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Why was the Deliveroo IPO so bad?

Dylan Hood — Sun, 04 Apr 2021 16:50:21 +0000

The Deliveroo (LSE: ROO) IPO has proved one of the worst in recent history. The food delivery companyâs shares floated on the London Stock Exchange on March 31 for an issue price of 390p. The price then plummeted 30%+ to 271p. It has risen to 282p as I write — still a harsh loss for investors who grabbed the early shares.

Deliverooâs history

Founded in 2013 by William Shu, the online delivery service is a giant in its market. Although it still operates at a loss, it has boasted encouraging growth in recent years, in line with Shuâs strategy of pumping cash into scaling up operations and business reach.

2020 losses shrank 40% to Â£224m, and in the first two months of 2021 transactions more than doubled in year-on-year value. While this seems encouraging for growth investors, there are some key reasons the IPO saw share prices slumping.

Reasons the Deliveroo IPO failed

Firstly, the IPO couldnât have come at a worse time. The UK economy is finally opening up, with restaurants and pubs set to begin opening their doors on April 12. Food delivery services such as Deliveroo were able to capitalise on lockdowns as people wanted restaurant-quality food delivered to their homes. However, this won’t be the case as of a week’s time as people will be eager to eat out. Holding an IPO now seems bad timing when taking this into consideration.

In addition to this, March 31 was the final day of the first financial quarter of 2021. This is a very important time for fund managers. They tend to review their portfolios and rebalance positions. It’s certainly not the time to jump on board a volatile investment such as an IPO.

There are also ethical issues behind this IPO. Many top institutional investors including Legal & General, Aviva, and BMO Global announced they would be steering clear of the IPO due to the poor treatment of workers. Research by the Bureau of Investigative Journalism showed that a third of workers are paid less than minimum wage. This is largely down to the zero-hour contacts and âflexibleâ pay structure of Deliveroo. Many long-term investors take this into consideration. They’re looking for more than just a profitable business. They want a solid ethical approach.

A final reason for the abysmal Deliveroo IPO is around the valuation of the company. The float was projected to increase Deliverooâs total value to Â£7.6bn. The decline in share price that followed knocked a hefty Â£1.2bn off this. A market cap of Â£7.6bn would have meant the company was worth 6.4 times the previous yearâs revenue. This seems rather steep considering rival Just Eat Takeaway.com is valued at only 4.8 times revenues.

So with all those negatives, why did the share price start to rise again after its plunge? Well, Deliveroo is a growing business and has strong potential. One plus point is that it has announced it will expand its grocery delivery service throughout 2021. This is the fastest-growing part of the business. The expansion will offer grocery delivery to an additional 125 towns and cities, taking the total to 300 for the UK. That could help it on its drive for profitability.

That said, bad timing, workersâ rights issues, and skewed valuation meant this IPO was always going to face a rocky ride. I wonât be adding any Deliveroo shares to my portfolio for now.

The post Why was the Deliveroo IPO so bad? appeared first on The Motley Fool UK.

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Dylan Hood has no positions in any of the shares mentioned. The Motley Fool UK has recommended Just Eat Takeaway.com N.V. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

3 Shares You Should Have Bought In March: GW Pharmaceuticals (+70%), Premier Foods (+88%), EnQuest (+71%)

Alan Oscroft — Fri, 01 Apr 2016 12:25:58 +0000

Promising

GW Pharmaceuticals (LSE: GWP) shares shot up 70% in March, to end the month at 421p. The company specializes in developing “novel therapeutics from its proprietary cannabinoid product platform“, and got some good news from a phase 3 trial of its Epidiolex (cannabidiol) treatment for Dravet syndrome on 14 March.

Dravet syndrome is a rare and severe form of epilepsy that affects children, and as yet there are no FDA-approved treatments — and so a breakthrough there could be nicely profitable. The trial results found that the drug reduces seizures, with “high statistical significance” when compared to a placebo control. As a result, the share price more than doubled on the day, though it’s fallen back a bit since.

Epidiolex notwithstanding, the shares are down 40% since their peak in June 2015, and the company still looks to be some years away from turning a profit. There was $324m in cash on the books at 31 December, although GW did make an operational loss of $86.6m in its last full year. The next step for Epidiolex is a regulatory submission, but though the drug does seem promising, this still looks like a risky investment to me.

Partnership

A takeover approach is one event that can make a share price jump, and we heard on 23 March that Premier Foods (LSE: PFD) had kicked out an offer by McCormick & Company saying it “significantly undervalues Premier’s growth prospects and represents an insufficient premium to Premier’s enterprise value“. The announcement was accompanied by news of a cooperation agreement with Nissin Foods, the inventor of instantÂ noodles.

The McCormick offer, revised from an earlier 52p bid, valued Premier shares at 60p, and on the day we saw a 70% share price rise. Since then, McCormick has upped its offer to 65p per share, and the shares ended the month trading at 57p for an 88% rise during March. The Premier board still believes that’s too cheap, but it’s going to have talks and hopes for an even better offer to emerge, and if that comes off then there’d be a profit to be made.

Even after the month’s rise, Premier shares are still valued on a P/E multiple of under seven based on 2016 forecasts, so it looks like there’s room for negotiation.

Rising oil

Results on 17 March gave oil explorer and producer EnQuest (LSE: ENQ) a 31% share price boost, and since then the price has kept on going for a 71% rise over the month. We’ve now seen a 118% gain since 20 January’s low point, buoyed by the price of oil which seems to be steadying at around $40 per barrel.

EnQuest reported a 31% rise in production for the year to December 2015 to 36,567 barrels of oil equivalent per day, which was above the upper end of the company’s guidance. The price of extracting the stuff dropped dramatically, due to continuing savings in operating costs, from $42.10 per barrel in 2014 to just $27.70 per barrel.

Net debt rose to $1.55bn at year-end, but the firm reckons it’s “well within its net debt to EBITDA covenant of five times“. EnQuest isn’t expected to get back to profit this year and next, so it’s tricky to value — but I reckon there could be more to come.

The post 3 Shares You Should Have Bought In March: GW Pharmaceuticals (+70%), Premier Foods (+88%), EnQuest (+71%) appeared first on The Motley Fool UK.

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