JustKitchen is a buy: Beacon Securities

Newly-listed public company JustKitchen (JustKitchen Stock Quote, Chart, News, Analysts, Financials TSXV:JK) represents a great risk-return tradeoff, says Doug Cooper, analyst from Beacon Securities, who initiated coverage on Monday with a “Buy” rating and $3.00 target, representing a projected 88 per cent return at the time of publication.

JustKitchen operates a network of food prep and delivery kitchens in Taiwan, so-called Ghost or Dark kitchens which do not have a sit-in restaurant but cater solely to the delivery market.

First opening operations in March 2020, JustKitchen uses a hub and spoke approach, with the hub serving as the primary preparation site which then sends food to the spokes for final prep and packing for delivery. Currently with 14 spokes and with plans to have 19 by the end of 2021 and 30 by the end of 2022, JustKitchen also has aspirations to expand internationally into areas including Hong Kong, Singapore, the Philippines and the United States.

Cooper said evolving demographics around food consumption are in JustKitchen’s favour, as there has been a global trend towards less at-home cooking and more eating out and delivery. Cooper said 50 year ago, 75 per cent of a family’s food budget was spent on in-home dining, while that’s dropped to 50 per cent today. Since 2014, online ordering and delivery has grown 300 per cent faster than dine-in traffic, according to Cooper, while in the United States, 60 per cent of those surveyed now order food at least twice a week.

Importantly, Cooper said the trend goes well beyond the COVID-19 pandemic where food delivery has become more common, as overall consumer spend on outside-the-home food has been increasing while delivery has become a much more available and convenient option.

“While dining-out will certainly rebound at the end of the pandemic, it may remain more of a special occasion or get-together with friends while delivery certainly seems to be filling the everyday void left from families not cooking as much at home. Consequently, we anticipate that delivery, and Ghost Kitchens that are increasingly catering to that market segment, will remain a growth market for the foreseeable future,” Cooper wrote.

Cooper said JustKitchen’s strategy is to fully align itself with this macro trend. The analyst said Taiwan is an excellent market for the company to launch, pointing to the country’s very densely packed population (about 24 million in an area about twice the size of New Jersey) and culture conducive to eating foods prepared outside the home (about 12 per cent of all household expenses go to such costs and Taiwan’s online delivery market is currently at about US$30 billion).

As for the ghost kitchen approach, Cooper said it does away with some of the costs which have always made the restaurant business so difficult, namely, high fixed costs in staffing and rent in high-traffic areas.

On JustKitchen’s own operations, Cooper said it takes about four months for each of its spokes to reach maturity, at which point it generates about $1.4 million in annualized revenue at 250 orders per day at an average of $15.00 per order, with an operating segment profit margin of 20 per cent per spoke. Those numbers imply about a $50-million revenue run-rate for JK in Taiwan within 18-24 months, Cooper said.

“Given the ghost kitchen trend is still in its early stages around the world and with its proven hub-and-spoke model, JustKitchen plans to expand beyond Taiwan with likely destinations including Hong Kong, Singapore, the Philippines and the United States,” Cooper wrote. “We would expect JK to pursue partnerships in these regions to ameliorate its entry. Note that such expansion is not currently built into our financial model.”

Cooper said in order to drive efficiencies, a business like JustKitchen needs a robust tech stake, which it does possess, while JK’s management also has the significant capital markets and technology experience.

“From its ordering app, loyalty/rewards programs to operations software, inventory management and performance analytics, JK has spent a significant amount of time and capital to build its technology, not only to enable the success of its Taiwanese operations but also to enable it in its expansion plans,” Cooper said.

By the numbers, Cooper sees JustKitchen hitting system sales in 2021, 2022 and 2023 of $12.3 million, $33.5 million and $47.9 million, respectively, and adjusted EBITDA in 2021, 2022 and 2023 of negative $4.8 million, $3.7 million and $6.1 million, respectively. (All figures in Canadian dollars except where noted otherwise.)

Looking at the comps, Cooper said there are no other publicly traded ghost kitchen companies but that two categories are worthwhile comparables, namely, delivery platform companies like Uber Technologies and Door Dash and meal kit companies like HelloFresh and Goodfood Market. The combined group, Cooper said, trades at an average of 2022 EV/Sales of 4.2x, broken down as 5.5x for delivery platforms and 1.7x for meal kit companies. Based on his 2023 revenue estimates, Cooper has JustKitchen trading at $3.00 with a 4x sales multiple.