Ocado Group PLC's (LSE:OCDO) new overseas deal is a much-needed bit of positive news for the company, according to analysts at UBS, though others downplayed the impact.
The FTSE 100-listed online grocery specialist said the deal for its Ocado Solutions business with the retail arm of South Korean conglomerate Lotte Group includes new technologies, meaning that multi-storey robot warehouses could be built for the first time.
Ocado said the ability of the new robots to operate on multiple levels would enable “a wider range of property types” for its customer fulfilment centres (CFCs), enabling “more efficient use of space in densely built environments”.
Getting a new contract over the line was the main thing for the UBS analysts, though they retained a 'neutral' rating on the shares, which jumped 34% on Tuesday to 635.83p but remain down 59% since the start of the year.
“We have consistently talked about lack of new customer contracts being signed by OCDO as a key concern for us and investors,” said UBS analyst Sreedhar Mahamkali in a note to clients.
“This deal, in one of the more advanced eCommerce markets, is a positive for OCDO, in our view, and increases confidence in the technology; and we think it should be taken positively today," he added.
Matt Britzman, equity analyst at Hargreaves Lansdown, also felt it was “welcome news for a Group that’s been struggling to drum up tangible deals” for the Ocado Solutions business.
“More so, given the tricky underlying conditions, it’s pleasing to see a large business happy to go out and commit to multiyear spend on integrating Ocado’s end-to-end solutions into their business – testament to the product on offer and efficiencies it’s able to deliver," Britzman added.
After three profit warnings this year, he also noted that investors will be pleased to hear no additional capital raises are on the cards, with the capex spend having already been modelled into Ocado’s plans, though he noted that the deal for six CFCs to be brought into production by 2028, is “unlikely” to see more than a few of the robot-operated warehouses live by that date.
Analyst Clive Black at Shore Capital concurred, saying “it will be sometime indeed before the financial benefits, if any, of this partnership trickle into the Ocado Group revenue, EBITDA and, dare we state it, earnings line”.
He saw other holes in the Lotte deal, noting that while there is no near-term impact on earnings or cash there is “an indication that very high capital expenditure will be sustained from FY25, and with the time-lag that it takes to build, fill, and operate a CFC, an even longer time period before the Lotte Partnership registers in terms of in-bound cash flows from operations”.
Indeed, despite Ocado having said in June that its £578mln of new funding will be enough to see it through to profitability, Black predicted that the Lotte deal may make that less likely.
“Ocado has a dozen such partnerships to date and the Solutions business on a compound and sequential basis remains sub-scale, loss-making, cash consumptive and delivers negative return on capital employed,” he said.
“The script here is the same as ever; if Ocado had a business model that worked, then it would generate much more EBITDA, noting ‘D’ and ‘A’ are real costs in this group, positive earnings and returns so it can self-fund, to organically support its expansion.
“That simply has not been the case, and this partnership probably brings forward the need for yet another round of fundraising; just as we stated the group would need to do for the last one this year," Black concluded.