The question every Ocado shareholder has is whether the M&S tie-up will deliver. The answer so far, just a couple of weeks into the partnership, seems to be positive. Forward demand is strong, and management say adding M&S products has increased the average basket by around 5 items. We should question though whether the novelty of getting Percy Pigs in your online shop will last. Retail revenues – pre-M&S – accelerated from +27 per cent in H1 to +52 per cent in Q3 as the shift to online grocery continues apace, with the number of orders on a weekly basis up almost 10 per cent. UK grocery sales rose 10.8 per cent in the 12 weeks to September 6th, according to Kantar, which indicates Ocado is significantly outperforming. Shares in Ocado jumped over 6 per cent, whilst Marks & Spencer rose over 5 per cent to 110p.
Of course, Ocado shares don’t trade on such lofty multiples because it runs a successful UK grocery business, but on expected recurring revenue streams from international partners. These have been slow to materialise and there was no further communication in today’s update. Earnings from international partners remain slow to emerge and in July management cautioned that EBITDA from International Solutions would decline due to ‘continued investment in improving the platform and building the business, and from increased support costs with launch of initial CFC sites’. Despite this jump in retail revenues, management can only promise full-year EBITDA of £40m. The problem for Ocado is it takes a long time to get a return from building costly fulfilment centres, while Marks will find out that it’s very hard to translate online grocery sales into profits.
On those Kantar numbers, it is worth noting that growth in supermarket sales decelerated in August because of the Eat Out to Help Out scheme, with sales down £155m compared with the July period. Shares in Tesco rose, while those in Sainsbury’s and Morrison fell.
UK Company Announcements
| Ocado (OCDO) | Retail sales soared by more than a half during the 13 weeks to August, with average order size still above pre-pandemic levels. Marks & Spencer swapped places with Waitrose on Ocado’s site on 1 September, and so far customers have “responded positively”. Ocado had said at the half-year mark that online grocery demand would be sustained. |
| G4S (GFS) | The shares shot up by more than a quarter yesterday after Canadian security business GardaWorld went public with a 190p a share all-cash takeover offer, valuing G4S at around £3bn. G4S has since rejected the “highly opportunistic” offer, believing that it “significantly undervalues the company and its prospects”. It is recommending shareholders take no action. |
| Vectura (VEC) | First-half revenues dipped by 2.2 per cent to £89.7m, while operating profits came in at £2.9m – from losses of £14.1m – after lower amortisation charges tied to prior-year asset impairments. The group has signed 12 new inhalation contract development and manufacturing organisation (CDMO) deals year-to-date. |
| Amryt Pharma (AMYT) | A European Medicines Agency committee has given a "positive opinion" for orphan designation for the use of Amryt's pre-clinical AP103 product in the skin condition Dystrophic Epidermolysis Bullosa (EB). |
| Marshalls (MSLH) | The landscape product supplier swung to a pre-tax loss of £16m in the first half, following £17.6m worth of restructuring costs. The board has skipped the interim dividend. |
| JTC (JTC) | Like Sanne, the peer whose private client business it formally acquired on 1 July, the corporate services firm showed its resilience in the first half of 2020. Earnings per share rose 22 per cent, just ahead of revenues, though net debt ticked up and the EBITDA margin dipped. |
| FirstGroup (FGP) | Adjusted operating profit and cash generated from the group's activities has been ahead of management's expectations at the start of the summer, resulting in the transport group guiding towards a small adjusted operating profit for the seasonally weaker first half of the financial year. Management credited cost control and better recovery of revenue, particularly in First Bus and First Transit. |
| Chemring (CHG) | The group says that adjusted operating profit for the year to 31 October is likely to come in at the upper end of the £47m-£53m range forecasted by analysts. The order intake for the 10 months to 31 August was 4 per cent higher than a year earlier, with a 32 per cent increase for the ‘sensor and information’ business. |
UK unemployment rose to 4.1 per cent, in a clear signal that the labour market is coming under increasing strain. According to the ONS, the number of employees in the UK on payrolls was down around 695,000 compared with March 2020. The claimant count rose to 2.7m, which is an increase of 120 per cent from March levels. Over 5m people remained in furlough in July – how many are coming back?
Boris’s internal market bill cleared its first hurdle in the House of Commons but 30 Tory MPs abstained, hoping to water it down. The EU retaliated by delaying its decision on allowing the City to continue clearing billions of euros every day in derivatives. London dominates the market but Paris and Frankfurt would both like a larger slice – of course you cannot strip it out of London very easily so this looks more like the European Commission flexing its muscles. GBPUSD was steady in the middle of its range around 1.2860 having struck a high at 1.2920 in afternoon trading yesterday. Support to be found on the recent lows put in around the 200-day EMA at 1.2750.
European stocks faltered a bit after opening in the green, indicative really of the whole summer. The Euro Stoxx 50 neatly shows how European blue chips have drifted since June.
US stocks pushed up yesterday, with the S&P 500 pushing higher by 1.27 per cent and every sector in the green. The Nasdaq was up almost 2 per cent. Tesla shares rocketed 12 per cent, while Nikola was up 11 per cent before plunging 8 per cent in after-hours trade. Nikola responded to the Hindenburg research note but it seemed to me to be a rather weak defence with the company’s own promo videos on YouTube served up as ‘evidence’.
Elsewhere, G4S shares were a little weaker this morning but largely held yesterday’s gains after the unsolicited approach from Garda World. A lengthy statement this morning rejects the offer in no uncertain terms, with management saying that the ‘highly opportunistic’ bid significantly undervalues the business. They go on to outline a detailed financial case on why they should not be bought. Whilst the 190p offer represents a 31 per cent premium to the undisturbed 145p the stock was trading at before the news broke, this only really recovers pandemic-related depreciation and G4S is probably right to demand a lot more for solid business that generate about £7bn in sales annually. Always interesting to see how a company deleveraging (G4S reduced net debt to EBITDA from 3.27x in 2015 to 2.58x today) makes you more appealing to a leveraged buyout, in which GW is a specialist.
Neil Wilson is chief markets analyst at Markets.com
