Ocado Group plc (OCDO) Ordinary 2p

Ocado’s first-half revenue grew 12.6% to £1.5bn, reflecting growth in all business areas. The Technology Solutions business saw the fastest rate of growth, up 21.8% due to more installed modules and inflation-based contractual price increases.

Ocado Retail saw revenue rise 11.3% to £1.3bn. This was helped by increased active customer numbers which rose 8.1% to nearly 1.04mn, while price increases were a much smaller contributor.

Underlying cash profits (EBITDA) jumped from £16.6mn to £71.2mn, largely due to improved profitability in the Technology Solutions and Retail businesses. Smaller gains were seen in the Logistics business.

Free cash outflows improved from £305.2mn to £145.1mn. Net debt, including lease liabilities, grew from £0.9bn to £1.2bn.

Full-year group revenue growth guidance has been maintained, suggesting a slowdown in Technology Solutions and Retail in the second half. However, the outlook for cash-burn has improved.

The shares rose 17.5% following the announcement.

Our view

Ocado’s half-year results delivered some positive news to investors’ doors. Revenue growth in the first half was strong, with all business areas seeing an uplift.

But future growth rests on its so-called Technology Solutions business. This segment has seen some of its retail partners press pause on plans to open more Customer Fulfilment Centres (CFCs).That’s seen analysts trim their expectations for future growth and leaves the Group’s path to profitability a little unclear.

CFCs are the cornerstone of Technology Solutions. The group charges third-party retailers to use its robotic systems. Hundreds of thousands of orders are processed each week, with the help of automated 'bots' scurrying around the trademarked grid systems.

There has been increasing demand for the kind of technology Ocado specialises in, allowing it to bring new partners on board. But the current economic outlook poses challenges, putting pressure on existing and potential partners to cut unnecessary spending.

However, running operations through Customer Fulfilment Centres (CFCs) brings a host of cost savings and efficiency benefits that could offer a competitive advantage for those who can afford it.

But there’s pressure for the group to establish a long runway of CFC openings, because Ocado is stumping up hundreds of millions to fund these centres. This has led to significant fundraising from shareholders. Medium-term plans for free cash flow generation from existing CFCs seem ambitious to us, and we can't rule out Ocado burning through its available liquidity faster than planned.

Ocado's smaller retail business - the grocery delivery company half-owned by M&S - is continuing to perform well, with profitability improving substantially in the first half. Customer numbers have now passed the one million mark and volumes are showing impressive growth.

But there are things to monitor. Growth in retail sales has been driven by the increased customer numbers rather than letting price hikes do the heavy lifting. We approve of the positive customer value perception this creates, but raising prices slower than UK grocery inflation is putting downward pressure on profitability. It’s a tough balancing act and careful management on this front will be required to hit the group’s high mid-single-digit margin targets.

There’s also potential legal action with M&S over a withheld £190mn performance payment, after pre-defined targets weren’t met. We’ll be following this closely, but regardless of the outcome, it’s hard to imagine it will benefit relations.

We should be clear - Ocado has an amazing product. It's the only global provider of an end-to-end, online grocery platform. That's an enviable position. As the group builds scale and partnerships mature, profits and free cash should flow. We just aren't convinced this will happen in the projected timeframe, which could result in further knocks to the valuation.

Environmental, social and governance (ESG) risk

The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.

According to Sustainalytics, Ocado’s management of ESG risk is average. The group has an adequate environmental policy and its whistleblower programme is strong. However, ESG reporting falls short of best practice and the group lacks regular risk assessments on data privacy.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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.

Previous Ocado Group plc updates