Today Ocado Group PLC (LSE:OCDO) raised another chunk of cash, which despite coming not that long since its last fundraising, the company promised will satisfy its needs for the “medium term”.
The arrival of yet another fundraising from the ‘reverse cash machine’ that is the FTSE 100 company was met with a little frustration but not surprise by long-time followers who view it as one of the ultimate “jam tomorrow” peddlers.
In full, Ocado said the £578mln of new funds from institutional and retail investors, alongside £300mln of bank finance, will “allow the company to capitalise on the opportunity set over the medium term”.
This received a sceptical “hmm” from analyst Clive Black at Shore Capital, who has seen similar promises before.
Indeed for Black, head of research at the Liverpool-based broker, “this is a placing that reflects material cash burn and concerns about liquidity.”
It follows four weeks after a profit warning for Ocado’s 50% owned UK joint venture Ocado Retail and four months after the even worse one before that, with the offer at a 9% discount to the last closing price and more than a 70% discount to the share price in early 2021.
Russ Mould, investment director at AJ Bell, elaborates on the jam-tomorrow riff, saying Ocado has “greased its baking trays by means of winning numerous contracts with third party grocery sellers”, with the next stage being to “fill these trays with the right ingredients to support their online grocery operations, and that’s where all the extra money is needed alongside making improvements to its systems”.
Ocado, which has so far evaded profitability for all but three years since it was founded in 2000 and floated in 2010, dangled the carrot of “a clear path to potential group revenue of £6.3bn+ and group EBITDA of £750m+”.
It said this path was paved by its Solutions business, the tech business that has 11 overseas clients with which it is building a combined 58 customer fulfilment centres (CFCs).
The lack of precision in the “medium term” guidance may only add to the frustration of some followers.
Ocado states that the online market will continue to grow, but the latest grocery figures which emerged this morning showed it is currently contracting as households return to some pre-pandemic habits and eschew the extra delivery costs.
Black notes that this all comes as the UK economy heads into a potentially deep recession, which he notes that Ocado's most recent statement “suggests it is notably exposed”.
He also takes issue with Ocado promising EBITDA of £750mln, which he says is “a luxury for this business” as “shareholders do not live off EBITDA, particularly when monetary policy tightens, and risk becomes a bigger issue in equity valuation”.
This is because EBITDA allows the group to exclude all manner of major items that would chip away at its true profit figure: “R&D is amortised, assets do depreciate and need updating and replacement, and Ocado’s operations are high intensity in this respect.
“Furthermore, profitable businesses do actually tend to pay tax and deliver retained profits and even free cash flow.”
Black says it leaves open the question as to “how should that EBITDA be valued if it is continually expanded to no transparent shareholder gain” in terms of matters like earnings and dividends.