LONDON (ShareCast) - (Sharecast News) - Deliveroo has good growth prospects but it faces stiff competition and regulatory uncertainty, Berenberg said as it initiated coverage of the company's shares with a 'hold' rating.
The company offers a great service and has a strong brand to capitalise on growth in households ordering food to eat at home, Berenberg said. It started coverage of the shares with a price target of 310p.

Deliveroo claims 90% of transactions are from markets where it is number one or two but it is up against well-funded competitors, Berenberg said. It can use the £1bn raised from the recent flotation to respond but it has to keep up marketing to hold on to market share, the broker said.

The initial public offering has been described as one of the worst in London's history after a series of big fund managers refused to take part and the shares plunged on the first day of trading. The IPO, priced at 390p, was hit by doubts about Deliveroo's employment practices, a high valuation and a dual-share structure that many investors did not like.

Several European markets are debating how riders and drivers in the gig economy should be classified. Deliveroo pays its riders per delivery and if regulation is tightened it could be forced to make retrospective payments and pay more per delivery, Berenberg said. Its rival, Delivery Hero, has fewer concerns on this front, Berenberg said.

"We expect demand for at-home dining and food delivery to continue to grow over the medium to long term as consumers place an ever increasing value on convenience services," analyst Sarah Simon said in a note to clients.

"We see the stock as modestly undervalued at current levels, but less attractive than Delivery Hero, which we believe offers sustainably higher growth and has more dominant positions than Deliveroo. We also believe that Delivery Hero faces less risk from the aforementioned regulatory headwinds, given its greater exposure to emerging markets, which structurally have less developed employment regulation."

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