Just Eat results get cool reception

Just Eat reported underlying annual profits growth at the top end of its recent guidance as the online takeaway food platform competes in an increasingly competitive market.

While it battles for territory with Deliveroo and Uber Eats, the FTSE 250 group signed up more than four million new customers to its platform in 2018 and increased revenue 43% to £779.5m, as it had revealed in its January update.

Underlying earnings before interest, tax, depreciation and amortisation was lifted 6% to £173.9m, as management invested £51m in the business. The latest guidance had been for EBITDA of £172-174m.

Profit before tax swung to a positive £101.7m from the loss of £76m a year before, while adjusted earnings per share rose 1% to 17.0p.

Net operating cash flow shrank 6% to £157.3m.

Peter Duffy, who has been promoted from chief customer officer to interim chief executive after Peter Plumb abruptly stood down in January, confirmed that the targets for 2019 remained for revenue of £1-1.1bn and underlying EBITDA of £185-205m. This excludes the 33% owned iFood joint venture in Mexico and Brazil, which is expected to lose £80-100m, but Just Eat plans to maintain its shareholding to "fully participate in funding iFood's exciting growth plans".

After Canada's SkipTheDishes, the first business to offer the group's delivery service, broke even in the fourth quarter, it is expected to make an underlying profit in 2019. Based on this model, delivery is being rolled out in the UK, where the company has seen a continued "improving trend in the delivery economics reaching breakeven on a gross profit basis in more mature zones".

Summarising the company's strategy, Duffy said Just Eat "We are creating a leading hybrid offering founded on our unrivalled marketplace, combined with the targeted roll-out of delivery. This gives our growing customer base access to the greatest choice of restaurants and drives even more orders to our Restaurant Partners, ultimately strengthening the network effects of our business," he said.

He said the group was aiming to accelerate the execution of its strategy and "remain focused on long-term returns for shareholders".

There was no news on a permanent replacement for Plumb, whose departure was hastened by a 30% decline in the share price amid calls for change from activist investor Cat Rock, which has pushed for exits from Australia and iFood or for a merger with another industry player such as Takeaway.com, where Cat Rock has a 4.9% stake.

MARKET REACTION & ANALYSIS

Just Eat shares were down more than 2% at 760.60p after an hour and a half of trading on Wednesday.

Analysts at Peel Hunt observed that the investment of £51m in strategic initiatives was below the increased £55-£60m guide provided at the half year. "This is disappointing when it comes to Just Eat’s desire to invest for growth and combat our view that the company will come under growing pressing from competition including recent aggressive moves from Uber Eats and the continued nipping from Deliveroo."

Morgan Stanley said there as the company pre-released 2018 results and 2019 guidance in January, the key incremental data was the decision on iFood and geographic breakdowns.

On this, UK fourth quarter order growth of 13% to 33.2m was below its expectations, with revenue up 27% to £386m and underlying EBITDA increased by a bigger-than-expected 22% to £189.5m; Australian revenue growth was flat, which was slightly better than forecast; Canada revenue was up 186% to £178m and reached breakeven in the fourth quarter; with plans to maintain the stake in iFood expected to be "taken well by the market given the attractiveness of the business".

Nigel Parson at Canaccord Genuity said the decision to run with the SkipTheDishes model in the UK "helps to remove the ambiguity" that affected Plumb's tenure, with the Canadian performance demonstrating that this can be a viable model that will travel.

"It will need to be in the UK as rising competitive pressures are an increasing concern," Canaccord said. "Just Eat is explicit that it will protect market share ahead of profits in Marketplace. In September, it emerged that Uber was in early talks to buy Deliveroo. A possible war for market share could be very damaging for margins and profits."

Market analyst Neil Wilson at Markets.com noted that operating costs increased to £599.9m from £382.5m a year ago, ahead of revenue growth. But saw encouragement from improving margins in 2019 and that Just Eat was "getting its house in order" in Australia and New Zealand after some problematic integration.

"Global expansion and fighting off fierce competition is coming at a cost. It is becoming a difficult task in managing growth and building out scale without eroding margins. Heavy investment in its own delivery network may not be the right option but management is sticking to its guns and will invest more heavily in delivery, whilst racing to boost shares, at the expense of profits," he said, adding that his main worry for the company is that it becomes too focused on the contest with Deliveroo, Uber Eats and Amazon on lower-margin deliveries and take its eye off the ball on the core focus of being a technology enabler for restaurants.