ii view: Ocado's laser focus on transforming online grocery

Its share price has plunged from a peak of over £28 in September 2020 to under £7 today. Buy, sell, or hold? 

First-half results to 28 May

• Revenue up 8.6% to £1.27 billion
• Pre-tax loss of £289 million, up from H1 loss last year of £211 million
• No interim dividend
• Net debt of £901 million, up from £759 million this time last year

Guidance:

• Continues to expect full-year mid-single digit revenue growth for the Retail business
• Continues to expect full-year revenue growth of 40% for the Solutions business

Chief executive Tim Steiner said:

"Ocado Group has made good progress over the last six months. Technology Solutions has continued to deliver our industry-leading Ocado Smart Platform around the world. In the UK, Ocado Logistics had a steady, profitable first half and Ocado Retail is making good progress, with a return to profitability in Q2. 

“Our operations in the UK remain an important demonstration of the potential for our international ambitions, as we seek to transform the economics of online grocery and expand into the wider automated storage and retrieval solutions market.”

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ii round-up:

Ocado Group (LSE:OCDO)operates via the three divisions of Technology Solutions, Retail and Logistics.  

Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer Group (LSE:MKS). Ocado Logistics supports both Ocado Retail and Morrisons in the UK. 

Technology Solutions is responsible for helping other retailers with their online offerings, both in the UK and overseas, using its Ocado Smart Platform (OSP) software and robot technology. Its own UK Retail division is an OSP user. 

For a round-up of these latest results announced on 18 July, please click here. 

ii view:

Ocado Retail delivers over 50,000 products, including big-name brands, a range of M&S and Ocado own-brand products and a selection of non-food items. Every shopping bag is packed in one of its distribution centres using its own software and technology. The Technology Solutions business supplies its OSP, an end-to-end eCommerce, fulfilment, and logistics platform, to other retailers around the world. Current customers include Morrisons in the UK, Kroger in the US, Groupe Casino in Europe and Coles in Australia. 

Analysts break the Ocado business and its prospects into three areas: its UK Retail business; the valuation of contracts around its Solutions business; and expectations on newly-won Solutions contracts. 

For investors, a widening pre-tax loss should not be overlooked. Costs for businesses generally remain elevated, rivals targeting its retail joint venture with M&S are busy enhancing their own online and delivery operations, while the lack of a dividend contrasts with yields of over 4% at both Tesco (LSE:TSCO) and Sainsbury (J) (LSE:SBRY). 

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More favourably, revenue for all its businesses rose during this latest period, with management remaining highly focused on costs. Full-year revenue growth of 40% for its Technology Solutions business continues to be targeted, speculative takeover rumours regarding Amazon cannot be completely dismissed, while an estimated price-to-net asset value ratio of 3.1 times compares to a three-year average nearer nine times, suggesting better value. 

Ocado has become a marmite share - you either love it or you hate it. They will likely remain volatile and speculative, but fans of the business will point to an established consumer appetite for online shopping and delivery. An analyst consensus estimate of fair value at over £8 per share might also convince others to monitor progress.

Positives: 

• Efficient technology-based packing of customer orders
• Growing number of solutions related customers

Negatives:

• Loss making
• Not paying a dividend

The average rating of stock market analysts:

Strong hold