Interactive Investor

ii view: prospects for Ocado, its relationship with M&S and AI

This FTSE 100 company offers a unique mix of defensive food demand and predicted growth in warehouse automation globally. Buy, sell, or hold?

19th January 2024 11:28

by Keith Bowman from interactive investor

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Retail business fourth-quarter trading update to 26 November

  • Retail revenue up 10.9% to £609.4 million
  • Active customer numbers up 5.9% 998,000

Guidance:

  • Expects the Retail business to return to a full-year 2023 adjusted profit (EBITDA)
  • Now expects full-year 2024 revenue growth in the mid-high single digits compared to 7% growth in 2023

Retail chief executive Hannah Gibson said:

"We made significant progress in 2023. We have focused first and foremost on being a great shopkeeper, improving our unbeatable range, great value and unrivalled experience - all underpinned by improved cost efficiencies. Our Perfect Execution programme set a high bar for our performance, and we are pleased to have finished the year with strong momentum. 

“We are starting the new year with over one million active customers. Over the next 12 - 18 months, we will be embedding the foundations we have laid this year and raising the bar again for online grocery shopping. We have a really strong platform to build on in 2024."

ii round-up:

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

Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer. 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 a OSP user. 

For a round-up of this latest Retail business trading update on 16 January, 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 seven distribution centres using its own software and technology. The Technology Solutions business supplies its Ocado Smart Platform (OSP), an end-to-end eCommerce, fulfilment, and logistics platform, to other retailers around the world. Current customers include Morrison’s in the UK, Kroger in the US, Sobeys in Canada, and Auchan Retail in Poland. 

Analysts broadly break the Ocado business and its prospects into three areas. First, its UK Retail business; second, the valuation of contracts around its Solutions business, and thirdly, expectations on newly won Solutions contracts. 

For investors, group-wide pre-tax annual losses persist, with a loss of £500 million in 2022 up from £177 million the year before. Costs for businesses generally remain elevated, rivals to its Retail joint venture business with M&S are busy enhancing their own online and delivery operations, while the lack of a dividend contrasts with yields of over 3.5% at both Tesco (LSE:TSCO) and Sainsbury (J) (LSE:SBRY)

On the upside, its partnership with M&S is arguably proving successful, with a return to adjusted (EBITDA) profit for its Retail business expected in 2023. Revenue at its Technology Solutions business rose by 59% at its most recently reported 2022 interim results, with artificial intelligence (AI) now aiding the business. A strong management focus on costs persists, while an estimated price-to-net asset value of 2.6 times compares to a three-year average of 8.7 times and 10.8 times at Amazon.com Inc (NASDAQ:AMZN), suggesting improved value.

For now, the difficulty in valuing the Technology Solutions business and its prospects continues to leave Ocado shares as both speculative and volatile. Yes, there's an established consumer appetite for online shopping and delivery, plus a consensus analyst estimate puts fair value at over 850p per share, but the company, long accused of being a 'jam tomorrow' business, is a Marmite stock too. There's clearly potential, but the company will continue to be judged on results

Positives: 

  • Efficient technology-based packing of customer orders
  • Growing Technology Solutions revenues

Negatives:

  • Loss making
  • Not paying a dividend

The average rating of stock market analysts:

Strong hold

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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