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Check out of Ocado

With no new contracts on the horizon, and existing deals under threat, we can't see hidden value in Ocado shares right now
March 3, 2016

We think news of changes to Ocado's (OCDO) deal with Morrisons, coupled with Morrisons' grocery tie-up with Amazon (US:AZN), looks like bad news for the UK online grocery group and we see plenty of room for its shares to derate further. Over recent years, Ocado has sought to build an investment case around its ability to use its technological know-how to partner with large international grocery retailers. But not only have no international deals been forthcoming, Morrisons' actions cast doubt on a key UK relationship, which could be seen as a test-bed for any interested international partners. What's more, Morrisons' deal with Amazon make a rumoured takeover of Ocado by the US online behemoth look unlikely in our view, for now at least.

IC TIP: Sell at 254p
Tip style
Sell
Risk rating
High
Timescale
Short Term
Bull points
  • Hanging on to profitability
  • Takeover speculation
Bear points
  • No new contracts announced
  • Morrisons-Amazon tie-up
  • Rising investment costs
  • Limited scope on current trading

Having failed to sign a new contract in 2015, Ocado now says it expects "multiple deals in multiple geographies" in the medium term, thanks to interest from "a number of retailers". However, that "medium term" is unspecified in duration, and since the signing of the Morrisons deal in 2013 the company has failed to sign another contract. There's also a distinctly different relationship emerging between Morrisons and Ocado than when ex-Morrisons boss Dalton Philips signed the deal. It has long been suggested that the agreement was good for Ocado but not for Morrisons, and Morrisons current chief, David Potts, is taking corrective steps. He just amended the contract to allow Morrisons to sell its wares online via Amazon Prime - a scheme also beneficial to the US retail giant as it tries to launch its fresh food delivery services in the UK. By way of compensation, Morrisons has agreed with Ocado to share some of the capacity at its new south-east London customer fulfilment centre, where it will also use Ocado technology to fulfil customer orders from its stores.

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