Our thoughts on DeliveryHero’s Q1 2022 results

Delivery Hero, a holding company of food delivery operators in multiple regions, released its Q1 2023 results last week. Share prices popped as a result. 

Could this imply that investor’s sentiments towards the company have become more positive?

Here are some of our key takeaways from and thoughts about its latest quarterly report:

1. In Q1 2023, Delivery Hero’s Middle East and North Africa (MENA) segment reported a double-digit GMV growth of 16% YoY. The good consumption power in many of its cities, the availability of labour force, as well as the absence of serious competition all help. Friends in Dubai will know that Talabat is dominant in the most lucrative market in the region.
2. Its Asian business, which is 57.7% of the total GMV, declined by 6% YoY. The company said the decline was “primarily due to challenging market conditions in some of the company’s key Asian markets”. The company did not provide details – but there is some information on South Korea, which we discuss in point 5 of this article.
   
   At Momentum Works, we track the GMV and market share by country of Southeast Asia’s food delivery sector on an annual basis – and you can download the latest report here. Growth was normalising in 2022 as offline returned and companies started working towards profitability – the trend seems to be continuing in 2023.
3. The company reported a positive “contribution margin” – of course many would be curious what that actually means. In our “Apples to Apples” report, we actually did break down the different levels of contribution margin.

   DeliveryHero’s contribution margin means contribution margin 1.The America and MENA segments both reported “gross profit margin” of almost 10% – meaning its gross profit (which is revenue minus cost of sales, excluding vouchers) as a percentage of its revenue.

   It is important to note that for Deliver Hero, the gross profit margin differs from the IFRS gross profit, this is mainly because the former excludes vouchers, whereas the latter recognises vouchers as revenue reduction.

4. Adjusted EBITDA improved by 41%, and the group expects to break even on this metric in 2023. (read section 5 of  “Apples to Apples 2.0” report for a comparison of adjusted EBITDA). So yes, good progress towards profitability.

   The rumours last year about divesting some of the markets in Asia (in particular Thailand) have not yet been confirmed – though we learnt from some people that the talks were indeed in advanced stages.

   We were however curious about why a competitor with an existing presence would buy Delivery Hero’s country business, and if so, how should such business be valued.

5. On a positive note, Delivery Hero’s reported considerable earnings growth and cash conversion at Woowa Group, its South Korea operations. Woowa group achieved a 42% increase in revenue YoY as well as positive cash flow.On a detailed look, Woowa’s GMV declined at similar levels compared to Delivery Hero’s overall Asia business. We calculated last year that Woowa would contribute to about 70% of Delivery Hero’s Asia GMV.
   As the undisputed top player in South Korea – a market of 51.74 million people and GDP per capita of US$ 32,236.80,  Woowa seems to be a significant cash contributor to the group as well. In 2022, Woowa’s free cash flow was  €269 million, almost 5 times more than the €50 million in 2021.

   Delivery Hero aims to reach free cash flow breakeven during Q2 2023, probably largely thanks to Woowa.

6. Delivery Hero has managed to delay its repayment obligations by refinancing its existing debt. In February this year, used the proceeds from its successful placement of convertible bonds due in 2030 to repurchase a portion of its outstanding 2024 and 2025 convertible bonds.Although the company’s net debt still remains large (especially compared with its peers), with €4.7 Billion in outstanding convertible bonds, for now Delivery Hero has been able to buy some time to manage its debt obligations while working towards profitability.
   Check out section 6 of our latest Apples to Apples 2.0 report for a breakdown of Delivery Hero’s convertible bonds including the coupon rate and conversion price of each bond.

In general, Delivery Hero’s Q1 2023 report was relatively positive, with a positive growth in all its business segments, except Asia which is its largest market. However, as mentioned above, South Korean subsidiary Woowa Group has been a good cash flow generator. 

Moving forward, it will be interesting to see how the company progresses in the coming months and whether it can achieve its targets of free cash flow breakeven and positive adjusted EBITDA in Q2 2023. 

As we concluded in each year’s Food Delivery Platforms in Southeast Asia report, it is volume, density and operational efficiency that makes a food delivery business profitable, and winning. DeliveryHero needs to bring that to markets other than South Korea.