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Ocado - retail sales still high but calming down

Sophie Lund-Yates, Equity Analyst | 6 May 2020 | A A A
Ocado - retail sales still high but calming down

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Ocado Group plc Ordinary 2p

Sell: 2,104.00 | Buy: 2,108.00 | Change 0.00 (0.00%)
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Retail revenue is up 40.4% in the second quarter to date compared to last year and against growth of 10.3% in the first quarter.

However the group said shopping habits were starting to return to more normal levels. The uncertainty about the length of the outbreak, as well as the extent of economic damage, means Ocado has withdrawn all previous retail revenue guidance.

The shares rose 3.2% following the announcement.

View the latest Ocado share price and how to deal

Our View

Panic buying in the wake of COVID-19 has dominated headlines about Ocado, but that's not what investors should focus on.

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. The current disruption is likely to accelerate the shift to online shopping, as people get used to the service during lockdown. To that end, Ocado's in prime position to capture that demand as grocers look to improve their digital capacity.

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.

And we wonder if a severe economic downturn could cause supermarket chains to hold off on multi-million pound expansion, making it harder to strike deals.

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.

To its credit the group does have a net cash position of over £140m, and adequate access to funding. We're not concerned about the group's liquidity position at present, but the net cash pile could be eroded if performance comes under pressure.

That isn't helped by the fact Ocado remains heavily loss making. And that also makes it harder to value than a more traditional company. Looking on a purely sales basis, the shares change hands for 5.6 times expected sales. That's well over double the longer term average of 2. 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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Trading statement details

The number of items per basket have passed their peak, but are still high. The group also said customers are buying a lower proportion of tinned food again.

In order to meet the significant increase in demand, capacity has been ramped up. More mature customer fulfilment centres are running at their peak, and in some cases the number of grocery units per labour hour is almost 200, compared to 185 in normal times.

The CFC in Erith is currently processing 110,000 standard sized orders per week versus an equivalent number of 80,000 at the end of last quarter. The Ocado Zoom site in West London - which is the service offering same day delivery - is progressing ahead of plan.

The first international CFCs have been delivered for partners Groupe Casino and Sobeys, and Ocado isn't seeing any "material delays in the delivery of future CFCs for Ocado Solutions customers".

The group has £1.2bn of cash available on the balance sheet.

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