Key topics:
- Prosus’ €4.1B bid for Just Eat follows years of massive financial losses.
- Cumulative loss since 2019 exceeds €10B, with equity plunging 97%.
- Firm’s low margins and high costs hinder cash generation, worsening the outlook.
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By Ted Black ___STEADY_PAYWALL___
In 2019, Prosus made a bid for Just Eat but didn’t pull it off. Helped by the Covid lockdown fiasco and buying Grubhub and Takeaway, the firm grew rapidly. At the time, some thought it a big, missed opportunity. Clearly, Prosus management still thinks so given its €4.1 billion bid.
However, when you look at its performance for the past six years, let alone the last ten, it’s puzzling why they’re in this market sector at all – especially if they want to close the discount gap with Tencent.
The task and contribution of management and reason for its existence is a firm’s economic performance. Its work is to make money – a profit – and generate cash at a level that beats the cost-of-capital.
Looking at the firm with operating productivity eyes first, this chart shows the link of Costs and Expenses to Sales. The cumulative loss since 2019 is more than €1 billion. Add depreciation and impairments and it’s €8.4 billion.
Operating management can barely achieve break even before adjusting for non-cash expenses and “write offs”. It is Cost/Expense “intensive”.
Moreover, despite using the financial stratagem of share buybacks, equity fell from a high of €13.8 billion in 2020 to €4.4 in 2024. A big reason is the cold bath of €5.2 billion it took to get rid of Grubhub whose profitability was already falling when they bought it.
As for getting management to walk in “Owners’ Shoes” and think like them, how do you do that?
It isn’t with Share Options. Those seem to encourage a focus on the share price and ways to lever it up while measures of economic productivity tend to be ignored. The focus is more on growth, EBITDA and “Gross Profit” margins.
Instead, focus on the highly asset intensive resource Just Eat uses to grow the value-of-the firm. To do that, start by inserting an interest charge into the income statement that reflects a Return on Equity a shareholder would expect. On average that’s around 15%. In this case, it translates to an average interest rate of 10% on assets managed – close to WACC.
Cumulative value destruction has been massive …
As one could predict, given the very low sales productivity of the asset base, the firm will show a loss before tax. Even though there’s an improvement, the loss posted in each of the last two years totals €2.8 billion.
The question is: Is the value destruction curve unstoppable? It could take a long time, if ever, to recoup it.
As to cash generation, the link to a high level of trade payables is key. Since 2020, the cash-to-cash cycle has resulted in working capital never been less than -12% of sales and as high as -25%. Apart from writing back depreciation, it’s the prime contributor to a positive cash flow – albeit a very low one. Trade payables are now close to 75% of working capital.
The firm’s margins are too low to generate cash at operating level. That’s because from a strategic position point of view, the firm is neither differentiated enough to get premium pricing, nor a lowest cost supplier.
That’s yet another reason why the capital market value of equity has fallen by 97% since 2018 – from €18.27 to €0.63.
Overall, the evidence tells us the Prosus “Food Delivery” segment is not the great “opportunity” it’s claimed to be. Just Eat’s cumulative loss after tax since 2019 is €10.5 billion. Delivery Hero isn’t far behind that number. As to iFood, who knows what its numbers are?
To complete the picture, maybe Fabricio Bloisi and his team could get around to some credible corporate marketing that’s simple to understand – to tell shareholders how “technology” improved iFood economic results, what the trends are now, and what they mean for the total segment in future.
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