Like many of the cash- guzzling, high-shooting companies of its ilk, Deliveroo’s promise of profitability is laden with caveats.
The food delivery app hit break even in the second half of last year, a year ahead of previous guidance. However, that is only if you strip out a heap of charges that include finance costs and exceptional items, the latter of which amounts to legal, regulatory and restructuring expenses. On a statutory basis, the group recorded a £231 million pre-tax loss and chomped its way through £342 million in cash, just over a quarter of the total liquidity on its balance sheet.
Still, it reckons that it can hit adjusted earnings before interest, taxes and all those other items of between £20 million and £50 million this year, against a loss of £45 million last year.
If the food app can turn out earnings at the top end of that range, it could even flick to a positive free cashflow position, Will Shu, the group’s boss and co-founder, reckons. That would be a remarkable turnaround from the £243 million in free cash sapped in the most recent 12 months.
However, achieving even against a sympathetic profit measure will be a stretch. Shu reckons the gross value of transactions put through the app will grow by low-to-mid single digits this year, a haircut on the 9 per cent recorded last year, to account for cost-of-living pressures and a post-Covid comedown. That includes transaction values being flat over the first quarter against the lingering impact of the Omicron variant at the same time last year.
That looks optimistic compared with takeaway volumes across the rest of the industry. Food delivery sales volumes from British restaurants were 13.3 per cent lower in February compared with last year, according to CGA, a hospitality research specialist. Not even lofty rates of price inflation could offset the demand decline.
True, higher prices helped to offset a 2 per cent fall in the number of orders Deliveroo took over the fourth quarter. The average takeaway value was 11 per cent higher. Repeating that this year is hardly something to bank on. As Shu concedes, inflation is bad for business.
For Deliveroo, which generates revenue primarily from restaurant and grocer commissions and from consumer fees, part of the plan to raise its transaction value over the long term is to take a greater share of the food delivery market, improve its grocery delivery income and increase coverage within markets that it reckons can sustain more drivers.
Investors have not put much store in Deliveroo’s growth plans. Those who bought into 2021’s disastrous IPO will be sitting on a loss of 77 per cent. The group is valued at a touch under 0.3 times forecast sales for this year, far below a peak multiple of 3.4 in August 2021. Such caution is warranted.
Even putting the cost of living pressures aside, more potential stumbling blocks lie ahead. Let’s not forget various legal wranglings, including over the status of its riders in some international markets. The provision taken against legal disputes had risen from £81.7 million at the end of 2021 to £129.3 million at the end of December. Costs incurred for legal and regulatory problems came in at £62.6 million, up from £10.8 million the year before.
Branching out internationally, from a more saturated UK market is necessary if Deliveroo is to achieve the growth promised. It is now taking a tilt at the Middle East, launching in Kuwait in 2019 and Qatar last year. Who knows how long it will stick around. The plug was pulled on Australia and the Netherlands last year. Monthly average customer numbers outside the UK and Ireland declined during the fourth quarter. Pulling out of countries is not without costs.
A lowly share price is a better reflection of the reality for Deliveroo’s prospects.
ADVICE Avoid
WHY Weaker consumer spending could see the
group miss earnings guidance this year
Rentokil Initial
Even by the standards of Rentokil Initial, a group built on hoovering up smaller rivals, the Terminix deal caused some jitters for investors. A boost to the savings and top-line growth set to be squeezed from the $6.7 billion takeover of the US rival should be enough to restore faith.
The FTSE 100 group reckons it will extract $200 million from its cost base thanks to the deal, against previous guidance of at least $150 million. Much of that has come from the back office, including better procurement that comes with greater scale. Consolidating its 600 branches in the US to 400, each producing at least double the revenue of the previously more bloated footprint, has added to the savings.
Having more clout does not just help on the cost side; the pest control giant reckons it can churn out at least 5 per cent revenue growth even without acquisitions over the medium term. Passing through the impact of cost inflation to prices, together with more profitable Terminix business, is expected to boost the margin to 19 per cent by 2025, from 15.4 per cent last year.
Last year’s organic revenue growth of 6.6 per cent was not all inflation, either; a third came from higher sales volumes. Strip out the lingering trail-off in disinfectant business, which boomed during the pandemic, and organic revenue was just over 9 per cent higher. That should help boost growth rates this year.
Debt may be one area that makes some investors uneasy. At £3.3 billion, net debt equated to 3.2 times adjusted earnings before tax and other charges. By the end of next year, management reckons it will have cut that leverage multiple to below three. That looks like a credible ambition. All but one of its five markets recorded double-digit adjusted profit growth last year and it has scope to pay down the absolute level of debt. Free cashflow amounted to £374 million, even after spending more than £250 million on smaller bolt-on deals.
ADVICE Buy
WHY There is solid earnings growth on offer
