Interactive Investor

Deliveroo sent skidding off track by market plunge

19th August 2021 15:36

Graeme Evans from interactive investor

Our equities writer examines one of the big takeaway delivery apps against the backdrop of a sliding stock market.

Jittery markets have put the brakes on Deliveroo (LSE:ROO) just as the revival for shares in the food delivery app hit a key landmark by trading above the IPO price for the first time.

The stock closed last night at 395p, which is 5p above its debut price and up from a low of 228p in April in the weeks after a £7.6 billion flotation described as the worst in London's history.

That “floppero” tag has been dropped on the back of an important court victory over the employment status of Deliveroo's delivery riders, while the company has allayed fears that the end of lockdown restrictions would mean a big drop off in takeaway demand.

Broker coverage is now increasingly positive, with Goldman Sachs Group Inc (NYSE:GS) last week upping its price target by 20p to 460p and counterparts at Numis Securities reiterating their 400p target price after interim results showed a smaller-than-expected half-year loss.

Numis said recently: “The last six months have shown further evidence that Deliveroo is set to be a long-term food delivery winner given its track record as an innovator and through its hyper-local logistics focussed model.”

The resurgence for shares failed to overcome today's wider market sell-off, however, with the stock down by 2% or 7.1p to 387.9p after spending just one session above its issue price.

Takeover speculation after the purchase of a 5.1% stake by Delivery Hero SE (XETRA:DHER)is also no longer supporting the stock after its German rival declared it is not considering an offer.

Chief executive Will Shu has control over 50% of shareholder voting rights, which means a sale of a business he founded in 2013 is much less likely. The dual share structure was put in place to provide Shu with the stability to execute his long-term plans, but proved controversial for some potential investors ahead of the flotation.

Shu's first results presentation to the City last week showed half-year growth “materially ahead of expectations”, with gross transaction value (GTV) doubling to £3.8 billion and the company's average order value proving resilient despite restrictions easing. It now expects full-year growth of 50-60%, compared with the 30-40% forecast in July.

He said: “We have widened our consumer base, seen people continuing to order frequently and we now work with more food merchants than any other platform in the UK. At the same time, more riders are choosing to continue to work with the company because they value the work we offer.”

Shares fell, however, on fears about the outlook for profitability after Shu said the full-year profit margin would be in the lower part of the 7.5%-8% range, reflecting investment needs and the expectation for average order values to ease back towards pre-pandemic levels.

Shu added: “Whilst we expect that consumer behaviour may moderate later in the year, we remain excited about the opportunity ahead and our ability to capitalise on it."


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