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Deliveroo is still a tough gig for investors

Adjusted earnings of £85 million were positive for the first time, but wider pressures remain

The Times

Deliveroo arrived on the stock market to much fanfare during the pandemic, hailed by Rishi Sunak, the chancellor at that time, as a “true British tech success story”. Three years on, its shares languish at about a third of the initial 390p float price.

Its dilemma remains how to secure a clear, profitable lead in a highly competitive sector, while balancing the demands of its gig economy workers and cash-squeezed customers. The company has never reported a net profit — but on the face of it, its latest full-year results seemed promising.

Adjusted earnings before interest, tax and other charges of £85 million were positive for the first time, compared with a loss of £45 million in 2022. The adjusted pre-tax margin, which it measures as a percentage of gross transaction volume, is now at 1.2 per cent and is on track to meet a goal of 4 per cent in 2026. There was also an improvement in free cashflow, from minus £243 million in 2022 to minus £38 million in 2023. The company says it should be cashflow-positive in 2024.

Yet the cost of living crisis put a dampener on orders, which slipped by 3 per cent to 290 million in the 12 months to the end of December. Across the app, Deliveroo’s monthly active costumers averaged 7.1 million, down from 7.4 million in 2022. This after a year in which the company tightened its purse strings, reducing marketing and overheads spending by 7 per cent to £641 million last year.

The company is still stuck with an operating loss of £44 million, but this is a notable improvement compared with the previous year’s £246 million.

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For investors, a chief concern is how Deliveroo can maintain its gig economy worker system. Regulation in the area is getting tighter and could end up pushing up labour costs if some markets force it to recognise riders as staff rather than self-employed workers. While the British courts have concluded that riders are self-employed, this week the European Union reached a final agreement over a “platform work directive” that should help member states to set clearer employment rights for riders.

Legal challenges will revert back to national employment law, but this may not always work in Deliveroo’s favour. Late last year, a Belgian labour court overturned a judgment that found riders to be self-employed. The company says it wants to appeal against the decision.

That is not to mention the reputational damage that can arise from Deliveroo’s employment system. Last year, a BBC investigation revealed that an underage teenager had died while working as a rider, after renting a verified account from another worker.

The company’s name has been dragged into debates over low wage immigration, with Neil O’Brien, a Conservative MP, writing extensively on what he describes as the “Deliveroo Visa”: the idea that the UK allows people to come to Britain to take up low-paid work, usually in the gig economy.

These legal and reputational risks leave investors exposed in a fiercely competitive market. Some regions have proved too tough to crack. Deliveroo has already conceded defeat in Australia and in the Netherlands, announcing exits from both regions in late 2022.

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Deliveroo’s income statement is moving in the right direction, but while profits remain elusive and regulation still takes shape, investors should wait for stronger signs that the company can emerge as the winner in this highly competitive space.
Advice Avoid
Why Gig worker system risks higher costs and reputational damage. The company is yet to make a net profit despite attempts to slim down.

Moonpig

Deliveroo wasn’t the only product of London’s 2021 flotation frenzy to update the market and, like the delivery group, shares of Moonpig have tumbled since its arrival on the market, losing more than half of their initial value. However, investors have reassessed their expectations of the online cards retailer. In the past year, its share price has risen by almost two fifths as it makes progress on a subscription service, growing margins and improving its app.

Moonpig’s fundamentals are compelling. The company, which operates exclusively online, sells greeting cards, but the real value is in the add-ons: why not add flowers to a last-minute Mother’s Day card, or a box of chocolates for your Valentine? This strategy has beefed up customers’ baskets, with revenue per order rising by 7 per cent in the six months to October last year. Gross margins sit at a healthy 59 per cent.

The convenience that Moonpig offers its customers means retention is exceptionally high. Almost 90 per cent of revenue comes from existing customers and the company says its new Moonpig Plus membership service, which offers discounts in exchange for a £9.99 annual fee, has more than 250,000 subscribers.

The company is certainly the market leader, with analysts placing its market share in online card shops at about 60 per cent. The shares are also not particularly expensive, trading at a price-to-earnings ratio of 17.5.

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Yet Moonpig may be haunted for ever by its own success. Its order volumes have still not managed to match pandemic-era highs. There has also been some concern, too, around Greetz, the smaller Dutch rival it bought in 2018, where revenues dropped by about a tenth in the six months to October last year, which the company attributed to an economic downturn in the region.

Worries about leverage, prompted by the acquisition of Buyagift, an online gift shop, in 2022 for £124 million, are starting to wane. Net debt to adjusted earnings before interest, tax and other charges stood at 1.8 times in October, down from 2.45 the year before. Moonpig said that it expected the ratio to settle below 1.5 by the end of next month. It will launch a £180 million revolving credit facility maturing in 2028, replacing an existing term loan of £175 million and other revolving credit facilities of £80 million. Analysts think this should add about £4 million more interest to pay this year, but overall the structure of the loans should make their borrowing more efficient.

Investors waiting for the shares to regain their highs should not hold their breath, but with steady improvements in profits and a watchful eye on debt, Moonpig looks like a steady grower.
Advice Hold
Why Profits are improving and debt is under control

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