Marley Spoon AG

Uprising Total Orders Across the Regions: Marley Spoon AG (ASX: MMM) is a subscription-based weekly meal kit service provider across the six countries i.e., Australia, the United States, Austria, Belgium, Germany, and the Netherlands. It has a market capitalization of circa $110.97 million as of November 05, 2018. The company was listed on July 02, 2018 on ASX. The company is an emerging player in the Restaurant & Grocery sector. Over the past one month, the stock price has deteriorated by almost 26% due to the muted earnings it has reported for the 3rd quarter ending 30 September 2018. Also, the company has till now not been able to post any operating profits due to higher operating costs, including soaring marketing and fulfilment expenses (which includes shipping costs).
 
Further, net revenue increased by 15% to €23.9 million in Q3FY18 as compared to the prior quarter. It was mainly supported by the launching of 20 recipe options in Australia, the success of Marley Spoon’s two brand strategy i.e., “Martha & Marley Spoon” and Dinnerly, and rise in demand of its services in the European market. With the strong performance in Q3FY18, the company confirms that the business is on track to achieve its prospectus revenue forecast of €93 Mn and meet prospectus targets for contribution margin and general & administrative expenses for the full year. To capitalize on the strong sales momentum, the Company has decided to increase its investment in marketing to drive further customer acquisitions. With this strategy, the company expects to exceed the number of active customers at the end of FY18. As at Q3FY18, the number of active customers has grown by 113% to 173,000 from 81,000 over the past 12 months. Additionally, MMM has revised FY18 EBIT guidance in the range of €32- €34 Mn loss from the previous guidance of €25 Mn loss due to increased investment in marketing activity. As at 30 September 2018, the company had a cash balance of €17.7 million and additional debt funding is on track to be finalized in the next three months. The raised fund will be used to support the business operations which will facilitate the company’s path to positive operating EBITDA profitability within the next 1-2 year.
 

MMM Total Orders (in 000s) (Source: Company Reports)
 
As there is an expectation of a strong top-line growth but simultaneously there is heavy pressure on the margin front in the short run on the back of higher marketing and customer expansion expenses  and also due to heavy competition from players like Deliveroo & hello fresh, we advocate a cautious view on the stock at the current market price of $0.790 and advise the investors to be having this stock under a “Wait & Watch” stance at the current juncture.
 

Xero Limited

Continued focus on growing its global business platform and constant subscriber growth across geographies: Xero Limited (ASX: XRO), together with its subsidiaries, operates as a software as a service company worldwide. The company offers Xero, a cloud-based accounting software that connects small businesses to their advisors’ and was founded in 2006 and is headquartered in Wellington, New Zealand. The company has a market cap of circa $5.76 Bn as of November 05, 2018. The company has posted its first ever positive EBITDA of $26 Mn for the year ended 31st March 2018.

As on 31st March 2018, there was an Operating revenue growth of 38% YOY driven by Australia and New Zealand segment growth of 33% and International segment growth of 49%. ARPU is stable compared to FY17 Earnings improvement driven by operating efficiencies. There is a continued investment in geographic expansion and new products. EBITDA was impacted by $1.5m in costs relating to ASX consolidation and higher share-based payments. Share-based payments increased 45% to $17.0m in FY18.

ARPU which is a key metric in this industry to evaluate the operational performance is $29.6 for the ANZ and $28.2 for the international markets. In the constant currency terms, the ARPU has increased by over 1% in the year ended 31 March 2018, however, the same has fallen by 3% in international markets.

 
Gross Margin Trend (Source: Company Reports)
 
Meanwhile, the stock price has deteriorated over the past one month by 17.97%, however over the period of past 6 months the stock has given modest rise of 3.75% but if we look at the YTD performance, the stock is up by 44.55%. Taking into account the improving gross margins of around 81% in FY18 and first positive EBITDA driven by the operational efficiencies & further expansion to be fuelled with internal accruals and cash flows, we recommend a “Hold” rating on the stock at the current market price of $41.110.
 

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