Description

I think Just Eat Takeaway is an attractive investment opportunity at these levels looking for the long term. Online food delivery is a long-term trend and JET is well positioned geographically, has the right model and strategy and benefits from a founder-led well-aligned management team that has insofar accrued significant value to shareholders.

·         Online delivery is still, at slightly more than 1/5^th GMV, a small proportion out of the food takeaway markets where JET operates.

·         Geographies like the UK and the Netherlands show high customer penetration ~30% and 25% respectively, still trending upwards benefiting from the shift from phone orders to online. It is realistic to assume 50%+ long-term penetration.

·         There is a there is truly a significant untapped opportunity in large-population countries like Germany with customer penetration at 13%+.

·         The typical active customer orders just once a month. Ex-breakfast a month has 60 meals to fill, so there is significant potential through higher frequency.

·         JET has the right strategy in the right markets - Most JET markets are “marketplace” – i.e. restaurants providing delivery themselves, which confers JET a sustainable, scalable, and difficult to replicate model predicated on strong network effects, resulting in 40%+ EBITDA margins and strong cash generation.

·         Competitors like Deliveroo, UberEATS and Glovo rely almost entirely on a logistics-based model to serve restaurants which lack their own delivery fleet. Unlike the marketplace, delivery logistics are a non-scalable loss-making model.

·         Upon year merger, Takeaway can improve Just Eat’s margins and operations by undoing the mistakes Just Eat made when rolled out UK logistics and can also add value to JE Canadian operation to a lesser extent.

·         The company owns an asset in Brazil through its JV stake on iFood potentially worth more than €1B or ~7% JET’s EV.

·         The founder and CEO Jitse Groen owns ~10% of the shares and most of his net worth is invested in the business. The company has generated ~49% CAGR TSR since its IPO in September 2016.

I will elaborate the thesis in a few lines in the name of brevity. JET surged because of the recent merger of Takeaway.com and JustEat, after a close bidding match between the former and Prosus, which holds Nasper’s international internet assets. JET dominates the market in many countries as shown in the company presentation.

The markets central to the thesis are the Netherlands, Germany, the UK, Canada and Brazil, with the rest providing a nice upside optionality together. These markets, with the exception of Canada, are marketplace-type meaning that (1) restaurants with their own delivery fleet comprise an overwhelming majority of orders and GMW and (2) the logistics-based model is uneconomic at any scale. This is central to the thesis as bodes well for high-margin economics.

Just think about it. Logistics can only work in markets where couriers are self-employed, there is a tipping culture and customers are willing to pay significant delivery fees. On the other hand, when regulation requires riders to be full time employees and there are neither tipping nor delivery fees (or low ones), the math does not work. Say €12 per hour salary, 2 average orders per hour, that is €6 per order. 25% take rate being generous (anyone able to charge 25% to MacDonalds!??) for €20AOV results €5, so the model is loss-making on a per order basis. Even worse, the model does not scale well as riders operate at full capacity, meaning that delivery is a pure variable cost.

Pure marketplace model is great. The platform charges an average 10-12% fee to the restaurant for the order without participating on the delivery. In the absence of delivery staff, marketing is the largest cost and has a high fixed cost component – i.e. national marketing campaigns. Since 2015 marketing costs per order have decreased by 1/5^th as orders almost double. Marketing has leverage, so that a pure marketplace commands 60%+ EBITDA margin.

Until 2016, Takeaway.com was a pure marketplace. As competitors rolled out logistics for restaurants without delivery capabilities, Takeaway.com did so, denting the marketplace margins but keeping competitors away. As a data point in the Netherlands 5% of the orders are logistics and 95% marketplace, with EBITDA margins moving from north of 60% to 49%. It was a great success because comps never gained traction. Unlike JustEat in the UK, Takeaway had the smart idea to keep their logistics in-house. JustEat rolled logistics late and outsourced them. It was a disaster. On top of this the fixed-cost nature of marketing and the strong network dynamics of more restaurants calling for more customers and vice versa, means that new entrants have a difficult time. Scale matters and JET is times larger than the next competitor on its main markets.

Now quickly with valuation so you can grasp it is cheap even without splitting by geography.  Blended numbers are, with ~20m customers now, that number will move to ~80m customers in 2025 (assuming penetration of 20-30% depending on the market). Assuming customers (included those that just order once) order 10x a year that is 800m orders. At €21 AOV that is 16.8B GMV. Assuming 15% take rate, we would have 2.52B revenue. Now 2.52B revenue at 50% EBITDA margin, 50m D&A and 25% tax rate would be 908m. That is 12x 2025 EBITDA or 16x 2025 earnings for such a business.

Catalyst

- Increasing penetration and order frequency