Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Ioannis Pontikis. He is an equity analyst at Morningstar in Amsterdam. Hello.
Ioannis Pontikis: Hello. Thanks for having me, Holly.
Black: So, Ioannis, you've been looking at the online food delivery sector. Now, one name that's not yet on the stock market is Deliveroo, but we are expecting an IPO very soon. What can you tell us about this company?
Pontikis: Yeah. So, Deliveroo is a privately-owned online food delivery platform. It operates in 12 countries with hundreds of thousands of restaurant partners and hundreds of thousands of riders worldwide. From a regional presence perspective, Deliveroo has exposure to mainly Europe, Asia and Australia. But the largest number of restaurant partners and the majority of sales is coming from Europe and specifically, U.K. Now, the interesting part about Deliveroo is that it is despite being a very popular brand across regions, it operates in very, very competitive markets and with more than one well-financed home delivery competitors present in the majority of those markets and competing against dominant and highly profitable marketplace competitor in some of those markets, so notably, Netherlands and the U.K. So, all in all, from a market position perspective, Deliveroo is holding a suboptimal number 2 or number 3 market position across regions.
Black: One of the, sort of, controversies around this sector is the employment status of these so-called gig workers, the people we see cycling around in the turquoise Deliveroo jackets. Is that a concern for the business, do you think?
Pontikis: It is certainly a concern, but we don't see the regulation concerns to be of an existential threat to Deliveroo's business model. We do see a significant downside risk for Deliveroo in terms of valuation, and that's important for investors. And the reason for that is the significant difference in terms of unit economics between those two employment models. And why does this significant difference exist? First, with a good tracking model food delivery companies are not obligated to pay for pension and health benefits, and the second reason is that they don't pay for the waiting time for those riders. So, the difference in unit economics is significant. It translates into significant profitability difference as well. It will have impact on valuation, but we don't see existential threat in Deliveroo's business model from that downside risk.
Black: And Deliveroo is also being quite active in what's called the dark kitchen space. What can you tell us about that?
Pontikis: Yes, this is a really interesting concept. This is one of Deliveroo's most important contributions in the food delivery space. These are essentially pop-up kitchens in high density areas. They allow for high order volumes from partner restaurants. These types of kitchens provide more, or let's say, quicker options for consumers as well as for Deliveroo's partners to increase their regional coverage or fulfill area-specific demand. So, dark kitchens have – in my opinion, they have the potential to be a real differentiator for Deliveroo over time. And we reflect that in our DCF analysis as well. So, the main strategic benefits we see from this very promising concept for Deliveroo are, first, they artificially expand the available stock of restaurants; second, they lower the cost basis of preparing and delivering food orders, so cheaper operations; and the third one, it is an indirect way for food delivery platforms to offer private label restaurant brands by utilizing ultra-local consumer taste data that are very, very valuable.
Black: Okay. So, we don't know all the details on the IPO yet, but if we think about valuation, what's your take on this stock?
Pontikis: Yes. So, in our DCF analysis, we end up with a £5.5 billion equity valuation for Deliveroo and this happens to be close to the implied valuation from a recent private funding round. But in general, we think the U.K. market, it is a very profitable market, is still very competitive and that's – we will see – I think we will see the need for further restructuring and consolidation in the coming years. And Deliveroo, being a number 3 player in that market, a very important player, it is a very attractive acquisition candidate in our eyes, either for incumbent players like Uber Eats or new entrants like Amazon. Amazon, by the way, has already 16% stake. So, based on this assessment, we arrive at £7.5 billion blended equity valuation, which incorporates a 50% chance of Deliveroo being acquired as a result of market consolidation.
Black: Ioannis, thank you so much for your time. For Morningstar, I'm Holly Black.
