Interactive Investor

Another deal for Ocado as half-year results receive pandemic boost

6th July 2021 08:36

Richard Hunter from interactive investor

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Ocado has been a star performer for a few years and won over more than a few doubters, but are these half-year results enough to reignite the share price?

Ocado Group (LSE:OCDO) is seeing a twin benefit from the move to online grocery shopping, with a near-term boost to Retail revenues accompanied by underlining future demand for its smart technology solution.

The Ocado Smart Platform is the flexible, state of the art system on which much of the group’s future growth is pinned. 

In the meantime, the company is continuing to invest heavily in the Customer Fulfilment Centres (CFCs) necessary to provide the delivery of goods. Ocado has opened three more CFCs in the period, including two in the US, with five expected for the full year and another nine in 2022. With total capital expenditure expected to hit around £700 million, however, this remains a long-term investment before the fruits of the expansion can be enjoyed.

This expenditure further ramps up capacity while supporting the group’s international aspirations, where it expects a 30% uplift in fees for the year. The announcement of a deal with Auchan retail of Spain to develop the online business at the Alcampo business is another string to its bow. While the deal will not become effective until 2024, Alcampo has annual revenues of €4.5 billion and is therefore a meaningful addition to Ocado’s portfolio, with other partners still actively being sought.

Overall revenues jumped 21.4% during the 26 weeks ended 30 May 2021, enabling the pre-tax loss to reduce to £23.6 million versus a previous £40.6 million, and this was achieved despite an additional £100 million of capex. Meanwhile, further expansion is underpinned by a cash position of £1.7 billion, with this liquidity providing both capacity and flexibility.

In the meantime, the Retail business is largely carrying the fight as the Solutions business continues to burn through the cash for future investment. The joint venture with Marks & Spencer (LSE:MKS) continues to show early signs of success, with an increase of 19.8% in revenues being achieved despite tough comparatives against what was the height of the pandemic last year. While some of the basket sizes are currently normalising as restrictions are eased, the company nonetheless now has 777,000 active customers, an increase of 22% on the previous year.

The potential for Ocado is clear, with its cutting edge technology continuing to both deliver and to be attractive to new customers who appreciate the efficiency of the solution which they are signing up for. At the same time, while investors have long been inspired by the story, to some extent this remains a “jam tomorrow” stock, even though there are increasing signs of success.

Share price growth has therefore stalled of late, with the shares having dipped 1% over the last year, as compared to a 14% hike for the wider FTSE100. Even so, the longer term direction remains strong, with the shares having added 61% over the last two years and 94% over the last three. With the company now at the juncture between promise and delivery, the market consensus of the shares as a 'hold' reflects the fact that more evidence is required to enable the next phase of growth.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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