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Ocado - Deal with No.2 Canadian food retailer

Nicholas Hyett | 22 January 2018 | A A A
Ocado - Deal with No.2 Canadian food retailer

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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: 1,761.00 | Buy: 1,762.50 | Change -33.50 (-1.87%)
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Ocado has announced a deal with Sobeys, Canada's second largest food retailers with C$23.8bn in annual sales, to develop an online grocery business in Canada using the Ocado Smart Platform.

Ocado shares rose 10.9% in early trading.

View the latest share price and how to deal

Our View

A friend's grandfather used to say "everything in life can be divided into fact, fiction and wishful thinking".

Even with impressive organic sales growth, the fact is Ocado's existing business doesn't justify the lofty valuation of 239 times expected earnings. The premium is a reflection of Ocado's to transform from niche British retailer into international technology provider.

Licencing out the rights to its patented systems that enable others to take their online offerings to the next level, is an attractive opportunity and the group's tech is clearly impressive. Ocado's efficient Customer Fulfilment Centres churn out thousands upon thousands of orders each and every day, largely without human intervention.

However, up until recently, a lack of actual deals meant the investment case lent on more wishful thinking than we might have liked.

That makes recent agreements in Canada and France significant.

While the crucial question of exactly how much Ocado can make from these deals remains unanswered, we're heartened by these developments. The group can now point to tangible progress towards its medium-term goal of securing multiple licencing deals in multiple territories.

Recently appointed head of the Smart Platform, Luke Jensen, will likely be walking with a spring in his step. However, his job isn't done yet. Investors are after more than just the odd deal here and there.

The threat of Amazon expanding into traditional retail may prove something of a kick up the backside for those potential partners. The $13.7bn acquisition of Whole Foods won't have gone unnoticed by traditional supermarkets.

Hopefully Mr Jensen can continue pulling rabbits from the hat in the coming months.

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Canadian Deal

The deal initially focuses on a Customer Fulfilment Centre (CFC) in the Greater Toronto Area, with a build that expected to take two years. Further CFCs will be considered.

Sobeys will pay Ocado certain upfront fees upon signing and during the development phase, then ongoing fees linked to installed capacity within the CFC and service criteria.

Ocado expects the transaction to be earnings neutral in the current financial year, with the costs of establishing the partnership offsetting the initial fees payable. A further £15m in additional capital expenditure is expected in the next financial year, with further expenses in future years.

In FY19 and beyond the profitability of Ocado Solutions is likely to grow as the fees from the transaction increase, and as other deals are signed.

Trading details - 14 December 2017

Retail revenue rose 11.6% to £373.8m. This growth was driven by an 11.1% growth in average orders per week, which now stands at 280,000.

Average order size increased marginally from £105.83 to £106.11, as higher inflation offset the impact of the continued take up of Ocado Smart Pass. The pass which typically sees customers shop more frequently, but purchase less each in each order.

Growth in the period was slightly hampered by a lack of available drivers. Ocado says this issue has now been resolved.

Following the recently announced partnership with Groupe Casino, Ocado CEO Tim Steiner said "we remain confident in our ability to sign more deals such as this in the medium term. We are also encouraged by the progress we have made ramping up capacity at our revolutionary Customer Fulfilment Centre in Andover which has supported further growth in our retail business in the UK".

Find out more about Ocado shares including how to invest

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.