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Ocado - sales remain strong despite Andover fire

Nicholas Hyett | 9 July 2019 | A A A
Ocado - sales remain strong despite Andover 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's group revenue was £874m in the first half, 10.5% ahead of last year. However, increased investment, and the impact of a fire at the Andover fulfilment centre in February, meant pre-tax losses grew to £43m.

The shares rose 3.8% following the announcement.

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Our View

Most of us will think of Ocado as an online supermarket. And while its retail division shouldn't be ignored, it's of diminishing importance. Not least since half was sold to M&S earlier this year.

Ocado's future is a lot more, well, futuristic, than delivering groceries. The Solutions business charges retailers to use its robotic systems. Hundreds of thousands of orders are processed each week, with the help of Ocado's automated 'bots' scurrying around the trademarked grid systems.

The group isn't holding back on investment in this area. The number of technology employees has risen 73% since 2015, and extra hands on deck mean over 100 new patent applications were filed last year. Booming e-commerce and the increasing threat from Amazon's groceries business means traditional supermarkets are increasingly looking for a digital answer. To that end, the spending makes sense - it's important to stay ahead of the curve. But it does also mean investors can't expect to see meaningful profits or dividends for a while yet.

There is a lingering bugbear. Ocado is having to stump up hundreds of millions to fund the Customer Fulfilment Centres itself - which is a far cry from the capital-light techy business model investor had once expected.

Ocado needs to keep momentum in the division going. There's been a lack of new contracts announced lately, perhaps in part because the fulfilment centre fire at Andover in February sent prospective partners the wrong signals.

It shouldn't be forgotten that recent performance exceeded expectations though, and we think Ocado's cutting edge technology still has the ability to entice new partners. The fire may have dominated headlines, but in reality it's a bit of a sideshow.

The Solutions business is a sound proposition, but the lack of profit generated makes Ocado harder to value than a more traditional company. Looking on a purely sales-basis, the shares currently change hands for 5 times expected sales. That's more than double the longer term average of 2.4. Overall, Ocado will need to a) continue to impress with its existing partnerships, and b) get more deals done.

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Half year results

Retail revenue rose 9.7% to £803.2m, as the average number of orders per week grew 10.4% to 318,000 and basket value decreased slightly to £108.04.

EBITDA (earnings before interest, tax, depreciation and amortisation) from the division fell 4.5% to £44.1m. That was mostly due to higher costs associated with the Erith fulfilment centre, marketing and administration.

Strong demand and the use of alternative capacity means guidance for retail revenue growth remains unchanged, at 10-15% this year.

The Solutions division earned revenues of cash fees from partners of £122.7m, up 36.2%, with fees from international partners doubling to £46.7m. Loss of fees from Morrison's temporary exit from the Erith fulfilment centre means revenue growth will be slower than previously thought this year.

EBITDA losses rose to £16.2m (2018: £6.6m), driven by a change to accounting rules, which causes a delay to when fees are recognised as revenue. Higher fixed costs from Morrisons' "holiday", and share schemes for staff also played a part.

Capital expenditure guidance for the full year is unchanged at £350m.

Looking ahead, Ocado continues to expect retail EBITDA to improve in the coming year, and is pursuing further Solutions deals. The group expects insurance payments to cover the costs of any business disruption experienced over the next few years as a result of the Andover fire, including lost sales and cost inefficiencies.

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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.