ii view: Why Ocado is the biggest blue-chip winner

The corona crisis has played into Ocado's hands, but management stays level-headed. 

First-quarter trading update to 1st March 2020

• Retail revenue up 10.3% to £441 million
• Average orders per week up 10.2%
• Coronavirus – second quarter growth double that of first quarter

Guidance

• Full-year 2020 retail revenue growth of 10 to 15% - unchanged

Retail chief executive Melanie Smith said:

“The fundamentals at Ocado Retail are strong, illustrated by double digit increases in customer orders, driven by consistent execution, which deliver a best-in-market customer experience. 

“Preparations for the M&S switchover from Waitrose, this September, are on track, and we are looking forward to building closer and stronger relationships with our branded suppliers as part of the transition.”

ii round-up:

Online grocery retailer Ocado (LSE:OCDO) reported a doubling in growth in the second-quarter as customers responded to the coronavirus outbreak.

While the virus’s impact on the full 13-week first-quarter had been muted, a dash for shelf-stable or ambient goods in the second-quarter to date had been notable.

However, with management assuming a large degree of customer forward buying, and with the possibility of disruptions ahead, its estimate for full-year revenue growth was left unchanged. 

The shares fell by more than 7% in early UK market trading, but are now only marginally down on the day. They have gained 34% over the last week and 26% since the crash began around 20 February. Shares in Tesco (LSE:TSCO) and Sainsbury's (LSE:SBRY) both rose by around 2%, adding to double-digit gains over the past week.

Operational changes to adapt to the coronavirus include no longer taking back plastic bags from customers for recycling and delivering groceries only to the doorstep. 

Registration for new customers had also been temporarily halted and a new website interface installed to help reduce the impact from a significant jump in web traffic. 

ii view:

Ocado was founded in 2000 and listed on the London Stock Exchange in July 2010 at an IPO price of 180p per share. It operates two divisions. Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer (LSE:MKS). Solutions is responsible for corporate partnerships with online retailers using the Ocado Smart Platform software and technology.

A current stock market value of over £10 billion is roughly equal to both Sainsbury's and Morrisons (LSE:MRW) combined. Investors are already pricing in a lot of good news. Although, arguably, other traditional supermarkets do not offer a direct comparison. Ocado has been winning large contracts with significant overseas retailers. In 2019, it signed its eighth and ninth Solutions customers - Coles in Australia and Aeon in Japan. Its technology tag warrants serious consideration when assessing prospects. 

However, despite the current boost from the coronavirus and mid-February full-year results, which underlined continued international growth, it still appears that investors are undertaking something of a leap of faith. As such, Ocado shares remain an investment for higher risk investors.

Positives:

• Growth for both Retail and Solutions continues to be reported
• Funding position strengthened - a further £600 million recently raised

Negatives:

• Price to net asset value of 10.2, above the three-year average of 8.3 times
• Doesn’t pay a dividend

The average rating of stock market analysts:

Hold