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Ocado - Revenues up, but costs set to rise

George Salmon | 19 September 2017 | A A A
Ocado - Revenues up, but costs set to rise

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Ocado Group plc Ordinary 2p

Sell: 1,827.50 | Buy: 1,829.50 | Change 80.00 (4.57%)
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Shares in Ocado were down 1.8% after a brief third quarter trading statement.

Group revenue rose 14.3% to £344.5m in the 13 weeks to 27 August. The increase came despite a further 1.2% decline in average order size (to £106.25) as this fall was more than offset by a 16% rise in the number of Ocado.com orders. An average of 254,000 orders per week were placed in the quarter.

CEO Tim Steiner said costs look to rise in the short term, as the group invests in its next generation of customer fulfilment centres (CFCs). He's confident these investments will help Ocado meet rapidly growing demand, while also ensuring the group offers the latest technology to current and future customers of its Smart Platform. Recent innovations include becoming the first UK grocer to link up with Amazon's voice activated Alexa tool.

Our view

Last year's pre-tax profit 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 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.

In 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 on 183 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 likely only become more appealing to others.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.