Ocado Group plc (LON:OCDO) investors are pinning their hopes on the online grocer securing further deals in the wake Amazon’s US$13.7bn takeover of Whole Foods.
Chief executive Tim Steiner said today that the company expected the international deal it secured last month to be the first of many as it reported a 12.5% increase in first half revenue to £713.8mln.
The deal is with an as yet unnamed European retailer to use Ocado’s smart platform and marked the company’s first overseas partnership.
Amazon's takeover of Whole Foods sparks interest in Ocado
Steiner said Ocado has seen a pick-up in enquires from US supermarkets interested in possible partnerships after Amazon’s acquisition of Whole Foods had made them consider the growing competition they face.
“Amazon’s US$13.7bn acquisition of Whole Foods has put the cat amongst the pigeons in the sector, and may prompt others to reassess their online strategies,” said George Salmon, equity analyst at Hargreaves Lansdown.
“This could potentially put Ocado in the frame for more deals.”
Salmon said the quality of future deals will be key.
He added: “Ocado has already secured one international deal, which is certainly a step in the right direction, but we’ve yet to see the details behind the headline. Having a deal is one thing, but a good deal is quite another.”
Ocado needs international deals 'sooner rather than later', says Shore Capital
Shore Capital noted the company’s existing deal to facilitate the online business of garden retailer Dobbies as well as its extended partnership with Morrison Supermarkets.
However, Ocado trades on 150x earnings for FY2017, falling to 115x in FY2018.
“Relatively unremarkable growth from a rather modest scale is not worthy of lofty valuation multiples, in our view,” ShoreCap stressed.
“The current multiples perhaps necessitates the execution of further service agreements with other international retailers sooner rather than later.”
ShoreCap put Ocado 'under review' with a target price of 289p.
Outlook for Ocado's retail operations improving, says Numis
Numis was positive on Ocado’s prospects for growth, reiterating a ‘buy’ rating and target price of 400p. It said the company had recorded a “solid first half” with underlying earnings (EBITDA) of £45.2mln, up 2.7% on the prior year.
Retail sales rose 12.5% to £659.6mln as the number of active customer edged up 12.7% to 600,000, supported by the shifting trend towards online grocery shopping.
Pre-tax profit fell 18.1% to £7.7mln but this was mainly due increased costs associated with the opening of its customer fulfilment centre (CFC) in Andover, Hampshire.
“We continue to believe that the outlook for the UK Retail operation is improving and that Ocado is developing the most advanced and economic end-to-end platform for third party retailers,” Numis said.
Ocado said in its own outlook that it expects to continue to grow ahead of the online grocery market. The group has a UK grocery market share of 1.3%.
Ocado invests in technology, driverless vans, to tackle growing competition
The company has, however, recognised the fierce competition it faces in the supermarket industry and has in turn been investing in technology.
As part this investment, Ocado has been trialling driverless vans in London to deliver goods at short distances. The vehicle, named the CargoPod, has been spotted in Greenwich, south west London, completing journeys around a two-mile loops over the past two weeks.
To support such investments, the group has refinanced its operations through a £250mln bond issuance and £100mln revolving credit facility.
ShoreCap said Ocado had been running out of money before the recent bond issue, which further leverages the organisation.
“The current capital expenditure, £175mln this financial year, indicated that the company was likely in need of further financial resources, which has now emerged in the form of £250mln of senior secured notes and new £100mln revolving credit facility,” the broker said.
“Accordingly, if there was a path to material and sustained profit, earnings and maybe even, dare we say it, dividends for shareholders after seventeen years of project development then we may be more sanguine about the business model.”