Ocado is still a 'jam tomorrow' business

Ocado (OCDO) shares were boosted by a third on 22 June after media rumours of takeover interest hit the market, with talk of potential involvement from Amazon (US:AMZN). Given the subsequent denial from the technology giant, and no mention of any bid in these half-year results from Ocado’s management, the uplift seems to have been built on flimsy foundations. Shore Capital's head of consumer research, Clive Black, said that the episode, which swayed investors “to buy into a bid story that does not exist, does not reflect well all round”.

The shares rose by 17 per cent on the back of this week's figures, as adjusted cash profits turned positive and management kept full-year guidance steady, but they remain worth less than a quarter of their pandemic-era peak, with no obvious catalysts for getting back to such a level.  

Indeed, the results emphasise that the business remains one that has promised much but has failed to deliver. Despite growing its revenues through higher retail prices and more technology fees, higher costs – which included a £70mn increase in exceptional items – damaged Ocado’s bottom line.

In the key retail division – a joint venture with Marks and Spencer (MKS) – the 5 per cent revenue uplift was driven by an 8.4 per cent increase in selling prices and a 10.6 per cent uplift in active customer numbers, although cost of living pressures led to a 6.3 per cent contraction in basket size.

An easing of food inflation could potentially tempt some customers back from the discounters, but the rate of price growth remains highly elevated. According to Kantar, UK grocery price inflation fell by 1.6 percentage points to 14.9 per cent in the month to 9 July.

The technology solutions side of the business is the most interesting and is what differentiates Ocado from competitors. The company’s robots race around ‘customer fulfilment centres’ sorting out orders. Sales in the division were up 59 per cent to £198mn, with international clients including US retailer Kroger (US:KR), Japan's Aeon (JP: 8267) and South Korea's Lotte (KR: 004990). But only two fulfilment centres went live in the half, and delays with opening new centres with Coles (AU:COL) in Australia don’t inspire confidence. Elsewhere, logistics revenues rose by 1.7 per cent to £335mn. 

RBC Capital Markets analysts concluded that Ocado’s mid-term targets “appear ambitious” and pointed to the limited chance of material new international deals and a pricey valuation as other risk factors.

An uncertain cash flow outlook, higher net debt and weak margins keep us bearish. Sell. 

Last IC view: Sell, 568p, 28 Feb 2023