors were shocked by the decisions Jitse Groen made, VC investors were far more familiar with his actions. As a founder in an industry with low entry barriers, you live in a mild state of paranoia. You need to run fast, do a land grab, and worry about profitability later. A competitor who achieves profitability before you or greater profitability than you is a threat to your existence as it could use its profits to underprice you and put you out of business.

Groen could not have been content with two nicely profitable businesses in the Netherlands and Germany because Uber, Deliveroo, Delivery Hero, Just Eat plc and DoorDash were growing in larger markets and they could have created large profit pools with which to outcompete him in his two smaller markets. From a founder’s paranoid viewpoint, he had to go into the UK to protect Central Europe. Regarding Grubhub, the story a sell-side analyst told me was that Matt Maloney, GRUB’s founder and CEO, called Groen after Uber make overtures and said that if Uber acquired GRUB, its share in the US would be so great that it would use its FCF to take share in Europe. Whether Maloney made up the story to get a higher price from TKWY or he indeed had knowledge of Uber’s plan, anyone in Groen’s shoes would have been acting irresponsibly to ignore such a potential threat. So is Jitse Groen an egotistical empire builder who bit off more than he can chew by making two large acquisitions in a year and taking the company deeply into cash burn mode? I don’t see it that way. The food delivery business has low entry barriers. The way you win is to beat the competition so badly that they give up on competing with you and stay in their lane.

At some future point when the industry matures, I believe all of the players will have very profitable businesses in their respective markets and these companies will be like utilities; they will have modest top-line growth, stable margins and they’ll return capital to shareholders. Until we get there, a healthy dose of paranoia is warranted.

If a new CEO took over TKWY, the most natural strategy would be to exit loss-making markets that are not strategic. This process has quietly started at TKWY and at competitors, but it seems that investors have not noticed since the same people are running these companies and TKWY has not sold Grubhub yet (it reported that GRUB is for sale but that it has not received fair value offers since fee caps in NYC are still depressing GRUB’s profitability).

In 2022, TKWY shut down its businesses in Portugal, Norway and Romania. Uber Eats exited seven small markets in 2020. In 2023, it also exited Italy and Israel, where TKWY still remains and stated that it will only invest in markets where it can be #1 or #2. In 2021, UK-based Deliveroo exited Spain, where TKWY is #1. The following chart summarizes the results of a 2021 Spanish survey that asked participants “which of the following online food ordering services have you used in the past year?” It shows Deliveroo dead last with Uber Eats second to last. Based on Uber’s comments, it would not be a surprise to see it exit Spain as well, but archrivals Uber and TKWY seem to be reluctant to exit markets where the other remains. As concerned as Jitse may have been about Uber buying Grubhub and using its FCF to invest in Europe, Uber’s CEO is also aware that TKWY still has a foothold in his home market despite stating that Grubhub is for sale (which I don’t 100% believe). I see the industry cautiously rationalizing and dividing up the respective markets, but this process is like nuclear disarmament between countries that were recently at war and don’t fully trust each other.     

Regarding Grubhub, NYC’s fee caps depress its EBITDA by $100mn. The food delivery industry has sued to reverse the permanent caps which originally were put in place to help restaurants during the pandemic only. Regardless of what happens with fee caps, I believe Grubhub may remain a permanent holding for TKWY because it has strategic value in keeping Uber and DoorDash at bay. If Uber and/or DoorDash get aggressive in the Netherlands or Germany, TKWY can cut prices in the US and make life difficult for them in their home market. Without this asset in the US, TKWY has a weaker hand in Europe.

A similar dynamic exists in the cement industry in France, one of the most profitable cement markets on the planet. The French players have bought up most of the ports in France through which imported cement could come in, but there are still some independent ports through which Italy, which has an oversupplied cement market, could dump its excess cement onto France. To offset this risk, the French players own grinders and sea terminals in Italy where they have a very small share and loss-making businesses. One could say that they ought to sell their Italian assets but that would be a strategic mistake. Those assets are there to keep the Italians at bay. If Italy brings its cement into France, the French have the capacity to flood the Italian market with their cement. Since the French players have higher margins, they can do far more damage to the Italians. So everyone behaves, and France has one of the most profitable cement markets on the planet.

When Buffett talks a moat, it sounds as if moats don’t cost anything. While no moat is free (even Apple has to spend on branding and advertising to maintain its moat) more commoditized industries require capex as well as ongoing opex to create and maintain a moat. Cement is a commodity that has a local price, not a global price like other commodities. The French market has some of the highest priced cement in the world, but that took capex to acquire ports in France, capex to build assets in Italy and ongoing cash burn to maintain a small market presence in Italy.

I would not be surprised if TKWY is merely paying lip service to a GRUB sale to placate Cat Rock Capital (a large and vocal shareholder that has a substantial loss in TKWY). Jitse has stated that Grubhub will achieve FCF breakeven even if fee caps are not lifted, and it recently laid off 15% of its corporate workforce to get there. I believe a breakeven business that could act as a deterrent against competition may be a valuable strategic asset which may not have much of a DCF value, but high strategic value that gets reflected in the value of the European businesses.   

Hidden Value

As the following table illustrates, TKWY is very profitable in Northern Europe, and its entire net cash burn position is due to its other three segments.   

In the following table, I allocated Corporate expenses to the Northern Europe segment, which has a 26.8% adjusted EBITDA margin after such allocation. Whenever I refer to Capex for TKWY I’m including investment in other intangibles assets in CFFI and principal element of lease payments in CFFF. Capex/revs has averaged 4.5% for the company. Giving zero value to the three unprofitable segments, Northern Europe is being valued at 10.1x EBITDA and 12.1x EBITDA-Capex, both after corporate allocation. These multiples undervalue this segment as TKWY has 70-80% share in the Netherlands and Germany and has increased penetration potential, especially in Germany where Germans have been slower than other Europeans to adopt delivered food.

In conservatively valuing TKWY’s three unprofitable segments, I made some punitive assumptions. I assumed that Grubhub is akin to cement assets in Italy owned by French players. TKWY will likely get the business to breakeven and may get lucky if fee caps in NYC are lifted, but I assumed it has no DCF value and will never be sold given its strategic value. In the table below, the €500mn in value I ascribed to North America reflects 1x revenues for the Canadian business. Canada generated €515mn in revenues in 2020 (pandemic year) when it was last reported as a separate country. This business is a lower-margin logistics business, but it is #1 in Canada and is one of the few profitable logistics businesses on the planet. I valued UK & Ireland at 0.7x revenues as TKWY has shown encouraging progress on margin improvement, and the highly unprofitable Southern Europe & ANZ segment at 0.3x revenues. To underscore the massive discount here, I’ve valued, at €1.5B,  businesses that TKWY has on its books for €11B, a punitive worst case scenario (Just Eat plc at €7B, and Grubhub at €4B after a €3B write down; note that TKWY has not written down Just Eat plc and Groen has stated that the UK & Ireland segment can achieve a 5% EBITDA/GTV margin over time).      

With the non-Northern European businesses valued at a mere €1.5B, Northern Europe is being valued 5.6x EBITDA and 6.7x EBITDA–Capex, both after corporate allocation. These single digit multiples imply that Northern Europe is a declining business, while TKWY’s Dutch and German businesses are two of the most dominant food delivery businesses on the planet. Switzerland is also a highly profitable but smaller market within this segment.  

Projections

Contributing to TKWY’s undervaluation and lack of credibility is the unrealistic long-term outlook management provided some time ago which it has not updated despite recent results indicating that it is beyond a stretch goal. TKWY’s outlook is that GTV will grow by €30B over the next 5 years, representing more than a double off of GTV of ~€28B which has been flat for the past 3 years. The lack of growth reflects a post-pandemic hangover, but a 15% CAGR going forward seems overly optimistic. The rest of the outlook states that overall EBITDA/GTV will exceed 5% in 5 years. As shown earlier, before corporate allocation, the Netherlands was at 6.25% and Germany was at 5.0% in 2020. Both markets have likely moved higher since. Northern Europe achieved a 5.0% margin before corporate allocation in 1H23, and TKWY’s overall margin including corporate expenses was 1.1% in 1H23. Exiting highly unprofitable markets in the company’s Southern Europe & ANZ segment where its businesses are subscale is an easy way to boost the overall margin. If TKWY shut down this segment entirely, it’s overall EBITDA/GTV margin would jump by 70 bps. On the 1H:23 call, Jitse stated that he is confident that fee caps in NYC will be terminated (the lawsuit claims they are unconstitutional) but he has no idea about timing. If fee caps go away and Grubhub gains $100mn (€91mn) in EBITDA, the company’s overall EBITDA/GTV margin would rise by 32 bps.

On the 1Q23 trading update call, management was asked about updating its optimistic long-term outlook and Jitse said he would do it on the 1H call. The same outlook was reiterated on that call, and TKWY’s CFO announced he is leaving to pursue another opportunity (I do not think the two events are completely unrelated). TKWY is not managed in a public market-friendly manner. In an interview a couple of years ago, Jitse stated that he runs the company no differently since it went public than before it was listed. Anyone who has followed Oracle knows that Larry Ellison still runs the company like the startup he founded in 1977. Oracle’s lack of professional management contributed to it having a discounted multiple for many years, but patient shareholders were recently rewarded (see ORCL’s NTM P/E chart below). I view the “startup management style” at TKWY which profoundly annoys some public market investors as a key contributor to the opportunity in the shares. TKWY is a psychologically difficult stock to own if you’re unfamiliar with the disorganized way in which startups are run relative to mature public companies with professional management. To be clear, this managerial style has nothing to do with Jitse’s skills as an operator and visionary which, in my opinion, are world class (see the linked article above by Adrian Blair).       

The final table illustrates my 5-year projections where I’ve tried to be conservative and roughly right. After a -2% decline in GTV this year, I project GTV will grow by just 2% annually, reaching €30.5B in 2028E. TKWY has given guidance for €275mn in adjusted EBITDA this year – the stock trades at 12.3x 2023E adjusted EBITDA – which works out to a 1.0% EBITDA/GTV margin, but it achieved 1.1% in 1H23 and its efficiency improvement plan still has more to go in 2H.

I assumed a tax rate of 27%, and have TKWY generating 2024E FCF of €82mn (€0.38 per share) after a €60mn working capital use of cash. TKWY announced a €150mn (4.5%) share repurchase earlier this year and bought back €86mn as of its 1H23 call. I believe this is just the beginning and that capital return will become much more prevalent at TKWY as the industry rationalizes and its margins improve.     

I conservatively assumed the EBITDA/GTV margin improves by 60bps per annum going forward, after rising by 131bps and 93bps in 2022A and 2023E, respectively. The company provided a few insights on its 1H23 call into why margin improvement should continue. (1) Competitors are leaving smaller markets where TKWY is #1 such as the Netherlands, Switzerland and Belgium. Management talked about a lot less competitive pressure in these markets where margins are already high. (2) In the UK, its second largest market, the company’s efficiency program will yield further improvements in unit economics. When Just Eat plc was acquired, it had a very profitable marketplace business but lacked logistics. TKWY quickly built out a logistics network to defend its share. That work is largely done and the company is now focusing on improving margins through order pooling, reducing courier wait times, increasing customer fees and growing a lower-cost freelancer network (called Delco). TKWY is in the early innings of its unit economics improvement plan and has already seen a 10% reduction in delivery fulfillment cost per order in 1H23. Similar efficiency efforts are having an even larger impact company-wide as overall revenues less order fulfillment costs per order increased 21% in 1H23. In the UK, the company is reinvesting a lot of the savings in advertising as it wants to ultimately dominate this market. Given improving unit economics, management expressed confidence that the UK & Ireland segment is on track to achieve a 5% EBITDA/GTV margin over time. (3) High-margin advertising revenues grew 33% yr/yr in 1H23. The growth plan for this nascent business is also in the early inning. As a percent of GTV, advertising represented 1.1% in 1H23 (a €200mn business annualized) and it has significant upside. Not only can restaurants advertise on TKWY’s websites and apps, but since the company has partnered with grocery chains to do home delivery, brands such as Heineken and Unilever are also seeing TKWY’s properties as attractive advertising outlets.        

For conservatism, I ignored interest income on TKWY’s growing net cash balance over time. Due to leverage on Capex (4.5% of revenues), FCF/EBITDA expands from 18% in 2024E to 52% in 2028E. In 2028E, TKWY achieves a 3.99% EBITDA/GTV margin falling short of its 5% target, and generates EBITDA of €1.2B and FCF of €629mn (€2.94 per share). On 2028E numbers, it trades at 2.8x EBITDA and 4.9x P/FCF. Assuming TKWY pays out 40% of FCF in dividends in 2028E, its dividend will be €1.18 per share, yielding 8% on today’s share price. 

From 2024E to 2028E, I have TKWY generating €1.7B in FCF, leaving it with a net cash balance of €1.4B at the end of 2028E. In 5 years, I believe the industry will have rationalized to a large extent and TKWY will be seen as a utility; a slow-growth, wide-moat business that returns capital to shareholders. I valued it at 10x EBITDA, implying 12.9x EBITDA-Capex, 19.4x FCF net of cash, and a 1.8% dividend yield. This implies a share price of €64 in 2028 (versus an all-time high was €110 in 2020), and a return of 339% over the next 5 years, or a 34% CAGR.        

Catalyst

• Better than expected margin improvement
• Share repurchases
• Positive FCF in 2024
• A new CFO
• Potential reversal of fee caps in NYC
• Continued industry rationalization