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Ocado - another deal sees share rise

George Salmon | 26 March 2019 | A A A
Ocado - another deal sees share rise

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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: 929.00 | Buy: 929.80 | Change -13.00 (-1.38%)
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Ocado has confirmed another strategic partnership, this time with Australian group Coles for facilities in Melbourne and Sydney. Coles trades from over 2,500 locations, including 818 supermarkets, and generates $39.4bn in annual sales, over A$1bn of which is online.

The shares rose by 4.1% on the news.

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Our View

The sale of 50% of Ocado's UK retail business to M&S might leave you wondering, 'what exactly does Ocado do if it's not scurrying around delivering upmarket groceries?' But the £9bn valuation is based on much more than a niche online supermarket.

Its cutting edge systems fulfil tens of thousands of orders every day, largely without human intervention. And those whirring systems are a product themselves, with other retailers paying license fees to make use of them.

A major deal in the US and several other agreements are a good start in Ocado's transformation from small British online retailer to international technology provider. And the £750m cash injection from the sale of the half the Retail business is more than enough to fund those projects.

The deal also reduces Ocado's direct exposure to food retail. Tesco manages an operating margin of around 3% on its £60bn-ish of sales. Ocado might not be able to match it on the top-line, but its shift to lucrative technology business means margins should outshine Tesco's in time.

Progress has been impressive so far, and exceeded most expectations. The group remains loss-making for now, and investment demands mean dividends are unlikely for a while. But we think the group's right to allocate every penny to making the most of the opportunities in front of it.

That's because Ocado's revolutionary technology is clearly attractive to retailers looking to bump up their online presence. That's an issue that's surely high up board room agendas all over the world.

We think Ocado's in a very strong position - but investors shouldn't forget the rising share price means it will need to a) impress when its partnerships are up and running, and b) get more deals done.

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Trading details (19 March 2019)

Ocado Retail revenue grew 11.2% to £404m in the first quarter, with a fire at the Andover Customer Fulfilment Centre impacting sales by around 1.2 percentage points.

Growth was driven by the average number of orders per week rising 11.3% to 314,000, which more than offset a small decline in average order value, to £110.24.

The latest Customer Fulfilment Centre at Erith is now processing around 37,000 orders a week, which is close to a 23% increase compared to the end of last year. The group will increase capacity here faster than envisaged to help minimise disruption caused by the Andover fire.

Ocado will update the market in due course about how the fire will affect its target for 10-15% Retail revenue growth in 2019. The group is confident the accident will not be a long-term set back, and an initial investigation shows the cause of the fire poses "no significant implications for the risk profile of the assets or the viability of [the] model".

Ocado ended the period with cash and cash equivalents of £390.7m and external borrowings of £288.5m.

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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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