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Ocado - sales hit by February warehouse fire

Nicholas Hyett | 19 March 2019 | A A A
Ocado - sales hit by February warehouse fire

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Ocado Group plc Ordinary 2p

Sell: 1,701.00 | Buy: 1,703.00 | Change 0.00 (0.00%)
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Ocado Retail revenue grew 11.2% to £404m in the first quarter.

As previously guided, growth was impacted by a fire at the Andover Customer Fulfilment Centre last month.

The shares were little moved following the announcement.

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Our view

The sale of 50% of Ocado's UK retail business might leave you wondering, 'what exactly does Ocado do if it's not scurrying around delivering upmarket groceries?' But Ocado's £7.9bn 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.

Agreements in Canada, France, and a major deal in the US are a good start in Ocado's transformation from small British online retailer to international technology provider. But these initial projects are being watched closely by other potential future partners.

Ocado's on the hook to fund some of the Customer Fulfilment Centres involved in those deals, and that led to some speculation it may need to raise money. However, M&S has agreed to pay £750m for the 50% stake in Ocado's retail business, and that's 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 eventually outshine Tesco's.

But all that relies on Ocado's ability to sign more partnerships, and a recent fire at one of its biggest warehouses won't look good. The group's confident this is a temporary setback - it said the cause of the blaze suggests no further risk to other warehouses, but Ocado could've done without burning a hole in its own shop window. It's important growth doesn't disappoint - the shares trade on a price to sales ratio of 5, more than double the longer term average, so there isn't room for error.

Still, Ocado's progress has impressed until this point, and exceeded most expectations. 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.

Overall, we think Ocado is an impressive business, with a genuinely revolutionary product. If it delivers, the rewards could be substantial.

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First Quarter Trading Statement

Retail revenues increased as the average number of orders per week grew 11.3% to 314,000 - that helped offset a small decline in average order value, to £110.24. Ocado said the impact of the warehouse fire in February was equivalent to 1.2% of sales in the quarter.

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.