Will Just Eat’s latest acquisition be a dodgy takeaway for shareholders?

Takeaway pizzaI’ve been bearish on Just Eat PLC (LON:JE) for some time now, but today’s acquisition suggests the firm’s management really have lost touch with reality, in my view.

The UK-based firm is planning to pay £445m for Menulog, a similar firm operating in the Australian and New Zealand markets. That’s a stunning 33 times last year’s Menulog revenues of £13.5m, and and even more bizaare 371 times Menulog’s 2014/15 EBITDA of £1.2m.

This deal will be financed through a proposed issue of new shares — and while Just Eat claims it will be eps accretive in the first year of ownership, I reckon shareholders need to consider how many years this acquisition will take to pay for itself.

Let’s look at the numbers

Given that Menulog has been building its takeaway business since 2008, it’s not clear to me what stage it’s reached in the growth cycle. However, if we generously assume it can extend the 96% year-on-year growth seen over the last quarter for the next four years, we see Menulog’s turnover rising to around £82m by 2019.

This would imply an EBITDA profit of around £7.3m, based on Menulog’s 2014 EBITDA margin of 8.9%.

In turn, this suggests that Just Eat may have paid around 60 times Menulog’s expected earnings in 2019!

Maybe I’m wrong

In fairness, it’s possible that Menulog’s sales will rise faster than this. Just Eat says that online penetration of the £1.6bn AUS/NZ takeaway delivery market is currently just 22%. I’d expect this to rise to between 40% and 60%, giving a potential market of, say, £800m.

Of this, a fat slice — perhaps 50% — will be taken by big brand firms, such as Dominos, which will never come onto the Just Eat/Menulog platform. That leaves a target market for Menulog of around £400m.

Menulog is unlikely to get this all to itself, given the lucrative nature of the business, but let’s be generous and say it might be able to build up to revenues of £200m, giving EBITDA profit of around £20m. However, even in this favourable case, Just Eat is planning to pay 22 times future EBITDA profits — which are likely to be at least five years away.

In my view, the £445m purchase price for Menulog just does not stack up, however you look at it.

To add insult to shareholders’ likely financial injury, this deal will be funded with new shares. It was no surprise to me to see Just Eat shares fall heavily after the news had sunk in on Friday. I suspect there could be further to fall.

The last word

For what it’s worth, I think Just Eat is a good business, but seriously overvalued. This premium valuation, combined with the current mania for consolidation in the online takeaway delivery market, seems to have led Just Eat’s management to massively overpay for Menulog.

I doubt this acquisition will pay for itself in the next decade, if ever.

I remain short of Just Eat.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has a short position in Just Eat. Do your own research or seek qualified professional advice before making any trading decisions.

Will Shell’s offer for BG Group trigger a wave of dealmaking?

Offshore oil or gas platformToday’s offer by Royal Dutch Shell for BG Group has compelling logic, in my view, and should be a sound move for both firms, albeit one which will take a few years to prove itself.

Shell’s expertise and focus on LNG and deepwater drilling is well-mirrored in BG, and Shell CEO Ben van Beurden’s record of cost-cutting and asset sales to date suggests to me that he will live up to his promise of $30bn of disposals and $2.5bn per year of sustainable cost savings.

Shell’s move to buy BG indicates two things: firstly, Shell’s management believes that the oil price will recover in the next eighteen months, and secondly, the firm is increasing its bet on a gasified future.

However, the more interesting question, of course, is what Shell’s bold move means for the wider industry. In my view, this deal could well mark the low point in valuations for independent producers with solid assets: inevitably some of those firms who are financially distressed may still fall by the wayside, but solid firms with good prospects may now see a floor placed under their valuations.

That’s not to say that the oil price has necessarily bottomed out: it may have, but there could still be a few violent moves lower to come, along with a further period of low prices before the global oversupply problem is addressed.

Staying within the universe of the London Stock Exchange, there are a number of other obvious bid targets: Tullow OilGenel EnergyOphir Energy and perhaps Premier Oil and Gulf Keystone Petroleum — plus of course BP, which could yet become part of the ExxonMobil empire, in my opinion.

In two new article for the Motley Fool today, I took a closer look at some of these possibilities and speculated on what may happen next:

Whatever happens, I’m pretty sure there will be further consolidation in the oil sector while mid-cap valuations remain so low. What do you think might happen next? Let me know your thoughts in the comments below or @rolandhead on Twitter.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has long positions in Royal Dutch Shell and Genel Energy. Do your own research or seek qualified professional advice before making any trading decisions.

3 reasons why Just Eat may have just peaked

Takeaway pizzaJohn Maynard Keynes famously said that “the market can remain irrational longer than you can stay solvent“.

It’s this risk — more than anything else — that makes shorting overvalued growth stocks such a hazardous occupation.

For this reason, I prefer to find additional reasons to enter into such short transactions, over and above excessive valuations.

My favourite measure is founder or director sales: this worked a treat with Ocado Group, and is also looking very promising with AO World, one of whose founder backers sold out late last year, and whose chairman Richard Rose sold 88% of his holding last week, as soon as the post-IPO lock-up allowed him to.

AO World and Ocado also suffer from another problem — they don’t really make any money. That’s not an issue for Just Eat (LON:JE), which is making plenty of cash — a fact that may explain why the placing of a 7.7% stake by four of the firm’s pre-flotation shareholders in December didn’t have a lasting impact on Just Eat’s share price.

However, despite this, I feel that Just Eat may be nearing peak valuation — or at least approaching a correction of some kind.

Yesterday’s blockbuster full-year results appeared to confirm my view: reading them before the market opened, I expected big gains when trading started, akin to those seen with ASOS last week (another overvalued stock with falling profit margins).

However, despite genuinely impressive results, Just Eat stock barely flickered higher yesterday, and has opened down by 5% today: have we just seen the top?

I think we may have done, for three reasons:

1. Consolidation and competition in the industry are becoming a real concern and could herald pressure on margins: Just Eat finance director Mike Wroe said yesterday that some of the recent merger and acquisition activity in the sector had been “pricier than we were willing to get involved with, so in that sense it has got more competitive”.

There’s also increasing competition pressure from peers such as Hungry House, and big brand takeaways, such as Domino, which runs a superb online service.

2. Yesterday, Just Eat announced a big beat on 2014 earnings, which were 4.2p per share, versus consensus forecasts for 3.1p per share. Orders rose by 52% last year, and sales were up 62%.Just Eat also issued a bullish forecast for 25% revenue growth in 2015, slightly ahead of consensus forecasts.

Yet the shares didn’t budge, and are down around 5% today. To me, this is a classic sign of a growth stock with a toppy valuation: investors are jaded and are no longer getting the ‘hit’ they need, despite strong results.

Just Eat shares now trade on 82 times 2014 earnings, and 63 times 2015 forecast earnings. To justify this high-octane valuation, post-tax earnings are expected to double in 2015, based on a 25% increase in revenue. That might be achievable if spending on acquisitions stops, but then where will the outsize growth rates come from?

3. Just Eat’s 12% operating margin appears to have been partly supported by an increase in commission charge for UK restaurants from 11% to 12%, which came into effect on January 1 2014. 

The firm says this accounted for the majority of the 10% increase in UK average revenue per order (ARPO) seen in 2014. To put this in context, ARPO rose by just 2.4% in 2013, when driven only by takeaway price inflation.

I’d suggest that without the increased commission charge, ARPO growth might have been lower in 2014 than 2013, given the widespread food price deflation being seen in the UK. To compound this, wage growth is also low, at the bottom end of the labour market, where most Just Eat customers presuambly operate.

I’m guessing that to compensate for this, Just Eat demanded a bigger slice of the cake (kebab?).

I’m not sure how sustainable this is: 12% seems a pretty hefty commission in a sector that’s quite price sensitive and must surely have fairly low margins (who’s seen a set of accounts for a takeaway/restaurant?).

Short Just Eat?

I’m not sure that Just Eat is a short just yet, although I am thinking about it. What I’m certain of, however, is that I wouldn’t want to be long of the stock at today’s price of 347p.

Update 24/03/2015: According to three RNS announcements today, three major shareholders have reduced their stake in Just Eat by a total of 4.8% since the firm’s results were published last week. The share price rose following the news, perhaps because a big overhang had been cleared? It seems bearish to me, however, that a number of major backers are choosing now to lock in some of their gains.

Disclosure: This article is provided for information only and is not intended as investment advice. The author has short positions in Ocado Group and AO World. Do your own research or seek qualified professional advice before making any trading decisions.

Victoria Oil & Gas 2015 interim results: any improvement?

Victoria Oil & Gas customer site

Victoria Oil & Gas is supplying gas for heat and power to industrial customers in Douala, Cameroon (image copyright Victoria Oil & Gas)

Having slated Victoria Oil & Gas plc (LON:VOG) after the publication of its 2014 results, I decided to take a look at the firm’s interim results, which were published at the end of February, to see if anything had improved.

The main areas that concerned me in the 2014 results were:

  • High levels of cash consumption
  • Stressed working capital situation with high levels of bad debt and likely bad debt
  • Excessive remuneration for staff and related parties — I’ve previously highlighted how Chairman Kevin Foo’s interests didn’t appear very well aligned with those of shareholders. Put differently, this company appears to be skilled at enriching its management but not its shareholders.

Have things improved?


Victoria’s cash balance fell from $17m to $5.8m during the period, while total borrowings rose from  $10.7m to $12.4m, an increase of $1.7m. In total, the firm appears to have consumed almost $13m of cash between June and November 2014.

However, in Victoria’s defence, some of this expenditure should have been funded by the firm’s 40% partner, RSM, which has subsequently paid up most of what it owed.

Victoria didn’t provide a pro rata breakdown of RSM’s payments across its accounting periods, but did say that it had received $6.9m from RSM to cover its share of expenses from February 2014 onwards, while a further $1.2m was still outstanding at the time of publication.

I’ve guesstimated the amount of this expenditure incurred during Victoria’s H1 (June- Nov) as $6m, meaning that Victoria’s net cash consumption during H1 appears to have been around $7m.

Working capital

Perhaps my biggest concern in 2014 was the apparent poor quality of Victoria’s receivables, and its fairly grim payables situation.

During H1, Victoria’s payables actually fell, from $12.5m to $10.5m, so I’ll focus on receivables here.

There was a slight improvement in receivables, too. Trade and other receivables (excluding monies owed by RSM) rose by 23% from $4.8m to $5.9m during the first half, as you’d expect given higher gas sales.

However, debtor days (the average time taken for customers to pay their bills) was 106 days, a modest reduction on the 120 days reported last year.

We won’t learn how this translates into good and bad debts, plus subsidised (never to be repaid?) customer installation costs, until this year’s annual report is published, but limited progress does appear to have been made.

Excessive related party remuneration

I’ve written about the gravytrain being enjoyed by top management at Victoria before. The firm’s interims suggest that the influx of cash from RSM, coupled with rising revenues, have given renewed momentum to the firm’s remuneration habits.

Total related party transactions — described as “payments to directors and other key management personnel” rose from $1.6m during the first half of last year to a nice round $2.0m during the first half of the current year.

One area of particular growth was “Directors’ remuneration – cash payments”, which rose from $716,000 during the first half of last year to $1,183,000 in the current year. That’s 10% of revenue!

Still a sell?

My conclusion after reviewing Victoria’s 2014 results was that the firm was putting a too much of a favourable spin on its receivables, and continuing to burn cash.

Although the subsequent growth in gas sales and the new supply agreements with the local power company are a big bonus, in my view, the firm’s interim results suggest my conclusions from last year are still broadly valid.

The increase in debt is worrying, and even if this is brought under control with more regular payments from RSM, I believe Victoria’s $100m valuation is ample, if not excessive.

Upside to valuation?

Victoria says annual production for 2015 is expected to average 10.4 mmscf/d, around 2.5 times the current average of 3.9 – 4.4 mmscf/d.

To keep things simple, let’s assume that means H2 revenues will be 2.5 times H1 revenues. Therefore, using the last 18 months’ figures as a guide, this is how Victoria’s 2015 income statement might look:

  • FY2015 revenue of c.$40m;
  • Gross profits c.$11.2m
  • Administrative expenses: $10m
  • Sales and market expenses: $0.8m
  • Operating profit: <$0.5m
  • Post-tax profit: c.$0.00

This is –obviously — a simplification, but as I’ve said before, it’s hard to see how Victoria will make a meaningful profit in the foreseeable future, unless perhaps gas sales rise much higher and actually manage to grow faster than the firm’s considerable overheads… (Remember, the firm’s forecast in 2011 was for sales of 44mscf/d in 2014. Actual sales were less than 4mscf/d).

There are of course, a few people who benefiting directly from Victoria’s rising revenues: the beneficiaries of the 4.5% royalty payment that comes directly off the top of the firm’s revenues. This would have been more than $500,000 during H1 alone…

Victoria Oil & Gas remains a sell, for me — especially as the firm could, in the next few years, face competition from BowLeven, whose Etinde gas field lies just offshore from Douala. BowLeven already has an outline agreement to supply a nearby fertiliser plant with gas, starting at the end of 2015…

Disclosure: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any company mentioned. Do your own research or seek qualified professional advice before making any trading decisions.

Is Lancashire Holdings really cheap?

Scales of justiceFull disclosure: early in January 2015, I purchased shares in Lancashire Holdings Limited (LON:LRE).

At the time they were trading at around 550p and seemed very cheap. Two months plus a 20% gain later, I’m not so sure. To be honest, I’m not sure my reasons for the purchase — into a value portfolio — stack up all that well.

Obviously I’m not complaining — a 20% return in two months is not to be sneezed at — but I am thinking about selling.

I try to continuously evaluate my investments with an open mind, as I believe that from fixed viewpoints cometh many losses… In this article, I’ve tried to explain the thought processes that led me to buy, and now consider selling, Lancashire Holdings.

1. Cheap valuation?

Lancashire’s shares nose-dived at the end of November, after two founder non-executive directors left the board, just a few months after the firm’s founder, Richard Brindle, also left the firm.

Such departures are often a sign of bad news, but so far there hasn’t really been any, making the short spell the shares spent between 500p and 550p look like a good buying opportunity for income seekers.

That’s when I bought in, tempted by a 2014 forecast P/E of less than 8 and a near-10% dividend yield.

I was also reassured by the firm’s low valuation relative to its history of strong earnings: although specialist insurers like Lancashire inevitably have good and bad years, the firm’s 10-year average earnings of 73p per share gave a PE10 of 7.6 at my 552p purchase price, and of 9.1 at the current price of around 665p.

Lancashire’s other metrics also seemed impressive. Since 2009, the firm’s combined ratio has ranged between 45% and 70%, which seems outstandingly low compared to mainstream insurers, which generally seem to operate with a combined ratio above 90%. Return on equity was good, averaging 18.8% between 2009 and 2014.

Finally, shareholder returns were clearly a priority, so I was happy to buy in to what looked like a cheap and very profitable firm, even though it wasn’t trading below book value. (I’ve previously used book value successfully for insurers, buying into Aviva and Friends Life Group when they traded below book value — both subsequently enjoyed a strong re-rating).

2. Maybe it’s always this cheap?

So far, so good. But as Lancashire’s share price rapidly re-rated over the last two months, I started to wonder where this would lead — how would I judge when the shares were fully valued?

As the portfolio containing the shares is value only, not income, then holding for the dividends, regardless of valuation, wasn’t an option.

Here’s how Lancashire’s current 2015 forecast P/E compares to some of its peers:

  • Lancashire: 2015 P/E 10.7
  • Amlin: 2015 P/E 12.1
  • Hiscox: 2015 P/E 14.5
  • Catlin: 2015 P/E 12.3

On this basis, Lancashire still looks a little cheaper than average, although not by a huge margin.

However, another consideration is the historical norm: some companies always trade on low multiples, for various reasons.

A look back at the figures suggests Lancashire could be such a company. For this list, I’ve calculated an approximate trailing P/E for the shares using the share price in March after the listed year’s results would have been published (e.g. share price in March 2014 following publication of 2013 results):

  • 2010 P/E: 5.0
  • 2011 P/E: 9.7
  • 2012 P/E: 10.7
  • 2013 P/E: 9.5
  • 2014 P/E: 8.6

It’s very approximate, but this list suggests to me that today’s forecast P/E of 10.7 is about right. Lancashire has not tended to trade much above this, relative to actual earnings.

3. I don’t understand it

My last point above brings me onto the final reason I am considering selling my shares in Lancashire Holdings: it may be a great business (I believe it is), but I don’t really understand it very well.

Conditions are said to be soft in the specialist and reinsurance sectors at the moment, due to an influx of new capital seeking higher returns. Lancashire is showing discipline and maintaining solid profit margins, but it’s also benefited from a period of low claims. I don’t really understand how things will pan out, over the next year or two.

Ultimately, I don’t think Lancashire currently fits my criteria for a value investment: a company that is trading at a low valuation relative to its likely earning potential or book value, offering the opportunity for a re-rating.

Given this, I am probably going to sell mine over the next few day, although I believe Lancashire shares could make an excellent long-term income stock.

Disclosure: This article is provided for information only and is not intended as investment advice. At the time of publication, the author owned shares in Lancashire Holdings Limited and Aviva. Do your own research or seek qualified professional advice before making any trading decisions.