Overlooked JustKitchen is a Buy, says Beacon Securities

Beacon Securities analyst Doug Cooper still thinks JustKitchen Holdings (JustKitchen Stock Quote, Chart, News, Analysts, Financials TSXV:JK) has the right ingredients to make a mark, reiterating his “Buy” rating with a target price of $3.40/share for a projected return of 240 per cent in an update to clients on Friday. 

Founded in 2019 and headquartered in Vancouver, JustKitchen operates a network of ghost kitchens in a hub and spoke model, which allows its delivery-only food brands and partner restaurant brands to reduce production and overhead costs, maximize efficiency, reach more customers and increase sales volume. The company currently has operations in Taiwan, with plans to expand further into Asia and through North America.

Cooper’s latest analysis comes after JustKitchen released its fourth quarter financial results for 2021, which Cooper said to be strong and in-line with expectations.

Headlining the company’s report was $4.4 million in revenue, marking 32 per cent sequential growth, a doubling in relation to the second quarter, and a 132 per cent improvement over the first quarter while projecting an annual run rate of $18 million.

According to Cooper, the growth is entirely organic, driven by an increased number of ghost kitchen spokes (period ended 20 compared to 17 in the previous quarter), as well as an increase in daily orders (~3,000 versus ~2,360 in the third quarter) and a continued strong average basket size, which at $15.90 is higher than Cooper’s long-term basket size price of $15.

The company said that due to increased general and administrative expenses while continuing to build out its infrastructure to support growth opportunities, JustKitchen reported an EBITDA loss of $2.6 million in the quarter. According to the company’s report, JustKitchen’s sales volume experienced a 26 per cent sequential increase from around 215,000 in the third quarter to nearly 270,000 in the fourth quarter.

“We have started 2022 strongly by delivering approximately 146,000 total customer food orders in January, as the sum of 125,000 Spoke-driven orders and 21,000 order equivalents from B2B sales,” said Jason Chen, Co-Founder and CEO of JustKitchen in the company’s January 26 press release.

“The team is also focused on bolstering the trend of improving margins and gaining cost efficiencies. Management continues to grow the business at a high rate as we add locations, develop and launch new in-house menus, license third-party brands, expand to new markets and secure new partners. I am proud of our accomplishments during the 2021 fiscal year and expect JustKitchen to maintain a similar growth trajectory throughout 2022,” Chen said.

Cooper believes 2022 will also be a prosperous year for JustKitchen, identifying Southeast Asia as a prime growth opportunity.

“While the Q4 results showed a very strong organic growth rate, we believe we are just in the early innings of JK’s path to a leading share of the Southeast Asian market,” Cooper said.

Cooper points to Taiwan as a success point for JustKitchen, as it has increased its spoke count in the country from 19 to 24 since the end of September, with impending growth to 28 following its 3 Square acquisition. Cooper’s model forecasts JustKitchen to have 30 spokes in 2022 and 35 by the end of 2023.

Meanwhile, JustKitchen has just begun its market penetration into Hong Kong, with Cooper expecting the company to have seven spokes by the end of the year; in the Philippines, JustKitchen has begun a joint venture with TDG Ventures to construct a number of spokes there, as well.

With the fourth quarter now in the books, JustKitchen reported full-year revenue of $11.9 million in its 2021 fiscal year, paired with a $7.8 million adjusted EBITDA loss. Looking ahead to 2022, Cooper projects a significant revenue jump to $27.8 million in 2022 for a projected year-over-year increase of 133.6 per cent, though it’s still a reduction from Cooper’s original $37 million projection on account of a first-quarter flat patch.

From there, Cooper projects a near doubling in revenue for 2023, setting a forecast of $55.2 million.

In terms of valuation, Cooper projects the company’s EV/Net Revenue multiple to improve from 4.6x in 2021 to a projected 1.9x in 2022, then dropping again to a projected 1x in 2023.

Meanwhile, with continued investments, Cooper projects the company’s adjusted EBITDA will remain negative in 2022 at a $7.4 million loss, followed by a $3.3 million loss forecast in 2023.

Overall, Cooper believes JustKitchen is in prime position to capitalize on its current market position.

“With a market cap of less than $75 million, JK is the ‘inverse unicorn’ versus its peers who all support valuations well over US$1 billion,” Cooper said. “Given its dominance in SE Asia as well as its growing brand portfolio, we believe it will not be long before either the market recognizes its position or its peers do.”

Since it began trading on the TSX Venture Exchange on April 15 of last year, JustKitchen’s share price has gone down by 3.8 per cent, but it has dropped by 22.1 per cent since beginning 2022 at $1.32/share. The stock’s high point to date came on August 6, when it closed at $1.90/share.