M4 BARRON’S October 26, 2020
EUROPEAN TRADER
I
t has been an exceptional year for
German meal-kit delivery firm
HelloFresh, which has seen de-
mand soar from locked-down con-
sumers desperate to add pep to their pan-
demic-hit evenings with exciting home-
cooked meals.
Shares in the Berlin-based consumer
stock have jumped 211% the past 12
months, and the stock (ticker: HFG.Ger-
many) is up 180% year to date compared
with a 3% drop in the DAX.
The firm, which sends subscribers
preportioned ingredients with a step-by-
step guide to create meals, has already
raised guidance four times this year, not-
ing that people are dining at home due to
Covid restrictions.
The stock could sate hungry investors
post-Covid as it increases capacity in its
main U.S. market, with new distribution
centers in Georgia and Texas that will
service its growing army of convenience-
and health-obsessed customers.
The meal-kit market is set to increase
15% in coming years, according to analysts
at private bank Metzler. This segment of
the global food market was worth $2.5
billion when HelloFresh floated on the
Frankfurt market in 2017. The entire
global food market is now worth 7.5 tril-
lion euros ($8.8 trillion).
Shares have reached an all-time high
of €55.20—and could have further to go,
with investment bank Berenberg predict-
ing a 17.7% increase to €65 along with
Metzler, and Deutsche Bank predicting a
target price of €63.
In an October note, Deutsche analyst
Nizla Naizer wrote that given the guid-
ance hikes, “one would assume that
HelloFresh has already incorporated the
increase in demand this year,” but she
thinks revenue could nearly double in
2020 and that there’s more growth
ahead. “Given the superior growth and
margin profile, HelloFresh should trade
at a premium to its e-commerce peers,”
she says. But shares trade at a discount
because the numbers give the illusion
that the company has a high churn of
users. Customers use the service for a
few weeks and end their subscriptions,
but crucially return some weeks later and
take out new subscriptions. It’s a bit like
visiting a favorite restaurant—customers
don’t go every night but are still loyal.
“We believe any material focus on the
typical ‘churn’ analysis is likely the result
of a misinterpretation of HelloFresh’s
business model, leading to an underesti-
mation of the company’s future growth
opportunities,” wrote Berenberg analyst
Robert Berg in a September note.
HelloFresh fetches 38.6 times this
year’s expected earnings and is valued at
a 50% discount to its peers. It has a mar-
ket value of €9.4 billion, employs 7,000
people, and operates in 14 countries in-
cluding the U.S., U.K., Germany, and
Australia. It delivered 280 million meals
in 2019 and had four million active cus-
tomers in the first and second quarters.
In March it posted a €25.8 million loss
for 2019, an improvement from the €82.8
million loss in 2018 as it invests in expan-
sion. Revenues for 2019 were €1.8 billion.
The business was founded in 2011.
Rivals Blue Apron and Plated formed
around the same time, and the race to
dominate the meal-kit space and disrupt
the traditional grocery market was on.
CEO Dominik Richter toldBarron’sin
a statement: “Pre-Covid, our consumers
were already cooking 50% of their din-
ners at home, a much higher share than
food delivery or restaurant visits.” He
says that percentage has risen since the
pandemic, and HelloFresh is improving
its products “to help all consumers find
exactly the meals they like to cook at any
given weekday.”
Profit margins are set to increase as
HelloFresh negotiates lower prices from
suppliers. Despite HelloFresh’s stellar rise,
there’s more for investors to chew on.B
By Rupert Steiner
EMERGING MARKETS
Time for Thailand
Stocks? Tread Lightly.
I
nvestors have paid scant attention to
the latest political turmoil in Thai-
land, where massive street protests
are demanding the government’s
resignation and curbs on a once-revered
monarchy.
That’s for good reason. From an Asian
tiger whose troubles shook world mar-
kets in 1998, the country of 70 million
has become a financial afterthought, ac-
counting for just 2% of global emerging
market indices.
“We own just one stock in Thailand,”
Siam Commercial Bank(ticker: SCB.
Thailand), says Rick Schmidt, emerging
markets portfolio manager at Harding
Loevner. “It’s very hard to find other at-
tractive companies.”
Thailand’s eclipse has come despite
adherence to globalist prescriptions. State
finances are in order, government debt to
gross domestic product was at a modest
40%-ish before Covid. The open economy
ran a whopping 8%-of-GDP current ac-
count surplus last year. Response to the
pandemic has been conscientious: Thai-
land slammed the door on tourists, who
numbered 40 million in 2019.
What ails the country is a selfish, mili-
tary-backed elite, which through a dizzy-
ing sequence of coups and power shifts
has consistently failed to share enough
wealth and opportunity with the larger
population. “Thailand is one of the most
unequal countries in the world,” says
Joshua Kurlantzick, senior fellow for
Southeast Asia at the Council for Foreign
Relations. “Twenty years of democratic
progress has been pushed back by the
military and the royalists.”
Inequality leaves Thais undereducated.
More than a third of the adult population
hasn’t finished primary school. So no
surprise that the country lacksexciting
innovative companies and became overly
dependent on tourism. Growth was lag-
ging well before the coronavirus, with
GDP expanding at 4% or less annually,
compared with about 5% for neighboring
Indonesia and 6% to 7% for the Philip-
pines.
The latest news from Bangkok is mildly
encouraging. Prime Minister Prayut
Chan-O-Cha, the ex-junta leader whose
election last year was “massaged” by mili-
tary colleagues, Kurlantzick says, offered
to lift a state of emergency “if there are no
more violent incidents.”
But King Maha Vajiralongkorn, who
has milked royal assets more aggressively
since ascending in 2016, has offered no
conciliatory gesture. The conflict is too
deep-seated for a quick fix, says Arthur
Budaghyan, chief emerging markets
strategist at BCA Research. “The ruling
elite’s fight against the poor people is not
going away,” he says. “That’s why the
Thai economy will underperform.”
A lot of gloom and doom is priced into
Thai equities. TheiShares MSCI Thai-
landexchange-traded fund (THD) has
lost 30% over the past year, while
broader emerging markets are up 9%.
And there are a few growth companies
on offer, likeBangkok Dusit Medical
Services(BDMS.Thailand), which was
riding a medical-tourism wave before the
pandemic. That spurs optimism in Nader
Naemi, head of dynamic markets at Aus-
tralia’s AMP Capital.
“If you believe there will be tourism
again, the share market has a lot of up-
side,” he says. Still, he is waiting for an-
other 8% decline before “technicals” sig-
nal that it’s time to buy.
The broader lesson from Thailand’s
travails is that economic orthodoxy isn’t
enough to maintain emerging market
stardom. Countries need mechanisms to
fight inequality and distribute the bene-
fits of growth through social protections
and education. The pandemic winners—
China, South Korea, Taiwan, and Viet-
nam—all check this box despite vastly
different political systems. It’s one more
thing Covid is teaching us.B
By Craig Mellow
HelloFresh Is a Stock for
Hungry Investors