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Ocado - revenue up but fire means pre-tax losses widen

Sophie Lund-Yates, Equity Analyst | 11 February 2020 | A A A
Ocado - revenue up but fire means pre-tax losses widen

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Ocado Group plc Ordinary 2p

Sell: 2,418.00 | Buy: 2,419.00 | Change 0.00 (0.00%)
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Full year group revenue rose 9.9% to £1.8bn, which was broadly in line with market expectations. However, costs associated with the fire at the Andover Customer Fulfilment Centre (CFC) and spending associated with new international partnerships, meant pre-tax losses were -£214.5m, compared to -£44.4m last year.

The shares were unmoved following the announcement.

View the latest Ocado share price and how to deal

Our View

Ocado's future is a lot more, well, futuristic, than simply delivering groceries. Having sold 50% of its UK Retail business to M&S, its eggs are heavily weighted towards the Solutions basket.

Solutions charges retailers to use Ocado's robotic systems. Hundreds of thousands of orders are processed each week, with the help of automated 'bots' scurrying around the trademarked grid systems.

We think that's an attractive proposition. Booming e-commerce and the increasing threat from Amazon's groceries business means traditional supermarkets are increasingly looking for ways to compete. Ocado's smart platform technology offers the digital answers they're looking for.

However, all that technology doesn't come cheap. Ocado is having to stump up hundreds of millions to fund a lot of the Customer Fulfilment Centres itself - a far cry from the capital-light tech business 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 they'll pay off, and in order to keep momentum going, Ocado needs to hatch a fair few more.

The group now has over 1,700 members of staff dedicated to technology, which is no mean feat. On many levels, 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.

For now Ocado remains heavily loss making and that makes it 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 needs to a) make sure existing partnerships are ultimately profitable ones, and b) get more contacts signed. There's still a lot to deliver.

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Full year results

Retail revenues rose 10.3%, reaching £1.6bn. That was driven by a 10.7% year-on-year increase in orders per week to 325,000, offsetting a slight decline in average basket value to £103.18.

Underlying EBITDA (earnings before interest, tax, depreciation and amortisation) from the division rose 16.3% to £35m. That reflects new accounting policies which means operating lease costs are no longer classed as an operating expense, as well as a 9.7% increase in other income, including supplier income.

The UK Solutions & Logistics division earned fee revenue of £109.9m, and cost recharges to partners of £473.3m, which resulted in a 7.8% increase in overall revenue. EBITDA of £84.8m was 25.6% higher than last year, but excluding the new accounting method, this would have been a 9.9% increase.

Within International Solutions, fees invoiced rose 38.4% to £81.4m, but revenue was flat at £0.5m. That's because fees aren't recognised as revenue until Ocado has delivered a working Ocado Smart Platform to the partner. Higher staff costs meant EBITDA losses more than doubled to -£62.1m.

Capital expenditure rose to £259.9m, and this is expected to rise to £600m next year as the group delivers more Solutions projects.

The group expects retail revenue growth of 10% -15% next year, with UK & International Logistics growing more slowly due to Morrrisons' temporary exit of facilities in Erith. Ocado also said "insurance proceeds related to Andover fire [are] to be received over time; expect business interruption losses to be covered."

The first international CFCs are expected to go live in the first half of next year, in Paris and Toronto.

Proceeds from the sale of 50% of the retail business to M&S offset the changes to accounting treatment of leases. Net cash finished the year at £142.4m, compared to £50.2m last year.

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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 disclosure for more information.