Deliveroo slashes losses and expects positive free cash flow in 2024

Deliveroo (ROO) pointed to “significant progress on profitability” as the online food delivery company cut its annual statutory pre-tax loss from £231mn to £10.9mn and guided for positive free cash flow for the entirety of 2024. 

The top-line growth rate wasn't particularly notable, as an 8 per cent uplift in the UK and Ireland was stymied by a 4 per cent downturn across the company's eight markets in Europe, the Middle East and Asia. 

The revenue increase was driven by a 3 per cent increase in gross transaction value (GTV), which was underpinned by food price inflation. As price inflation moderated over the year, however, GTV per order growth fell from 8 per cent in the first quarter to 4 per cent in the fourth. 

While consumer demand weakness for takeaways was evident as orders fell 3 per cent over the period, performance improved and was flat in the final quarter against the previous year. Orders nudged up 1 per cent in the UK and Ireland, but international orders were down 7 per cent. 

The significantly lower expenses burden stood out, as admin costs fell 13 per cent to £770mn. Marketing costs were cut by 14 per cent, which management attributed to "improving our targeting and introducing performance marketing optimisation signals linked to individual customer value", while technology contractor reductions also helped the bottom line. 

The free cash outflow came in at £38mn this time around, well under the £243mn posted in 2022. 

Shore Capital analysts value the shares (accounting for share-based payments) at 17 times forward EV/Ebitda, a premium to London-listed rival Just Eat Takeaway (JET) on eight times and European food delivery peers on 11 times. They argued that "marketing cost reductions are at risk of reversing as the [company] is still not a clear #1 player in its key markets and is introducing new nascent supply verticals (retail) required to build the ramp to medium-term guidance for teens GTV growth". 

To add to the downbeat mood, there was no news in the results of further share purchases. The company returned £309mn of capital to shareholders in 2023 through a tender offer and buyback programme. The shares still sit well below the IPO price of 390p.

However, the company is set to hit statutory profitability before Just Eat. As well as forecasting the delivery of positive free cash flow this year, management expects adjusted cash profits of £110mn-£130mn on the back of GTV growth of 5-9 per cent. Hold. 

Last IC view: Hold, 127p, 11 Aug 2023