December 2, 2021

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Remarkable business & finance

Questions Remain Unanswered Despite Deliveroo Recovering To IPO Price

In the five months since its initial public offering (IPO), the London-headquartered delivery company has risen almost 40%, returning the stock to its original price debut.

That IPO has been described as “one of the most embarrassing stockmarket debuts in living memory” by Lee Wild, head of equity strategy at interactive investor, as the company closed its first day 26% lower than it had opened, down to 287.45 pence per share from 390 pence per share.

Deliveroo’s IPO was also one of the most controversial in recent years, as asset managers lined up to add their voices to the condemnation of the firm.

M&G, Aberdeen Standard Investments (now abrdn) and Aviva Investors were among those that shunned the IPO, with head of UK equities at ASI Andrew Millington arguing the dual-class share structure would leave investors unable to exert influence.

Legal & General Investment Management went even further and petitioned the Financial Conduct Authority to not include Deliveroo in the premium indices so it would not be forced to invest in the company through its passive products.

Despite endorsement from Chancellor Rishi Sunak and insistence from Deliveroo these comments would not damage its IPO, the listing flopped.

At the time of its debut, Sophie Lund-Yates, senior equity analyst at Hargreaves Lansdown, agreed with the general concerns surrounding the fund’s social and governance issues to explain the poor performance, along with “general market volatility”.

She also highlighted that while the pandemic provided a “structural growth opportunity”, investors had to ask whether lockdowns meant “things are as good as they will ever be for a takeaway service”.

“Deliveroo’s recovery was always going to hinge on how well people’s desire for takeaway held up as life got back to normal,” she explained to Investment Week recently.

“We have seen that demand has remained strong, and this is likely because more customers have become used to the takeaway habit.

“It is also likely to do with continuing concerns over new variants of the virus, meaning some people are avoiding busy restaurants. This is where Deliveroo’s unique selling point really comes into play. It is far more focused on restaurant-quality food, rather than traditional take-out fare.”

Long-term winner

Wild also referenced the pandemic’s food delivery peak at the time of IPO and raised concerns the firm could not turn a profit even with “the biggest tailwind it could hope for”.

Since then, he argued there is a “stronger sense that Deliveroo is not just a lockdown winner, but a business with a long-term future”.

“Better than expected growth and other strong metrics revealed in its first half results are certainly reassuring,” he explained.

“However, with Deliveroo already cautioning that lower average order values will affect margins, sceptics need convincing that any positive trends can continue as societies return to normal after the pandemic.”

Ketan Patel, fund manager of the EdenTree Sustainable and Responsible UK Equity fund, remains unconvinced by the investment proposition of Deliveroo, which he described as “the antithesis of a sustainable business model” five months ago.

Now, Patel still has not shifted his view: “The investment thesis for Deliveroo still remains weak despite the recovery in share price following a poor debut on IPO.

“The business model remains unprofitable and the road to profitability remains highly uncertain with the company forecast to be in the red until the mid-2020s.

“Deliveroo’s monetisation is centred on monthly active consumers, their order frequency and average value per order, all three of which are likely to come under pressure as the pandemic lockdown eases and consumers return to normal consumption patterns”.

Noise around Deliveroo’s ESG failings has reduced since its listing, which was overshadowed by a report by the Bureau of Investigative Journalism and the Independent Workers’ Union of Great Britain, that found the company often paid its riders less than minimum wage, sometimes as low as £2 an hour.

Patel referenced this as part of the explanation for the share price recovery: “The positive sounds on rider regulation coupled with the endorsement by Delivery Hero, which has taken a 5% stake, has been a tailwind – as is the 13% stake taken by Amazon.”

Lund-Yates agreed the concerns around rider welfare have “been laid to rest with recent rulings” but is still worried about the firm’s ESG credentials.

“These issues are still circling above Deliveroo’s head. Further questions or reprisals cannot be ruled out in the future.”