Interactive Investor

Ocado: a FTSE 100 stock desperate to deliver on growth ambitions

21st June 2022 13:36

Graeme Evans from interactive investor

Online retailer Ocado has secured £578 million from investors to fund tech expansion. We examine a company under pressure to demonstrate a pathway to sustained profitability after years of City scepticism.

A discounted sale of Ocado (LSE:OCDO) shares at 2018 levels had no trouble getting City support as the FTSE 100 retail technology stock secured £578 million towards accelerating its growth.

According to Bloomberg, orders for last night’s fundraising were filled in 30 minutes as Ocado placed new shares equivalent to just under 10% of the company at a 9.4% discount of 795p.

The stock was over 2,800p in January, but has slumped after rising interest rates triggered a flight from growth stocks and as investors worried about the impact of cost of living pressures on Ocado’s 50-50 retail joint venture with Marks & Spencer.

The shares fell 51.4p to 826.2p today but stood significantly above the placing price as Ocado vowed to use the funds to ramp up capacity and for investment in new technology.

Among retail investors, however, the move represents their second dilution by the company in as many years. Ocado also generated £657 million at a 5.7% discount of 1,960p in June 2020 as it sought to take advantage of favourable conditions created by the pandemic.

Both fundraisings included a retail element through the PrimaryBid platform, but the number of shares involved in last night’s offer was a fraction of the 72 million in the placing as institutional shareholders got the chance to maintain their stakes without dilution.

Executives also took part in the fundraising, with chief executive Tim Steiner buying 125,786 shares in a move worth just under £1 million.

Today’s proceeds, alongside support from a new £300 million credit facility, will fund the openings of international Customer Fulfilment Centres (CFCs) over the mid-term and remove pressure on the balance sheet given the rise of UK interest rates.

Ocado now has six CFCs in the UK and partnerships with some of the world's largest food retailers, including Kroger (NYSE:KR) in the US, Sobeys in Canada and Casino in France.

The rollout of its software and CFC estate has accelerated recently after its number of live sites doubled to 10 in 2021 following Kroger launches in Ohio and Florida.

Ocado’s plan is to open a further nine this year, including six in the US and one in each of Sweden, Canada and the UK. These ongoing investment costs mean its annual loss came to £176.9 million in 2021, with more red ink expected in future financial years.

Having turned to investors for a second time in two years, Ocado will now be under even more pressure to demonstrate a pathway to sustained profitability after years of City scepticism.

Bank of America reckons it won’t be until 2025 that Ocado starts to show positive operating cash flow, with outflows of £1.1 billion before then.

It added: “Although Ocado's balance sheet is, so far, well-funded, Ocado is likely anticipating the rise of the net debt alongside the openings of the international CFCs for the next three years.”

The bank has a target price of 1,700p, describing Ocado “as a unique opportunity for those looking to leverage the global online grocery theme”.

Bernstein, which has a target of 1,990p, said the fundraising came as a surprise but added that it was pleased Ocado had removed questions over its liquidity “sooner rather than later”.

It added: “While this isn't our expected method of financing, it relieves management from the liquidity concerns and hence can focus on growth and avoids the cost of servicing debt.”

In a recent note, Bernstein described the CFCs as “cash generating machines” and said shares had been unfairly punished by inflationary risk and rising yields concerns.

The original Ocado.com business, which launched over 20 years ago and is now a 50:50 joint venture with Marks & Spencer, accounted for 92% of 2021’s £2.5 billion of group revenues and is experiencing toughening conditions as pandemic basket sizes start to normalise.

Amid cost of living pressures, the Retail arm’s management recently lowered this year’s revenues guidance to “closer to 10%” from mid-teens growth. Sales were 6% lower in the first quarter but this still represented growth of 32% against the same quarter before Covid.

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