When considering an investment for the Henderson EuroTrust portfolio, we tend not to focus on market noise or any technical factors; the main thing we are doing is trying to establish whether what we are looking at is a good company or not. This is a key part of the research process.
There tend to be many features that most good companies have in common, but there are a myriad of characteristics and features to analyse that will be unique to each and every business. By undertaking detailed analysis of the 50 or 60 companies we have on our radar (a portfolio of ~40 positions and a watch list of 10-20 names) we try to ascertain whether a business is a good business and if so, whether now is the right time to be invested or not.
We have held a position in the German takeaway-food delivery company Delivery Hero since late 2019. When we analyse companies, we focus our attention on the following five areas; ‘Potential returns and margin of safety’, ‘Quality and sustainability’, ‘Mispricings’, ‘Catalysts’ and ‘Fundamental and technical momentum’. Our analysis of Delivery Hero, which at present is an unprofitable business raised some interesting questions. How should we value a business generating negative profits and cash flow? How can an unprofitable business be a ‘good’ business? In order to build conviction in Delivery Hero as a potential investment, we spent a lot of time analysing what the business may look like in 3-5 years’ time rather than fixating on current financials.
Delivery Hero is a classic platform company; in their core business, they produce nothing themselves, but instead act as an intermediary, sitting between producers (the takeaway food companies) and consumers (you and I) and facilitating a higher volume/value of transactions than would otherwise exist. There are several features of platform businesses that we look for in our analysis and I will highlight four of these below.
Significant Total Addressable Market (TAM) opportunity
When investing in a platform business, one of the first questions that we try to answer is; how does the current Gross Merchandise Value (GMV) compare to the TAM opportunity. Answering this question gives you a feel for how much bigger the business could theoretically be if they are successful in their chosen end market. With Delivery Hero, we see a potential opportunity. In 2019, Delivery Hero’s GMV was €7.4bn whilst their TAM (the takeaway food market in Delivery Hero’s current geographies) was >€70bn.
Evidence of growing user numbers/transaction frequency
It is not sufficient for a platform business to have a large TAM opportunity. In addition, we look for evidence that their platform is gaining share and building scale. There are many data points that we could use to highlight how Delivery Hero are building a platform of increasing scale and usage. For example, in 2019, group order numbers increased by 80% to 666m, with significant growth in each and every region that they operate in. In addition, restaurant sales coverage increased by 70% in 2019 to reach a level of 500,000. These two statistics highlight how Delivery Hero is building scale on both the ‘consumer’ and ‘producer’ side of the platform; an essential sign of growing success.
Localised scale and market share
The importance of scale and market share is especially true in takeaway food delivery where even a strong number two operator can struggle to reach profitability. This is a ‘winner takes most’ business. Delivery Hero have operations in 44 countries globally and are the number one player in 90% of these regions. They view market leadership as extremely important and will likely exit a market where they see no route to being the largest player. We see this consistent local market leadership as extremely important in determining long term Return on Invested Capital (ROIC).
Investment behind the business leading to improving consumer experience
A platform business, no matter how dominant they are, must continue to invest behind the health of the ecosystem. We favour management teams who invest to improve the consumer experience rather than those who attempt to maximise shorter term margins. Delivery Hero is, in our view, a classic example of a business willing to invest at the expense of short-term profits. For example, in 2020, they set aside €200m to invest opportunistically in order to extend their leadership positions. They are investing behind rolling out their own delivery infrastructure, maintaining their best-in-class technology and in so-called ‘dark-kitchens’ and ‘dark-stores’. This is a management team willing to see short term pain (cash losses) for long term gain (building a stronger platform).
As with every investment decision we make, there are many other factors that we analyse such as the quality of the management team, the approach to capital allocation, cash flow generation and the management of the balance sheet. For us, Delivery Hero ticks all the boxes as a quality, long term focused business worthy of investment.
Gross Merchandise value: the total value of merchandise sold over a given period of time through a customer-to-customer (C2C) exchange site
Return on invested capital: a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments.
Total Available Market (TAM): the total market demand for a product or service.
 Delivery Hero Company Presentation, September 2020
 Delivery Hero Q4/FY Trading update 2019
 Delivery Hero Company Presentation, September 2020