Ocado Group PLC (LSE:OCDO) may be too ambitious in its forecasts for cash flow potential, that's according to RBC Capital Markets, which today downgraded the groceries and warehouse technology company’s share price target by 20%.
The group has “great technology, but at a great cost”, RBC said in a note, which also predicted additional financing will be needed in the midterm despite Ocado’s optimistic projections.
“We continue to view Ocado's technology solutions as industry-leading; however on analysis of the group's cash flow potential, its midterm targets appear ambitious,” said RBC’s analysts.
The Canadian bank continued: “Moreover, risk of additional financing, a likely slow recovery at Ocado Retail, downside risk to group estimates, a lower probability of further game-changing international deals and a relatively rich valuation lead us to downgrade the shares to underperform.”
Scrutinising Ocado’s goal of mid-to-high single-digit EBITDA margins, RBC said: “While we would agree that the majority of current margin pressure is temporary (driven by operating deleverage as capacity is under-utilised as well as utility price inflation), we believe a degree of inflation could persist (labour) and marketing costs may remain elevated as the market remains competitive.”
RBC downgraded Ocado from sector perform to underperform with a share price target of 560p against a going price of 690.6p as of January 26.