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Ocado - Funding future growth

George Salmon | 6 February 2018 | A A A
Ocado - Funding future growth

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Ocado Group plc Ordinary 2p

Sell: 2,146.00 | Buy: 2,148.00 | Change 4.00 (0.19%)
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Ocado's full year results show group revenue rising 12.7% to £1.4bn, but, on a comparable basis pre-tax profit fell from £12m to a loss of £0.5m as higher depreciation, wage increases and expansion costs hit margins.

The group also announced plans to raise additional equity via the placing of 31.5m additional shares, equal to around 5% of the current market capitalisation.

The shares fell 7% on the news.

View the latest share price and how to deal

Our View

On first glance, paying close to 300 times expected earnings for a company where profits actually fell last year seems daunting. However, the growth story isn't really about next year's profits.

Ocado's systems, which are capable of churning out thousands upon thousands of orders each and every day largely without human intervention, are at the cutting edge of its industry.

If it can convince other retailers to pay a fee for use of its patented systems, Ocado could enjoy a lucrative transformation from niche British retailer into international technology provider. Current earnings would be a distant memory in 5 years' time.

However, up until last year, a lack of actual deals meant the investment case was based on more blue-sky thinking than we might have liked. This made its recent agreements with retailers in Canada and France significant.

These deals may have been spurred on by the aggressive growth strategy of one of the biggest disruptors out there. Amazon's $13.7bn acquisition of Whole Foods means its tanks are now parked even closer to traditional supermarkets. Regardless of the whys and wherefores, the group can now point to tangible progress towards its medium-term goal of securing multiple licencing deals in multiple territories.

While the crucial question of exactly how much Ocado can make from these deals remains unanswered, the news has seen the shares jump significantly since last summer. We imagine 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, especially with debts rising and the group raising money through the dilutive placing of new shares.

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

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Trading detail (52 weeks to 27th November 2017)

For the first time, Ocado has split out details of its Retail and Solutions divisions.

Retail revenues rose 12.4% to £1.3bn, as an extra 33,000 orders per week offset a slight decrease in basket size. Ocado now averages 263,000 orders of £107.22 per week.

However, divisional EBITDA (earnings before interest, tax, depreciation and amortisation) of £79.2m was just 4.5% higher, as increased activity at the most recently opened Andover site, plus extra marketing, delivery and head office expenses, saw costs rise.

The Solutions division earned revenues of £115.5m, up 16.2%. This includes the deal with Morrisons and some upfront fees relating to recently signed international partnerships.

However, EBITDA fell 50.9% to £2.7m as distribution and administrative costs increased by 20% to £112.7m.

Total capital expenditure rose 2.2% to £160.3m, which is set to rise to around £210m this year. This will fund continued growth in Retail, where sales are expected to grow 10-15%, and accelerated development of the Solutions business, where Ocado remains confident of signing more deals in the near term.

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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 disclosure for more information.