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Ocado - still delivering strong sales

Nicholas Hyett | 5 February 2019 | A A A
Ocado - still delivering strong sales

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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: 940.60 | Buy: 941.40 | Change 16.40 (1.77%)
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Group revenue increased 12.3% to £1.6bn. However, increased investment, and depreciation charges following the new Customer Fulfilment Centre (CFC) at Erith, meant pre-tax losses grew to £44.4m.

The shares fell 2.4% on the news.

View the latest share price and how to deal

Our view

Ocado is worth almost £7bn.

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

Its cutting edge systems are capable of fulfilling tens of thousands of orders every day, largely without human intervention.

The longer-term goal is for those whirring technology systems to become a product themselves, with other retailers paying license fees to make use of them. Providing the template of online shopping the world over could make its services almost indispensable - by playing the same role in retail that Microsoft's operating systems do in computing.

A potentially lucrative outcome, to say the least. Although, in the early days it required more blue-sky thinking than we'd have liked. But some new agreements with retailers in Canada, France, and a major deal in the US, have changed that. And to borrow from the great economist John Keynes, when the facts change, change your mind.

The sudden burst of deals may have been instigated by the aggressive growth strategy of one of the biggest disruptors out there. Amazon's $13.7bn acquisition of Whole Foods, and the roll-out of its own grocery service, means its tanks are now parked even closer to traditional supermarkets.

Regardless of the whys and wherefores, Luke Jensen, head of Ocado's Smart Platform, will surely be walking into meetings with potential partners with a spring in his step. He's already exceeded most expectations, and Ocado's confident there are more deals to come.

Being in a growth phase means dividends are unlikely in the foreseeable future. However, we think the group's right to allocate every penny to making the most of the opportunities in front of it.

Investors shouldn't forget all this work won't have a positive impact on earnings for a while. And a dramatically increased share price puts pressure on it to execute smoothly.

The good news is though its largest UK sites are now online, which gives Ocado the chance to show potential partners what it can do. And we think those tech-laden warehouses will be very enticing 'shop windows' indeed.

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Full Year Results

Retail revenues rose 12% to £1.5bn, as the average number of orders per week increased 12.1% to 296,000. The average value of each basket was slightly lower at £106.85 (2017: £107.28), as higher prices were offset by a decrease in basket size.

EBITDA (earnings before interest, tax, depreciation and amortisation) from the division grew at the slower rate of 4.2% to £82.5m. As extra marketing, delivery and head office expenses, saw costs rise

The Solutions division earned revenues of cash fees from partners of £200.1m (2017: £146.1 million). That includes deals with Morrisons, and more recent international contracts with Bon Preu, Casino, Sobeys, ICA and Kroger.

However, EBITDA declined to a loss of £17.9m. But that's been driven by accounting changes, which means the timing of when Ocado can recognise revenue has been changed.

Total capital expenditure was £213.8m, a 33.4% increase on last year. Increased spending on improving operations at newer CFCs were the main drivers for this.

Next year, Ocado expects total capital expenditure to be £350m, as it will need to increase spending to deliver new CFCs and support new solutions partners.

Investment in the new CFCs means the solutions division will continue to be loss making in the coming year. No new centres are due to open next financial year, but 23 are in the pipeline for the longer-term.

Find out more about Ocado shares 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.

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