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Ocado market is even bigger than previously thought, says Citi

Citi’s rating of ‘buy’ was reiterated with the share price target hiked to 1,450p from 1300p

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Ocado Zoom, offering deliveries in under an hour, "doubles the addressable market"

Ocado Group plc (LON:OCDO) scooted to the top of the FTSE 100 on Friday after analysts at Citi forecast an even bigger market for the online grocery specialist in coming years.

Citi’s rating of ‘buy’ was reiterated with the share price target hiked to 1,450p from 1300p.

READ: Ocado climbs into vertical farming with acquisition and new joint venture

Analysts at the bank said their view was that Ocado was already the leader in a market experiencing "secular and structural growth".

The introduction of the one-hour Zoom service, currently being trialled in London with a minimum order size of £15 and a flat delivery fee of £1.99, “doubles Ocado’s addressable market", Citi suggested, by catering for baskets below £40.

Long-term economics for Ocado are underpinned by increased automation, notably via its “hive” grid system of robot-picked groceries and “outbound robopicking”, the analysts said.

However, an update of the forecast model and valuation, mostly to take account of the impending sale of half Ocado's half UK retail business to Marks & Spencer Group (LON:MKS), the announcement of the Coles in Australia as a partner, the introduction of robotic picking and a better line of sight on the economics of the Ocado Smart Platform, saw Citi’s underlying earnings (EBITDA) revised down to £47mln from £90mln for the current 2019 financial year and to £19mln from £148mln for 2020.

In a bull-case where Ocado hits 30% market penetration grocery licencees and adds another 50 warehouses for non-food customers by 2030 could warrant a share price of £24 for Citi, with the bear-case being 700p if penetration only turns out to be 10% and costs remain little moved by automation.

Ocado shares were up 5% to 1,157.5p on Friday afternoon, down more than 20% from their all-time highs of April.

Quick facts: Ocado Group PLC

Price: 2204 GBX

LSE:OCDO
Market: LSE
Market Cap: £16.48 billion
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