The biggest conundrum facing investors in Deliveroo is whether to accept defeat. Shares in the food delivery app, which took the wooden spoon as the worst IPO in London’s history, languish at just a third of last year’s 390p listing price.
Bad timing, short-sellers and institutional investor concerns over the group’s dual-class share structure, were all blamed for the group’s disastrous entrance to the public markets. Rising rates, which have turned investors off tech stocks, regulatory risk, widening losses and the threat inflation poses to consumer spending have taken their place as the biggest obstacles to Deliveroo clawing back ground.
The food delivery group has set a target to break even at some point between the second half of next year and the first half of 2024, before turning a profit. But that means hitting annual gross transaction value (GTV) targets and keeping a grip on operating costs are its best chance of winning back investors, and there are challenges to both.
Without lockdowns, consumers found other avenues for their cash. For Deliveroo, which generates revenue primarily from restaurant and grocer commissions and from consumer fees, that meant growth in gross transaction value slowed to 36 per cent during the fourth quarter.
Some post-pandemic comedown was inevitable, particularly as annual comparators get tougher. How does it grow its transaction value from here? The plan is to take a greater share of the food delivery market, grow its grocery delivery income and increase coverage within markets that it reckons can sustain more drivers. But the fact is that food delivery is a highly competitive market and a lot of consumers are hardly flush with cash at the moment. In an admission of the potential ill-effects of inflation on consumer spending, management last week widened its guidance range for GTV growth this year to between 15 and 25 per cent from the 20-25 per cent previously set out.
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Grocery delivery provides another strand for revenue growth, but note it also typically carries lower commission rates and so a greater contribution towards the overall transaction value put through the Deliveroo platform could weigh on the group’s revenue growth. Competition is also rising here, from some deep-pocketed rivals. The Turkish rapid delivery service Getir recently raised fresh funds at an eye-watering $11.8 billion valuation.
Bulls might point to the £1.3 billion in cash on the balance sheet, which equates to more than half the group’s market capitalisation. True, that alleviates any concern about the security of the balance sheet, or Deliveroo’s ability to fund its rapid expansion. But that balance is only heading one way. Heavy spending on improving the technology of its platform and marketing to grow its reach Brokerage Numis reckons its cash burn rate will come in at £230 million this year.
Deliveroo is plagued by an ever-present elephant in the room. The tech group has faced a number of legal challenges in multiple jurisdictions over the status of its riders as self-employed. Thus far it has been successful in winning these but some disputes are still outstanding. Those relate to a challenge to a historic operating model in France and another from an Italian trade union relating to the status of drivers as self-employed. Deliveroo is defending against these challenges.
But it’s not as if there is no precedent for a change in the law. In May last year, the Spanish government approved the so-called “Rider Law”, which means food delivery companies must employ their couriers as staff rather than as self-employed.
The market sell-off has made a lot of companies look cheap right now, many of which have fewer banana skins lying across their path.
ADVICE Avoid
WHY Wide losses and risk of missing income targets could cause shares to slip further
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The Renewables Infrastructure Group
Given the volatility of wholesale energy prices at present, not to mention the sting to household budgets, you can see why those generating power might refrain from shouting too loudly about the potential benefit to their bottom line.
But rapidly rising inflation means the direction of travel seems assured in the near-term, at least. For The Renewables Infrastructure Group (Trig), which acquires and operates renewable-energy assets across Europe, rising power prices so far this year could add a further 2p to 4p a share to the investment trust’s net asset value, based upon forward contracts being sold in the market.
The potential uplift on offer has not gone unnoticed by investors, with the shares trading at a 9 per cent premium to NAV.
Roughly 70 per cent of the FTSE 250 constituent’s income is derived from subsidies that have fixed power prices embedded, but that leaves 30 per cent that is not. What’s more, those subsidies are subject to an annual inflationary uplift, which adds to Trig’s appeal as an inflation hedge for investors. The flipside? It is subject to the same cost pressures as companies across the board, mainly around parts for replacement and construction of wind and solar assets.
But longer-term, the plan is to grow the scale and diversity of its portfolio to mitigate against fluctuations in power prices. That includes raising cash to repay debt used to acquire a 7.8 per cent stake in Hornsea One, the world’s largest operational offshore wind farm, located off the Yorkshire coast. A separate offer for retail investors to purchase newly issued shares is due to close by Thursday morning.
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Power prices aside, the security of Trig’s cashflows is inherently linked to how much power is generated, which is unpredictable. But bar last year, Trig has paid out an annually rising dividend since the investment trust listed shares almost eight years ago. A target this year to pay out 6.84p equates to a dividend yield of 5.1 per cent at the current 133p share price.
Further NAV growth this year looks certain, but that’s already been acknowledged within the share price.
ADVICE Hold
WHY Worth keeping for the inflation-linked dividend