James Gard: Welcome to Morningstar. Today, we're talking about Just Eat Takeaway, which has just released its annual results. With me here today is Ioannis Pontikis, who is an equity analyst for Morningstar. He's just been on the call with Just Eat Takeaway and he's got some instant reaction to the results.
What's the top-line, Ioannis?
Ioannis Pontikis: So, largely in line fiscal 2021 results, both for the revenue and adjusted EBITDA lines. Management reiterated the fiscal 2022 guidance, GTV and order growth. Performance has already been reported in January with the fourth quarter trading update. Three main takeaways here. First, better-than-expected North America and U.K. EBITDA losses, which could be a sign of lower competitive intensity in these markets. In North America, the main headwind industry-wide is the permanent hiccups in New York and San Francisco, which have been a huge drag on profitability for Grubhub. Second, the announcement of market exits in Portugal and Norway is another sign of a gradual transition to a more normalized rational market environment. As a reminder, Deliveroo recently announced they were exiting Spain. We think this is a slow but sure way of market repair in the food delivery space with companies essentially reassessing capital allocation frameworks by focusing on markets with higher chances of winning. And the third, strong balance sheet and plenty of optionality through the iFood stake, which in our estimates is worth about €3.5 billion, essentially a strong cash position is of paramount importance these days, as raising capital is increasingly getting harder and more expensive in the current capital market environment.
Gard: Sure. Thanks very much. I mean, as you touched on, the company has suggested that its profit margins will be increasing this financial year. I mean, they've talked about this being the peak year of losses. Are you happy with these forecasts? You think the 1 billion loss they made last year, do you think that is as bad as it gets?
Pontikis: Sort of, yes. I mean, this is the year of big investments. Really, 2021-2022 is going to be essentially half of that in terms of margins. And then, 2023, we expect the group to gradually start having a positive bottom-line performance. Bear in mind James here that in food delivery it's really important – profitability, it's really a function of what competition is doing and whether competition is doing rational things in terms of capital allocation or not. Otherwise, if competition is irrational and you have a strong cash position, I think the best strategy going forward is to continue investing for growth, because when we're talking about food delivery companies, this is a network effect business. So, you need to grow your top-line in order to boost your network effects.
Gard: Sure. And so, you think the company's dominant position will continue to work in its favour. I mean, I know it's always been one of your favorite picks in this sector. Do you think that's likely to continue?
Pontikis: Yes. Actually, Just Eat Takeaway is our top pick in this space. We do think that the sector is generally undervalued, and this is probably a cyclical effect and a function of the tighter interest rate environment and the outlook for a tighter interest rate environment. Typically, long duration stocks like food delivery companies are getting penalized during those environments. But Just Eat Takeaway is actually our top pick, significant upside implied by current fair value estimate.
Gard: Sure. Do you think there'd be any change to your fair value estimates after the latest results? Or it's too early to say that?
Pontikis: No, it was – as I said, because it was largely in line with guidance was reiterated. There's no need, we think, to change our fair value estimate.
Gard: Got it. Okay. And do you think investors need to just be more patient with companies like Just Eat Takeaway?
Pontikis: Yes, although we do see a couple of short to medium-term catalysts that will help in unlocking the value we believe Just Eat Takeaway has. We do think that this is a very high-return, low-risk type of situation for patient investors.
Gard: Do you really think that these stocks have moved behind the idea that they are pandemic stocks? People, once they've tried them on, will continue using them, even if there's no lockdown.
Pontikis: Well, what we see in terms of up and download data, (usage) and growth rates in terms of order growth and GTV across the food delivery space is that the pandemic-related behaviors continue even post pandemic, although at a much slower pace, but still this company will continue to grow at low double digit rates in the foreseeable future, in our opinion.
Gard: Super. Thanks very much for your insights, Ioannis. For Morningstar, I'm James Gard.
