Jefferies International bought Ocado Group plc’s (LON:OCDO) soaring share price down to earth on Monday, cutting its rating for the online grocery technology firm to ‘underperform’ from ‘hold’ on valuation grounds and a lack of optimism over its expansion plans.
In a note to clients, the US broker’s analysts noted that Ocado shareholders have benefited from “great value creation in the past 18 months” with the firm signing the first international deals for its technology as well as a joint venture with Marks & Spencer Group PLC (LON:MKS) in the UK.
They said the FTSE 100-listed firm’s soaring equity “has rewarded the group's ability to position its Ocado Smart Platform (OSP) as the turnkey solution for grocers challenged by the strategic dilemma of a margin dilutive channel shift in food.”
However, the analysts pointed out that Ocado’s valuation “now assumes an unequivocal commercial success of the OSP for its existing customers (and their 38 contracted sheds).”
They also noted that it prices in more than 150 future CFC (customer fulfilment centre) wins, which the analysts think “seems too optimistic”.
The analysts said: “Reasonable assumptions on the scale of Ocado's central costs and investment requirements as a technology supplier suggest that only c.210p/share is explained by the 38 CFCs currently contracted to drive Ocado's longer term cashflows.”
They added: “Inevitably given the back-end loading of licensing income, the valuation dislocation is set to reduce over time. But today's valuation assumes that more than 150 additional CFCs will be contracted by OSP partners over the longer term, currently accounting for c.780p/share.”
The analysts said their 600p target price for Ocado, increased from 460p, assumes the OSP pipeline building to a total of around 70 CFCs over time, and although they see upside potential to 1,500p a share, they also see the downside potential at 150p.
In late morning trading, shares in Ocado were 3.4% lower at 1,154p.