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Ocado - announces deal with Japan's Aeon

Nicholas Hyett | 29 November 2019 | A A A
Ocado - announces deal with Japan's Aeon

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Ocado Group plc Ordinary 2p

Sell: 1,205.00 | Buy: 1,207.00 | Change 12.50 (1.04%)
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Ocado has announced a new solutions partnership with Aeon, one of Asia's largest retailers. The nationwide partnership is expected to reach sales capacity of around 600bn JPY, or £4.2bn, by 2030.

Initial Customer Fulfilment Centres (CFCs) are scheduled to go live in 2023, with extra capacity added over the following two years. The transaction will have no financial impact on Ocado this financial year, although the group expects to invest an extra £25m in the solutions business in 2020.

This follows news earlier in the week the group will be building a "mini CFC" in Bristol in the UK, which will support up to 30,000 orders a week.

The shares rose 15.1% following the Aeon announcement.

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Our View

Ocado's future is a lot more, well, futuristic, than simply delivering groceries and its latest round of deal making is very welcome news.

The Solutions side of the 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. 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 a lot of the Customer Fulfilment Centres itself - which is a far cry from the capital-light techy business model investors had once expected. These are also long term investments. So while landing the deals is key, it'll be years before we know if it pays off.

It's worth remembering Ocado sold 50% of its UK Retail business to M&S earlier this year. That means most of Ocado's eggs are now in the Solutions basket. In order to keep momentum going, Ocado will need to hatch a few more CFC deals.

The Solutions business is a potential future money spinner, but the fact it's loss making means Ocado's harder to value than a more traditional company. Looking on a purely sales-basis, the shares change hands for 4.2 times expected sales. That's more than double the longer term average of 1.9. If it's to justify that rating Ocado will need to a) continue to impress with its existing partnerships, and b) get more deals done.

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Third Quarter Trading Statement (17 September 2019)

Ocado's retail revenue grew 11.4% in the third quarter, in line with previous guidance.

The group's joint venture with Marks & Spencer completed in August.

Retail revenues increased 12.1%, as the average number of orders per week grew, to 314,000. Average order size fell 0.8% to £105.42, which the group said reflects the higher frequency of orders.

Following the fire at one of the customer fulfilment centres earlier this year, additional capacity at the Erith centre helped facilitate the further growth.

Looking ahead, Ocado is preparing to launch the full M&S food range, which will be available on ocado.com from September 2020, at the latest.

Melanie Smith, new CEO, said the joint venture will enhance Ocado's offering, and deliver the "very best experience to an ever-growing number of customers".

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