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DELIVERY HERO SE - Equity Analysis



GENERAL ANALYSIS


Company description


Delivery Hero SE is a multinational food company headquartered in Berlin, Germany. it is present in over 70 countries across four continents and operate a wide range of local brands collaborating with more than 500,000 restaurants. the CEOs who lead the company are Niklas Östberg and Fabian Siegel, thanks to whom it first appeared in Australia and the United Kingdom, and then acquired the companies Lieferheld in Germany and Foodarena in Switzerland, arriving in the following years and continuing to acquire numerous delivery companies around the world. we can divide the history of the company into 4 important steps:

  • 2008: Niklas Östberg starts an online foods ordering service in Sweden.

  • 2011: Delivery Hero is founded

  • 2017: Delivery hero goes public on Frankfurt stoke exchange celebrating its IPO

  • 2022: Delivery hero operates in 70+ countries


Delivery Hero also operate 982 Dmarts (small warehouses located in strategically relevant locations for delivery) across the globe. In the second quarter of 2023, Delivery Hero generated EUR 11.1 billion Gross Merchandise Value, that equals a year-on-year growth of 8% in constant currency. The subject of their deliveries makes them unique because they deliver everything you need: From ready meals to groceries, flowers, coffee, medicines. Therefore, they don’t focus only on food.



Core business


Their business plan Delivery Hero generates revenue through fees levied on its participating restaurants, and it is mainly based on 3 points:

  • Riders: the strong network of riders is the heart of the business Restaurants and vendors: they work closely with them as key part of the delivery ecosystem

  • Quick commerce (q-commerce): the next generation of e-commerce, delivering small quantities of goods to consumers’ doors almost instantly, with a promise to deliver in less than an hour.

  • Dmarts (delivery-only supermarkets): centrally located warehouse allowing delivery groceries and household goods to costumer in record time (in less than 15 minutes).

OVERVIEW



Shares thus appear to be overvalued by about 67%, despite Delivery Hero being generally well regarded by investors. In fact, a price of $8.97 is expected in 5 years. However, and unexpected increase could be possible in 12 months, as the possibility of growth is real.



Industry concentration and power market


Delivery Hero has become the world's leading company in local deliveries, thanks to collaboration with over 1.3 million partners, and over 110 dark stores (local cloudbased stores). It also benefits a continuous structural improvement which brings unparalleled complexity. It is simultaneously hyper local and hyper global, above all thanks to the development of its e-commerce and p2c practice. The vertical expansion of Delivery Hero has made it possible to add this complexity to PIVC solutions, product advertising and therefore to their promotions (for example Google shopping). The general consequence is the Productsup ability’s gaining.



FINANCIAL ANALYSIS


Here we will list and expand into detail on DHER’s balance sheet, income statement, and financial performance, comparing historical data to current data.


Financial metrics



LIQUIDITY


Liquidity Liquidity ratios are calculated between various quantities of the reclassified balance sheet in order to point out the company's liquidity situation. It is clear here that the company generally has a generally bad financial situation. However, the current ratio rarely falls below 1, while the quick ratio never falls below 1.

  • Current ratio (0.92): The current ratio is a financial metric that measures a company's ability to cover its short-term liabilities with its short-term assets. It is calculated by dividing current assets by current liabilities. In general, a current ratio below 1 indicates that the company may have difficulty meeting its shortterm obligations with its current assets alone. A current ratio above 1 suggests that the company has more current assets than current liabilities, which is generally considered a healthier financial position. A current ratio of 0.92 may be a cause for concern, as it implies that the company's short-term liabilities are somewhat higher than its short-term assets. This ratio recorded a substantial decrease, going from 1.9 in 2020 to 0.92, with a decrease of 48% to date, reaching a peak of 0.69 in 2022 with an estimated value of 1.83 in 5 years.

  • Quick ratio (1.11): The quick ratio, also known as the acid-test ratio, is a financial metric that measures a company's ability to cover its short-term liabilities with its most liquid assets. The quick ratio is more conservative than the current ratio because it excludes inventory from current assets. A quick ratio above 1 suggests that the company has enough liquid assets to cover its shortterm liabilities. In this case, a quick ratio of 1.11 indicates a relatively healthy liquidity position. This ratio recorded an even more significant decrease of 363%, going from an optimal value of 2.98 in 2020 to a sub-optimal value of 0.82 in 2021. Fortunately, it has recovered considerably, arriving at a peak of 3.4, with an estimated value of 1.56 at 5 years.

  • Debt/equity (184.25%). Debt-to-Equity ratio, it is calculated by dividing a company's total debt by its total equity. If the Debt-to-Equity ratio is 184%, it means that the company has more debt than equity, and the level of debt is 1.84 times the equity. This ratio indicates that a significant portion of the company's financing comes from debt rather than equity.


That’s why it has a generally poor financial situation, which however should improve in the future. The company currently has good capacity to cover future expenses but is strongly linked to its debt which remains constantly high over time.



Profitability


Profitability could be analysed using four ratios: ROE, ROI, Net Revenue, EBIT margin:

  • EBIT margin (3.7%): If a company has an EBIT margin of 3.7%, it means that 3.7% of its total revenue is retained as operating profit after accounting for operating expenses but before interest and taxes. In other words, for every dollar of revenue generated, the company has a profit margin of 3.7 cents. A 3.7% EBIT margin is relatively low, and it might suggest that the company has a narrow operating profit margin. The trend reflects that of net revenue, and consequently the peak occurs in 2021 with a value of 7.07%. However, there is a slight difference: between 2022 and 2023 we have a small increase which brings the parameter from 3.3% to 3.7%. It may seem indifferent, but it is symptomatic of a possible expected future recovery of the company. However, we can state that it generally takes on a value between 3% and 7%. To analyse liquidity, we can use four ratios: ROE, ROI, Net Revenue, EBIT margin:



  • ROE (-61%): Return on Equity (ROE) is a financial metric that measures the profitability of a company in relation to its shareholders' equity. A ROE of -61% means that the net income of the company is negative, and it exceeds the shareholders' equity. In other words, the company's losses are greater than the equity invested by shareholders. A negative ROE is generally considered unfavorable because it indicates that the company is not generating enough profits to cover the equity invested by shareholders. It has recorded decreasing negative values in the last three years. ROE is negative, but it lends itself to being clearly positive in 5 years, reaching a value of 77% in 2028, starting from a value of -98% in 2020.

  • ROI (-6%): Return on Investment (ROI) is a financial metric that measures the profitability of an investment. It is expressed as a percentage. A ROI of -6% indicates that the investment has resulted in a negative return. In other words, the losses from the investment exceed the initial cost. Negative ROI suggests that the investment has not been profitable, and there has been a financial loss. It should be expected around 20% in 5 years.


We can therefore deduce that the company is not generating new wealth in recent years, rather it is constantly trying to recover losses. However, we can foresee a better future due to the big rise at the end of the half of 2022 which saw the maximum peak of the share price (€140) due to great progress in the launch of the innovative advertising technology across the company, with the increase in revenues of approximately 70% compared to the previous year and with the aim of generating more than 2 billion euros in the 2024/2025 financial year.


  • Net revenue: we can see an initial increase from 2020 to 2021, approximately 40%, followed by a constant decrease of a similar percentage in the following three years. This is coherent with the previous data and therefore represents a further demonstration.

  • Profit margin (-24.14%): A profit margin is typically expressed as a percentage and is calculated by dividing the net profit (profit after expenses) by the revenue (sales) and multiplying by 100 to get a percentage. If a profit margin is -24%, it means that the business has incurred a net loss equal to 24% of its revenue. This indicates that the expenses and costs associated with running the business exceed its revenue, resulting in a negative profit. The average value is around 10%, so it is clearly below.



Financial leverage


  • Debt/equity ratio (184%): the debt equity ratio also known as the debt-to equity ratio, measures the percentage of a company’s total financing that comes from the debt relative to equity. The fact that this ratio is above 100% and almost 200%indicates that Delive ry Hero is financed completely with debt and without equity. That’s a bad sign for investors because a lower ratio is typically a good sign.

  • Total debt to capitalization (56%): The Total Debt to Capitalization ratio is a financial metric that indicates the proportion of a company's capitalization that is provided by debt. it means that 56% of its total capitalization is funded by debt. In other words, 56% of the company's capital structure is comprised of debt, while the remaining 44% is represented by equity. This ratio is also unusually higher, because a higher ratio is usually a bad sign for investors.

  • Interest coverage ratio (-3,5%): The interest coverage ratio is a financial metric that measures a company's ability to meet its interest payments on outstanding debt. If the result is negative, it could imply that the company's earnings are not sufficient to cover its interest expenses, and it may be facing financial challenges. A ratio of -3,5% implies that Deli very Hero is not able to cover even part of its interest expenses. However, this is not as worrying as the other ratio. In fact, it’s a general trend across the industry.

  • Cash flow to debt ratio (-63%): The cash flow to debt ratio assesses a company’s ability to generate cash flow sufficient to service its debt. A ratio of -63% is extremely low, and it implies that DHER does not generates enough cash flow to cover even its debt. This situation could indicate financial distress and a potential inability to service debt. This is a very negative sign for investor, indicating and inability to manage debt.



Activity


  • Total assets turnover ratio (0.66): The total assets turnover ratio measures how efficiently a company utilizes its total assets to generate revenue. If a company has a total assets turnover ratio of 0.66, it means that for every dollar of average total assets, the company is generating $0.66 in net sales. It is one of the most variable ratios among different industries. In fact, a deliveryfocused enterprise will need a higher initial investment than average, so it is quite common for this ratio to register values between 0 and 1.



Key ratios and multiples


  • EV/EBITDA (5.2x): The EV/EBITDA ratio is a financial metric used to assess the valuation of a company by comparing its enterprise value (EV) to its earnings before interest, taxes, depreciation, and amortization (EBITDA). This ratio is commonly used by investors and analysts to evaluate the relative value of a company, especially in the context of mergers and acquisitions. If a company has an EV/EBITDA ratio of 5.2x, it means that the company's enterprise value is 5.2 times its EBITDA.

  • Low Ratio (below 8x): Generally considered relatively undervalued. Investors might see it as an attractive investment opportunity.

  • Moderate Ratio (8x to 12x): Considered average and may suggest a fair valuation.

  • High Ratio (above 12x): Could indicate a relatively higher valuation, and investors might scrutinize whether the company's future growth justifies the premium.

  • EV/EBIT (8.0x): The EV/EBIT (Enterprise Value to Earnings Before Interest and Taxes) ratio is a financial metric used to assess the valuation of a company by comparing its enterprise value (EV) to its EBIT. This ratio is commonly used by investors and analysts to evaluate the relative value of a company. If a company has an EV/EBIT ratio of 8.0x, it means that the company's enterprise value is 8 times its EBIT. We can enlist to the same result for this ratio, with the same consideration as the last one.

  • P/E(-5.0x): this is one of the most popular ratios used to test whether a stock is over- or undervalued. It is basically the ratio of the current price of a stock on a certain date to the earnings per share earned in the last fiscal year. The stock price has thus remained generally overvalued even though the ratio value has been decreasing recently. A P/E ratio of -5.0x means that the stock is overvalued by a multiple of 5x. In particular, the trend can be inferable from the graph below, it went from a very bad -25.24x in 2018 to a -5x in 2022.




VALUATION


We used a discounted cash flow model to estimate the intrinsic Value of Delivery Hero:


DCF model


This model is driven by Unlevered Free Cash Flow as this represents cash that is available for debt and equity holders and is calculated as EBIT minus taxes, plus D&A, minus CaPEx and change in Net Working Capital. This means that it is calculated in company value (EV Enterprise Value) based on the performance of its operational activity. The historical horizon is two years (2020 to 2022). The financial analysis horizon is over 5 years since Delivery is a company already formed and in a central position in the European industry. We can estimate that it will reach its full maturity in this period of time. A longer horizon would lead to a less truthful and effective solution also due to the lack of data and future market uncertainties, which are already difficult to predict because of various external factors.


We assumed a constant 3% TGR starting from a share price of $28.40. Having projected the revenue and the EBIT, taxed, over 5 years, finding the expected EBITA over the 5 years, assuming a constant D%A % sales of 6.5% and a CapEx of 7%, we can find the EBITDA.


There is another evaluation method: EV/EBITDA multiple method.


In finance, this method is used to assess how the market values a company's operating performance in relation to its total enterprise value. A higher multiple is generally interpreted as a more favorable valuation by the market, whereas a lower multiple may suggest a less favorable valuation. Analysts commonly use this method to compare the calculated multiple for a target company with those of comparable firms in the industry, aiding in the determination of whether the target.




The DCF model is particularly sensitive to 2 elements:



Weighted average cost of capital (WACC)


WACC stands for Weighted Average Cost of Capital, and it represents the average rate of return a company is expected to pay to its investors (both debt and equity holders) for using their capital to finance its operations.


A WACC of 9.45% means that, on average, the company is expected to pay a return of 9.45% to its investors. This rate considers the cost of both debt and equity capital, weighted by their respective proportions in the company's capital structure.


In summary, a WACC of 9.45% suggests that, to satisfy its investors, the company needs to generate returns sufficient to cover the cost of both debt and equity financing. It's a crucial metric in financial analysis and is often used in discounted cash flow (DCF) valuations and other capital budgeting decisions.



Future cash flows calculation


Using the DCF model, we calculated a terminal value which, when discounted, is lower than the enterprise value. This means that the company in the future will not continue to generate new cash flows, and above all it demonstrates that these future cash flows will be less than the current value of the company's operations. It is therefore a very bad sign for investors.




Sensitivity analysis


Sensitivity analysis in the context of a Discounted Cash Flow (DCF) valuation involves examining how changes in key assumptions or inputs affect the final valuation. The purpose is to understand the sensitivity of the valuation to variations in these variables. Here are some common sensitivity analysis parameters in a DCF: WACC, Tax rate, CapEx, Operating margins, Revenue growth rates, Terminal multiple and terminal growth rate.




We used two different elements (parts of the DCF): Terminal growth rate and Terminal EBITDA multiplier.

  • The first one represents the rate at which a company's cash flows, earnings, or dividends are expected to grow indefinitely into the future.

  • The second one is a valuation metric used to estimate the enterprise value (EV) of a company at the end of a projection period.




Relative evaluation (trading comps)


To make a comparison and have a general scenario we have selected 10 companies by sector, origin, size, offer, and relationships with suppliers: ROO, JETJ, CART, APRN, LYFT, DASH, DIDY, MPNGY. We calculate us on the EV/EBITDA multiple, EV/REVENUE multiple, and P/E multiple using consensus earnings estimates to calculate a potential share price range for the years of 2022 and 2023. The Revenue Growth median is around 2%, the EBITDA growth media around 31% and the Profit margin median is around 19%. The Revenue Growth median is 13%, the EBITDA growth median is 19%, and the Profit margin median is 21%.




Piotroski score


The Piotroski score is an indicator of a company's financial strength that is based o n the comparison of specific data from the company's financial statements. Piotroski score goes from zero to nine and reflects nine financial criteria used to determinate a company’s financial strength. The Potrioski score is based on 9 criteria focused on specific accounting data of the company in recent years. For each criterion met, the company is awarded one point; otherwise, no points are awarded. The points are then added together to determine the final score on a scale of 0 to 9, with nine being the best result and zero being the worst Those criteria are:

  1. Profitability: - Positive net income - Positive ROA - Positive operating cash flow in current year - Quality of earrings: cash flow form operation being greater than net income

  2. Leverage, Liquidity, and Source of Funds: - Decreased leverage: Change in long-term financial debt in the current period, compared to the previous year - More liquidity: Higher current ratio than last year - Lack of dilution: no new shares issued last year.

  3. Operating efficiency: - Higher gross margin than last year - Higher asset turnover than last year


The use of the Piotroski score in combination with other indices allows investors to focus on companies that provide financial strength guarantees. Therefore, applying Piotroski criteria on DHER profitability we get a score of 4. The breakdown is as follows:

  • Negative income of -24.400

  • Negative ROA of -19%

  • Negative operating cash flow of -36.457

  • Operating cash flows < net income Delivery hero scores 0 points in the first section

  • Lower amount of long-term debt compared to previous years (20 < 22)

  • Higher current ratio than previous years (0.92 > 0.69)

  • No new shares issued last year. Delivery hero scores 3 points in the second section.

  • Higher gross margin than last year (28.90% > 26.00%)

  • Higher asset turnover ratio compared to previous year (0.461 > 0.79)



Delivery hero scores 1 point in the last section. Therefore, we can affirm that DHER faces quite serious financial difficulties. In fact its total score is 4, which belongs to second worst possible scores category.



Altman Z-Score


Altman z score is a linear function of variables representing certain balance sheet ratios selected by multiple linear discriminant analysis. By substituting the value of a company's ratios for the variables in the formula, a score (the Z-score) is obtained; the lower the score is below a given threshold, the greater the company's risk of bankruptcy. According to its creator, the Altman model can correctly predict financial failure in 95% of companies a year before their bankruptcy.


A shortcut that might help readers to understand the Z-Score is thinking the score as a regression of y on xi independent variables with βi slope coefficients, where y is the Z-score, the xs are the five indices with i=5 and the slope coefficients β are the estimated parameters, it’s important to note that in this setting the intercept coefficient β0 is assumed equal to 0.


The 5 indices that make up the Z-score are as follows:

  1. Working capital/Total assets: Measures the liquidity of the company in relation to its size.

  2. Retained earnings/Total assets: Measures profitability reflecting the age and earning power of the company.

  3. Earnings before taxes and interest/Total assets: Measures operating efficiency after taxes and leverage factors

  4. Capitalization/Total liabilities: Considers market size that may show fluctuation in stock price as a possible warning sign.

  5. Revenues/Total assets: Standard measure for turnover of total assets calculated in number of times and not in percentage terms.


The coefficients are:

  • 1.2 × (Working capital/Total assets)

  • 1.4 × (Retained earnings/Total assets)

  • 3.3 × (Earnings before taxes and interest/Total assets)

  • 0.6 × (Capitalization/Total liabilities)

  • 0.999 × (Revenues/Total assets)

Z-score identifies three zones according to the company's risk of bankruptcy:

  1. Z > 2.99: green-safe zone-low bankruptcy risk

  2. 1.81 < Z < 2.99: grey zone-medium bankruptcy risk

  3. Z < 1.81: red/distress zone-high bankruptcy risk


Delivery hero Z registered in 2022 is -0.9; one of the worst performances ever registered in DHER history. Even worst is the last twelve months performance: -3.3


Z-score DHER history:



It is interesting here to analyse the increase due to the 2017 IPO, thanks to which DHER went from the worst z score ever (-2.7) to the best (7.0). It is thus evident how the IPO itself was not an evolution but rather a business necessity.


APPENDIX A: Drivers


APPENDIX B: Income statement and balance sheet





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