Delivery Hero: Rise from the dead or dead in the water?

Delivery Hero has taken a beating in the last 6 months. What does the future hold?

About

Delivery Hero offers online food ordering and delivery services, much like UberEATS and Checkers60/60 in South Africa. The company currently has over 52 000 employees and operates in more than 70 countries in Europe, the Middle East, North Africa, Asia, and the Americas. Delivery Hero was founded in 2011 and is headquartered in Berlin, Germany. 

Naspers is currently the biggest shareholder with roughly 27% ownership share. Inside investors own roughly 32%, which is super positive from a shareholder point of view.

Everything seems great. So, whats all the fuss about? Delivery Hero has been one of the worst-performing equities on the European stock markets as the company has seen its share price dwindle from EUR 130 in Nov 2021 to EUR 22 in May 2022. The share price has recovered since its recent lows to a current price of EUR 47 per share. Can Delivery Hero recover or is the company dead in the water? Lets investigate. 

Business

Delivery Hero has expanded its presence in local markets worldwide with various brands. The Group comprises 243 companies, which means in every sector there are various local markets with their own food delivery brands, all of which Delivery Hero owns.

The business of Delivery Hero is divided into four regional food order and delivery platform segments, and a segment representing the principal model.

• Asia (44% of revenue)
• MENA - Middle East and North Africa (24% of revenue)
• Europe (9% of revenue)
• Americas (8% of revenue)
• Integrated Verticals - Where Delivery Hero acts as Principal (15% of revenue)

Financials

Revenue has roughly doubled every year since its inception. For the full year of 2021, the company reported sales of EUR 5,855.6 million compared to EUR 2,471.9 million a year ago. Revenue has been growing strongly due to internal growth and external growth via acquisitions. 

As with any growth company, massive resources are spent on research and development and marketing. Profitability is never a priority in the short term, but rather market penetration. Delivery Hero is no exception, as the group reported an operating net loss of EUR 1,100 million compared to EUR 1,409.1 million a year ago. The company estimates to become profitable only by 2026.

Looking at the balance sheet, there is one line item that stands out: Goodwill. Goodwill has increased significantly in the last couple of years. Goodwill is created when companies are acquired (which happens all the time at Delivery Hero) for more than their net asset value (assets minus liabilities). The difference represents goodwill. From this figure, we can deduce that Delivery Hero paid much more to these companies (in an attempt to acquire market share) than what they were actually worth.

Debt levels dont look that great. The Group is operating at a debt-to-equity ratio of 82%, which is very high. The current ratio (short-term assets: short-term liabilities), however, looks good at 2.05, which means the Group can cover their short-term liabilities with relative ease. 

If we consider the cash flow statement, it once again does not tell a pretty tale: The company is issuing A LOT of debt and A LOT of shares in an attempt to fund operations (very low cash levels). Debt is still okay (as long as it does not get out of control), but diluting shares is never what you want as a shareholder. 

What do we think?

Despite the slight recovery, the share price is down over 64% from its November 2021 levels. Of course, we like the company - they operate in so many different markets under so many different brands in an industry thats booming and will continue to boom. 

We like that management still owns roughly a third of the company, and that big players like BlackRock and Naspers are shareholders. 

The problem is the high debt levels and the continued share delusion thats taking place. How long can the company keep going before they run into real problems? They need to start making profits, and its not looking like that is going to happen any time soon.

So, the question is: Is the valuation warranted, or is the market being over pessimistic? Were not sure. We think the company will dominate if it can keep its head above water for the next 5 years. FinMeUp will take that bet with a small, long-term position in Delivery hero.

***Disclaimer: Just a friendly reminder - This is not financial advice. Always do your own research before taking a position. Content is for informational and educational purposes only***