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Ocado still doesn't convince

Ocado's shares bounce on fundraising, but doubts remain
November 20, 2012

Shares in online grocer Ocado (OCDO) leapt by more than a quarter on Monday after the company announced a £35.8m placing and the extension of its financing arrangements, staving off a potential financial crunch in the process.

IC TIP: Sell at 76p

But the share price rise was more likely down to relief on investors' behalf and covering by short sellers rather than a widespread belief that the funding will be enough to push Ocado over the line into a consistently profitable operation. Admittedly, the fundraising was at a premium to the Ocado share price at close of play on Friday. But, at 64p, it is a pale shadow of the 180p a share valuation given to the company at the time of its float in 2010. For long-standing investors it is probably a small price to pay to guarantee the company sees it through to the next stage of its development.

Ocado can still be classed as an experiment in online grocery retail, though. Until the company turns a consistent and growing profit, it remains effectively a technology play wrapped up in a sophisticated warehousing system that's been in development for 10 years. And several imponderables remain in the Ocado story, such as the effect of the second fulfilment centre, which is due to open early next year in Warwickshire, and the fact its sales growth appears to be lagging bricks-and-mortar rivals' own online food operations. On Monday Ocado reported gross sales growth of 11 per cent in the 14 weeks to 11 November, which doesn't compare that favourably with Sainsbury and Asda, which have both reported online sales growth of 20 per cent-plus in recent weeks.

Some analysts, such as long-term bear Clive Black of Shore Capital, were dismissive of the fundraising - Mr Black described it as "a pre-emptive move to avoid a breach of covenants", a claim denied by Ocado despite its lending banks making a fundraising a condition of its new banking arrangements. Mr Black also believes the company's existing distribution centre is over complicated and "chronically over-capitalised" and this situation will be worsened by the opening of a second centre in February. His summing up of the investment case is scathing: "Until Ocado's trading materially improves, until Ocado's margins materially expand, until Ocado materially generates free cash flow and until Ocado is demonstrably free of discussion about a constrained balance sheet, then the stock remains a clear sell."