As markets head south again, one of the biggest fallers is Just Eat.
The online takeaway service which floated at 260p a share in April has fallen 11.4p to 264.2p after a cautious note from Peel Hunt. The broker said it expected the company’s positive momentum to continue in the short term, but there were a number of issues in the longer term such as a pricing structure which is perhaps unsustainable and a vulnerable business model. Peel Hunt kept its hold recommendation but said:
Just Eat still offers the potential to be a highly profitable business, but investors need to enjoy the dish now before it gets cold.
Structural opportunity. The emergence of online aggregator networks in the takeaway delivery market highlights a genuine online opportunity. We estimate that around 25% of takeaway food is currently ordered online, but by the end of the decade we expect this to grow to more than 50%. Just Eat has strong momentum, and in the race to grab land has the balance sheet to supplement dynamic organic growth with strategic acquisitions in its core markets.
In the short term, we expect the rapid rate of expansion to continue; however...we have real concerns about the sustainability of the current pricing structure. This view is based on a number of factors, including high charges relative to limited intellectual property, questionable bottom-line value accretion for restaurants, and ultimately we see the aggregator model as a zero-sum game for the takeaway food industry. In addition, the takeaway aggregator business model as it currently stands compares unfavourably with other online platforms/distribution models, both from a B2B and B2C perspective. Therefore, this leaves Just Eat vulnerable to disruptive new business models.
Land grab presents risks. There is a fierce land grab in the online takeaway aggregator market, with the four leading players all raising money in the last year. Comments from some of these players already point to more intense competition, while there is also a risk of over-paying for acquisitions.
[The] risks [are] not reflected in valuation. In the short term our forecasts are broadly around consensus; however, from 2017 and beyond we are more cautious. Our base case discounted cash flow gives a fair value of 247p (165p for the established operations and 82p for emerging markets). Our bull case (407p) does give greater upside than our bear case (144p) downside, but given the long-term concerns it is insufficient for us to be more positive at this stage.
