Description

Company overview and background

Just Eat is a leading online marketplace for takeaway food in many countries outside of the U.S. The best way to think about the company is as GrubHub’s cross-Atlantic cousin with more of a consumer focus (with GRUB being heavily dependent on corporate customers). The company generates its revenue by signing up takeaway restaurants that offer delivery and then charging them a small initial membership/equipment fee and an ongoing per order commission fee based on gross food value.

The company has been growing quickly having benefited from being a first mover, and is the clear market leader in 12 of the 13 markets in which it operates, with the U.K. being its largest and most profitable market.

However, after years of impressive growth and strong margin expansion, Just Eat now finds itself at a cross-roads. Its main businesses are reaching a mature state and its better equipped competitors have received significant investments from venture capital and other private investors. Going forward, growth will be harder to come by and margins will be susceptible to degradation from competitive pressure. Management has likely realized these dynamics given both the CEO and CFO sold a substantial portion of their shares following their 2015 year end results  

 Key thesis points

·         Maturing business

o   Growth in the company’s crown jewel UK business, which accounts for 70% of revenue and >100% of EBITDA, is slowing – overall U.K. order growth has slowed from 70% in 2013 to ~40% as of the most recent release and is expected to decline to ~30% as of YE 2016 and to then to 20% in 2017

o   Additionally, the commission rate that JE charges restaurants in the UK has either reached its peak or is not far off. As of April 2016 the company put through a 1% rate increase, bringing it to 13% for the majority of the UK base. Management has been open in saying that 13-14% is likely the max they can charge

o   Further, as of earlier this year, all new restaurants that JE signs up are being charged a 14% commission so there is a part of the base that is already at what management believes to be the ceiling

o   Penetration in the UK is also reaching a critical point. As of YE 2015, based on management’s guidance on market size/peak online order penetration, the UK market was ~50% penetrated from a potential revenue standpoint. Based on expected growth of JE and the overall market in 2016, penetration should increase to >60% by the end of the year

§  This is significant because once Denmark, its most mature market, reached the 60% penetration threshold, its order growth began to decelerate very quickly to the single-digit range. Single-digit growth in JE’s largest segment would significantly hinder overall growth given the 70% revenue contribution. It is also likely that this potential rapid growth deceleration is not fully understood or appreciated by the market

o   Denmark, although significantly smaller than the UK, is JE’s other positive profit contributor. This segment represents only 5% of revenue but its 40% EBITDA margins contribute ~9% of EBITDA. Denmark’s growth is essentially non-existent given how penetrated the market is. In fact, order growth was actually negative in the 2^nd half of 2015 because JE put through a 2% commission rate increase and restaurant churn exceeded management expectations

o   Lastly, management believes that 70% of people who order takeaway will eventually do so online. While this may be the case eventually, habits are hard to change and this could take years to happen. Estimates now are that ~6/10 orders are still done via telephone so JE’s projected TAM could be even more constrained in the near-term if people don’t change their ordering habits quickly. If TAM is constrained then market penetration could be understated

·         Competitive threats

o   Having been a first  mover in many of its current markets, JE benefitted significantly from the network effect. Their platform had the choice restaurants and consumers would therefore flock to JE’s website to place orders. Since consumers used JE to order, more restaurants would sign up for JE

o   However, a new breed of online food delivery marketplaces has entered the fray and is poised to completely disrupt the current makeup of the industry. On-demand marketplaces are relatively new services that provide an online, software based ordering platform as well as the logistics capabilities to deliver the actual food. While JE relies on the actual takeaway restaurants to provide delivery, these new services act as a courier, similar to UberEats

§  The most well-known and fastest growing company in this new genre of food ordering is Deliveroo. Deliveroo offers a compelling value proposition to consumers since its platform (1) Includes restaurants that historically didn’t offer delivery, (2) Offers a mix of medium to higher quality restaurant options, and (3) Guarantees faster delivery times than software only based platforms like JE

§  Deliveroo is backed by a few top shelf venture funds (accel/Index), has been growing at 30% per month for the last 3 years, and has been quoted as saying “We are going after Just Eat”

§  The real kicker is that Deliveroo’s main market is the UK, the same market where JE generates the bulk of its profits. Our proprietary survey results and diligence efforts have shown that the UK market, specifically London, has all but eschewed JE. Almost 60% of respondents said they now order from Deliveroo. Over 60% also said they recently switched to using a new delivery service because of better food options and faster delivery. But perhaps the most compelling result was that close to 70% of respondents said that Just Eat used to be the most popular service but now most people use Deliveroo

§  Based on Deliveroo’s current size, growth, and order metrics, we calculate that there is ~30% customer overlap between the 2 platforms and that the revenue headwind to JE could be greater than 5% in the near-term, growing to substantially more as people continue to migrate to Deliveroo

§  Now while Deliveroo is the main competitive threat, it is not the only one. A slew of new entrants have attracted funding recently including: Foodora, TakeEat Easy, and Urban Taste, demonstrating that smart money believes this new delivery based alternative is the future of the industry. Further, based on UberEat’s website and available job postings it appears that they are planning a UK launch in the very near-future which could also cut into JE’s market leadership and margins

o    This competitive pressure is not isolated to the UK. In fact, this impact could be even greater outside of the UK since some of these other markets, Australia/NZ for example, are less monopolized by JE. JE will have to compete in real time with a service that is far superior to its software only marketplace

·         Insider selling

o   Shortly after 2015 year end results, the company’s CEO and CFO dumped a significant portion of their shares

o   CEO David Buttress sold 3.19 million shares, leaving him with a 0.07 percent stake in a company

o   Finance director Mike Wroe sold 1.7 million shares, leaving him with 0.05 percent

o   To put this in context, Buttress sold ~60% of his shares while Wroe sold ~55%

Valuation

·         At current levels the stock effectively prices in perfect execution and market leadership in all segments

·         The company trades at a pretty steep 27x EPS and 17x EBITDA on a 2017 basis. Conversely GRUB, its US counterpart, trades at just 11x 2017 EBITDA after being beaten down due to slowing order growth and competitive pressure from UberEats, Amazon, Sprig, and the dozens of other alternatives that have popped up in the US

·         Assuming a similar sequence of events happens abroad in JE’s markets and that it re-rates to GRUB’s multiples, there is ~50% downside to the stock at current levels

·         Lastly, JE is adamant that it will not enter the delivery logistics market given the lower margins associated with that model. If the company capitulates on this firm stance and begins offering delivery, we see further downside given (1) This would a clear admission that competitive pressure is eating at their business, and (2) The margin profile of the delivery logistics is far worse than JE’s current software only and would surely dilute the strong margins of today

Other

·         Market costs per order are rising. Company isn’t getting the same bang for its buck

·         Changed disclosure and rolled Denmark into a new segment to seemingly hide the declining order volume

·         Company paid >30x revenue for its Australia acquisition

·         Deliveroo is also offering predictive analytics to optimize delivery times and to upsell orders to customers

Catalyst

Insider selling

Competitor funding rounds

Earnings and order updates

Entering the delivery logistics market