Today’s first international deal for online grocer Ocado PLC (LON:OCDO) has been a long timing coming and although there is little detail, hopes that more deals may be in the pipeline helped the shares to rise.
Neil Wilson, senior market analyst at ETX Capital, said: “It’s what investors have been waiting for: Ocado has at long last agreed an international deal with a retailer that it’s been promising to deliver for over a year and a half.”
WATCH: Ocado's European deal likely to be first of many says ETX's Neil Wilson
He added: “This is good news for sure. Investors have shown a great deal of patience and while the rewards from this agreement won’t be immediately forthcoming, it bodes well for the future.
“But the devil is in the detail and while welcome it’s unclear what actual value this deal in itself will bring to Ocado. Financials details about the tie-up are non-existent at present. The European retailer will not be using Ocado’s automated warehouse technology.
“We don’t even know who the company is – Ocado simply dUBS it a ‘regional’ retailer (not a national one). This is progress after a lot of promises, but it’s not exactly like doing a deal with Wal-Mart - yet.”
Still, Ocado shares were 4% higher in late morning trading at 328.90p today, having surged over 25% in the past month as short-sellers got squeezed badly by talk a deal was close.
READ: Ocado shares jump as it signs a long-awaited international deal
George Salmon, equity analyst at Hargreaves Lansdown, said: “The news that a European retailer has signed on the dotted line is what investors have been waiting for, and is a major fillip for the company.”
He added: “That the whirring equipment in Ocado’s distribution centres is a technological wonder has never really been in dispute, but this hasn’t stopped there being plenty of debate around the group’s potential profitability.
'It might be ahead of its rivals in terms of service, but the fact is that organic growth alone doesn’t justify the shares’ premium price to earnings ratio.”
Although Ocado said in today’s statement that it thinks there will be no material impact to earnings or cash this year or in 2018, it added that the deal should be “increasingly accretive” after that.
Ocado expects multiple partners to sign over medium term
The online grocer’s CEO Tim Steiner also said: “Our discussions with other retailers across the globe are ongoing and we continue to expect to sign multiple deals in the medium term."
Hargreaves’ Salmon said: “Investors should be relatively hopeful that this is just the first of a slew of new deals around Europe. But they may want to watch just how much the technology push eats up cash and whether these deals increase the burn.”
Ocado said it will provide this partner with its “full software platform, know-how and support services required to create an efficient and intelligent online grocery business, with orders initially fulfilled from their manually operated centralised warehouse.”
In a note to clients, analysts at Goldman Sachs pointed out "that this type of deal also appears much more scalable and less capital intensive (though likely less profitable) than providing fully automated solutions.”
However, they added: “It is the sum of the multiple partners Ocado expect to sign over the medium term that would likely provide upside risk to consensus earnings if realised and we believe this deal makes that a more realistic expectation.”
And analysts at UBS said: “This deal validates Ocado's technology leadership, but the economics look skinny with no net cash inflows for c.18 months.”
Reiterating a ‘sell’ rating on Ocado, the UBS analysts said: “To reach scale it will need to aggressively acquire customers through price and marketing investments. We expect OSP deals may disappoint high market expectations on value.”
They concluded: “We expect this news to ultimately act as a catalyst for profit taking, following strong recent share performance.”