JustKitchen sees price target cut by Beacon Securities

It’s been a long way down over the past year but Beacon Securities analyst Doug Cooper still likes the growth prospects from JustKitchen Holdings (JustKitchen Stock Quote, Chart, News, Analysts, Financials TSXV:JK). In an update to clients on Thursday, Cooper maintained a “Buy” rating while slashing his target price from $3.40/share to $1.50/share for a projected return at the time of publication of 295 per cent.

In explaining the revaluation, Cooper pointed to lower sales forecasts as well as a reduction in his target multiple. 

JustKitchen operates ghost kitchens in a hub and spoke model, allowing 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 and plans to expand further into Asia and through North America.

Cooper’s analysis arrived after JustKitchen released its second quarter financial results for the 2022 fiscal year, which were headlined by $5.04 million in revenue for 221 per cent sequential growth and a 125 per cent year-over-year increase.

According to Cooper, the company’s revenue growth was driven by an increase in the number of its spokes to 28, doubling the 14 it had at the same point last year, and representing a 33 per cent growth from the previous quarter.

In terms of margin items, the company reported an EBITDA loss of $4.5 million, pushed by an increase in labour expense given the increased number of spokes, with that figure representing 29.2 per cent of sales compared to 26 per cent in the previous quarter. Meanwhile, salaries increased to $0.9 million in the quarter, accounting for 17.6 per cent of sales.

Cooper pointed out that JustKitchen’s share performance so far in 2022 stands alongside losses incurred by industry peers like Delivery Hero (down 70 per cent from its highs), DoorDash (down 72 per cent), Just Eat Takeaway (down 77 per cent), and Goodfood Market (down 80 per cent).

“While the company continues to execute against its business plan and it has grown quickly from a standing start to over a $20 million revenue run-rate with locations in four SE Asian countries with two more on the near-term horizon, the shares have performed poorly, albeit in-line with its peers in the food delivery segment,” Cooper said.

According to Cooper, JustKitchen is working to reduce its cash burn and become cash flow positive at the spoke level by the end of the year, in particular by trying to reduce costs in food and beverage raw materials, labour and delivery, which would potentially make it a more attractive investment opportunity for larger entities like Kitopi, Rebel Foods, Reef or Kitchen United, all of whom could benefit from JustKitchen’s positioning in southeast Asia. 

In addition, Cooper believes JustKitchen should continue to pursue growth opportunities on account of the Asia-Pacific region accounting for nearly 70 per cent of the global food delivery market.

“As we grow beyond 30 ghost kitchen locations in multiple countries, expand our portfolio of proprietary and partner brands, increase the size and scope of our business network, as well as strengthen our JKOS tech stack, we are widening JustKitchen’s competitive moat and proving that there is an increasing level of demand for high-quality food delivered to consumers in densely populated areas,” said Jason Chen, Co-Founder and Chief Executive Officer of JustKitchen in the company’s May 31 press release.

Since the release of the quarterly report, JustKitchen announced its entry into India through a Virtual Kitchen Services Agreement with New Delhi-based Kitchens Centre, the largest co-shared kitchen space provider in India with over 1000 kitchens, in 80 locations in over 25 cities and it works with more than 350 brands, to offer a variety of its delivery-only food brands in tranches across the market.

“Expanding our footprint across Asia and deploying our tasty proprietary menus plus third-party brands to new customers, in a scalable and asset-lite model, continues to be at the core of our competitive strategy, and Kitchens Centre’s innovative business model makes our collaboration very exciting and will certainly expedite our growth,” Chen said on June 8.

With the 2022 fiscal year now halfway complete for JustKitchen, Cooper maintains a near doubling in his revenue projection for 2022, with the $22.6 million estimate representing a potential year-over-year increase of 89.9 per cent. Looking ahead to 2023, Cooper forecasts a jump to $37.7 million, good for a potential year-over-year increase of 66.8 per cent.

From a valuation perspective, Cooper forecasts the company’s EV/Sales multiples to drop from the reported 1.4x in 2021 to a projected 0.7x in 2022, then dropping again to a projected 0.4x in 2023.

Meanwhile, Cooper continues to forecast negative EBITDA for JustKitchen, with projected losses of $11.2 million in 2022 and $1.7 million in 2023.

JustKitchen has seen its share price fall by 69.5 per cent in 2022, falling gradually after starting the year trading at $1.31/share and dropping as low as $0.38/share on June 8.