Delivery Hero: Profitability Message Is Positive But A Lot Of Adjustments Were Made

Thesis

Delivery Hero (OTCPK:DLVHF) is a food delivery company that is specially well known for its Food Panda delivery app. Unlike the other big players like Deliveroo (OTCPK:DROOF), Just Eat Takeaway (OTCPK:JTKWY) (OTCPK:TKAYF), and Uber (UBER), that focuses on many developed markets, DLVHF focuses on Asia and Middle East, with a small exposure in EU/Americas. DLVHF also has a strong market position in South Korea under the brand Baedal Minjok (Acquired from Woowa Brothers). DLVHF is the market leader in most of the markets it is in, particularly in Asia and Middle east, and I see them continuing their momentum to further consolidate the market and gain share. Looking ahead, with more scale and a clearer path to FCF profitability, I believe the market will have a positive view on the business and stock, especially after a tough FY22 comparison, and FY23 weak macro. However, I have concerns about the business in terms of underlying growth, and the multiple accounting adjustments that make it hard to analyse the actual profitability. As such, I am recommending a hold rating until there is more clarity into the books.

Results

DLVHF reiterated its FY23 adjusted EBITDA guidance and reported 1Q23 results with GMV in line with expectations. GMV growth is expected to accelerate throughout FY23, as management has issued new top line guidance for GMV growth of 5-7% in constant currency for FY23. DLVHF's Asia operations have recently shown signs of improvement, and its Middle East and North Africa operations have been expanding steadily. Consistent currency growth of 10% is projected for revenues in FY23 as a result of the revised GMV guidance. The company's previous guidance for FCF break-even in H2 2023 was also reaffirmed. The industry as a whole has been battered by low profits and slow expansion (lower demand for food delivery due to the recession), so I anticipate the new guidance to be well received by investors.

Profitability

I believe the key message delivered to the market during this 1Q23 earnings report was the business now has a clearer path to profitability, and importantly FCF breakeven. Management indicated longer term adj. EBITDA guidance of 5-8% of GMV could be achieved earlier than initially anticipated – I expect the market to view this favourably and consensus to adjust their model, pulling forward positive EBITDA figures, thereby pushing up the stock price. I have always been skeptical about food delivery business that focuses on 1P model to become profitable, and this applies to DLVHF as well. However, what has surprised me this quarter was that management highlighted that around 50% of orders are now stackable in best-in-class markets which will drive better profitability going forward. I would note that the key words here are best-in-class markets, which means it is unlikely for all markets to be this way. The positive takeaway from this is that profitability per order would surge as each order stacked has very high incremental margins. On the other hand, I am sure this will impact user experience – Food delivery time takes longer, food gets colder, and importantly, it increases risk of operation hazards as riders rush to meet targets. On the latter, the impact to P&L will not surface today, but it opens the path for competitors as user’s seek “new alternatives”. In any case, this does improve profitability. The next update that management provided – Advertising revenue – was something that I agree would improve profitability. Management mentioned that advertising revenues are also gaining strong traction, particularly flagging the signing of new FMCG players. Another thing that DLVHF did well, I believe, was a clearer communication on how EBITDA would improve and also FCF (with charts clearly stating the bridge). This was the mistake made by Just Eat Takeaway, which caused massive confusion in the market.

Food for thought

While the message for profitability was very positive, I would remind readers that DLVHF P&L has a lot of adjustments and most of all a big fine/back taxes on its Glovo operations. On the former, the adjusted EBITDA of -€467 million was adjusted from an EBIT loss of -€2.8 billion. To put things into context, this €2.4 billion adjustment is 70+% of the business cash position. One might argue that these are all one-time expenses, but these one-time(s) have been happening all the time. Lastly, as I have written for Deliveroo, the lack of transparency in orders figure makes it very hard to dissect the business fundamentals. In the case of DLVHF, the positive inflation impact on its GMV from countries that have extremely high inflation rates – in North Africa, Middle East, and Asia – should not be taken for granted at face value (growing fast is not a function of volume).

Conclusion

In conclusion, while the 1Q23 results and guidance for DLVHF are positive, with a clearer path to FCF profitability and stronger market positions in Asia and Middle East, there are concerns about the business's underlying growth and the multiple accounting adjustments that make it difficult to analyze actual profitability. As such, I would recommend a hold rating until there is more clarity into the books.

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