After confirming details of current trading just 3 weeks before these results, there are few surprises in Ocado's half year numbers. However, having recently signed its first international partnership, with an as yet unnamed European retailer, Ocado says it is confident of securing multiple platform partnerships in the medium term. The shares rose 2.8% on the news.
2016's pre-tax profits of £15m on sales of £1.3bn might not be too impressive, but the investment case is much more about what Ocado can become, rather than what it is now.
Ocado has some phenomenal technology. Its efficient customer fulfilment centres (CFCs) churn out thousands upon thousands of orders each and every day, largely without human intervention. It might not be rudely profitable just yet, but the possibility of licencing out its patented Smart Platform technology to others creates attractive licencing fee opportunities. This could meaningfully move the bottom line.
On 3 June, the group announced a new European partner has signed on the dotted line. While we don't yet know the details of the agreement, it represents tangible progress towards its goal of securing multiple licencing deals, in multiple territories, in the medium term. This clearly puts a feather in the cap of the recently installed head of the Smart Platform, Luke Jensen. However, he can't put his feet up just yet.
The shares are trading at well over 100 times expected earnings. This rating bakes in more than just the odd deal here and there. While continued strong organic growth will of course be nice to see, investors' focus will likely remain on the potential for more deals to be done.
Amazon's $13.7bn acquisition of Whole Foods has certainly put the cat amongst the pigeons in the sector. With the threat of the mighty US giant looming, Ocado is hopeful this could prove something of a kick up the backside for those potential partners.
For now, the group will need to focus on making a success of the new facilities at Andover and Erith, and its new European venture. If Ocado can deliver on these projects, its proposition will surely become more appealing to others.
Interim results (5 July 2017)
In the six months to 28 May 2017, overall group revenue, including fees charged to Morrisons, increased 12.5% to £713.8m, with the 15.6% growth in average orders per week (to 260,000) more than offsetting a 1.4% decline in the average basket size. The active customer base increased to over 600,000. The group is primarily focused on retention of newer customers and the reactivation of lapsed customers rather than absolute growth in new customers.
Despite the higher revenues, and an increase in gross margin to 34.7%, profit before tax fell from £9.4m to £7.7m, impacted by the higher depreciation costs associated with the new Customer Fulfilment Centre (CFC) at Andover. The site at Erith, Ocado's fourth CFC, is set to open in 2018.
Over the period, Ocado significantly increased investment in innovation and capacity. Efficiency in the two mature CFCs improved 3.2% over the period, while improvements in the routing system and increased customer density helped average deliveries per van per week rise 2.7% to 180. The percentage of accurate orders and orders delivered on time both remain in the mid to high 90s.
This investment saw net debt rise from £136.2m to £210.5m. On 14 June, the group announced the successful issuance of £250m of bonds, and has also renegotiated a £100m revolving credit facility. This means Ocado has over £250m to support future expansion, enabling these high levels of investment to continue. 2017 capital expenditure is set to be approximately £175m.
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