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Ocado - major new deal send shares soaring

George Salmon | 17 May 2018 | A A A
Ocado - major new deal send shares soaring

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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: 1,682.50 | Buy: 1,683.50 | Change -61.00 (-3.50%)
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Ocado has announced another major strategic partnership, its first in the US market. Its new partner, Kroger, has annual sales of $122bn and plans to launch up to 20 Ocado-powered sites in the next three years. It will also be taking a 5% equity stake in Ocado.

The shares rose 42% on the news.

Find out more about Ocado including how to invest

Our view

Ocado is worth over £5bn.

If your first thought was 'that's a lot for a business that's little more than a fleet delivery of vans scurrying the country delivering upmarket groceries', you'd be right. But only because Ocado is much more than a niche online supermarket.

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.

The group is targeting a transformation that'll see its main product become the technology that runs its cutting edge systems, with retail giants the world over its main customers. Such an outcome would be lucrative to say the least.

Up until last year, that outcome required more blue-sky thinking than we'd have liked.

However, agreements with retailers in Canada, France and most recently, the US, have changed things. And to borrow from the great economist John Keynes, when the facts change, change your mind.

The deals are potentially transformative for the group, although we'll need to know what the terms are before getting too carried away.

The burst of 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, Ocado has made tangible progress towards its medium-term goal of securing multiple licencing deals in multiple territories.

Recently appointed head of the Smart Platform, Luke Jensen, should be walking into meetings with potential partners with a spring in his step. He's already exceeded most expectations, and there could yet be more deals to come.

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Trading details - 13 weeks to 4 March 2018

Retail revenue rose 11.7% to £363.4m over the period. Sales were boosted by price inflation and further growth in the average number of orders per week, up 11.1% to 280,000. These factors more than offset a decline in the average number of products bought per shopping visit, and the impact of adverse weather in early March. Ocado says the cold snap took around 1 percentage point off sales growth.

The period also included a £143m share placing, with the money raised set to be used towards securing more new Ocado Solutions partnerships globally.

Tim Steiner, Ocado CEO said: "The teams that are delivering the programmes for both Groupe Casino and Sobeys partnerships have been active and making progress. We remain confident that our Ocado Solutions business will be able to do further deals with the momentum of new signings building over time."

Find out more about Ocado including how to invest

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.