Operational Efficiencies And Cost Control Signal Path To Sustainable Profitability

Key Takeaways

• Market expansion, customer experience, and subscription in Korea could boost revenue and profitability through increased order volumes and customer retention.
  
• Talabat's potential IPO may attract regional investors, contributing to MENA growth and strengthening Delivery Hero's balance sheet.
  
• Intense competition and legal risks are pressuring Delivery Hero's margins, impacting revenue, cash flow, and overall financial stability requirements for strategic adjustments.

Catalysts

Offers online food ordering and delivery services.

• Delivery Hero's market expansion and improved customer experience initiatives, including subscription services and platform enhancements in Korea, are expected to drive higher future revenue and improved profitability through increased order volumes and better customer retention.
  
• The potential IPO of Talabat in Q4 2024 is anticipated to attract strong regional investors, which could raise additional capital and contribute to a long-term growth trajectory in MENA, positively impacting revenue and strengthening the balance sheet.
  
• Continued growth in AdTech revenue as non-commission-based revenue increases its contribution to GMV is expected to drive higher net margins, given the higher-margin profile of advertising income relative to core delivery operations.
  
• The company's focus on operational efficiencies and cost control, including adjusted EBITDA improvements and positive operating cash flow, signals a trend towards sustainable profitability, potentially enhancing earnings and free cash flow in the future.
  
• Growth in the Integrated Verticals segment, with increased daily order volumes per store, indicates potential for ongoing margin expansion and profitability gains as economies of scale and targeted investments drive financial improvements.

Delivery Hero Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Delivery Hero's revenue will grow by 11.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from -20.7% today to 1.5% in 3 years time.
• Analysts expect earnings to reach €234.7 million (and earnings per share of €0.91) by about February 2028, up from €-2.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €421.5 million in earnings, and the most bearish expecting €-609.4 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 75.7x on those 2028 earnings, up from -3.3x today. This future PE is greater than the current PE for the GB Hospitality industry at 14.3x.
• Analysts expect the number of shares outstanding to grow by 5.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Delivery Hero Future Earnings Per Share Growth

Risks

• Delivery Hero experienced a significant drop in category share in Korea at the end of Q1, leading to accelerated plans and strategy adjustments in that market. This uncertainty might impact revenue and earnings if similar competitive pressures reoccur.
  
• The GMV development in South Korea was negatively impacted by intense competition, particularly a promotional campaign by a main competitor offering free delivery. Sustained competitive pressure could affect net margins and earnings if such challenges persist.
  
• Antitrust provisions and adjustments related to European antitrust matters totaled €226 million, reflecting potential ongoing legal risks that might affect net profitability.
  
• The Asia segment saw a decrease in EBITDA to GMV margin, down by 10 basis points, partly due to increased spending on own delivery and marketing in South Korea. Ongoing cost increases to regain market position could hurt overall net margins if not adequately balanced by revenue growth.
  
• Due to working capital changes, there is an expectation of shifting from positive to negative cash flow in the second half of the year. This fluctuation might pose risks to free cash flow and liquidity management, impacting financial stability.

Valuation

• The analysts have a consensus price target of €42.297 for Delivery Hero based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €75.0, and the most bearish reporting a price target of just €23.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €15.2 billion, earnings will come to €234.7 million, and it would be trading on a PE ratio of 75.7x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of €25.52, the analyst price target of €42.3 is 39.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.