Cube Midcap Report (11 Feb 2020) – Ocado can’t make a profit #OCDO

Cube Midcap Report (11 Feb 2020) – Ocado can’t make a profit #OCDO

Good morning!

Today I’m going to take a look at Ocado (OCDO).

Finished at 12.15pm.


Ocado (OCDO)

  • Share price: £12.42p (+2%)
  • Market cap: £8.8 billion

Final Results

I last looked at Ocado in December, on the occasion of Ocado Retail’s Q4 trading statement.

Ocado Retail is the UK joint venture with M&S, after Waitrose got the sack.

Some highlights from today’s results:

  • 10% revenue growth in the UK. This would have been much bigger, except for a fire which removed 10% of existing sales capacity and also took out an opportunity to grow by a further 10%.
  • faster growth in Ocado’s international solutions business, though revenue hasn’t been recognised yet.
  • Adjusted EBITDA of £43.3 million is broadly in line with expectations. Note that this includes this impact of IFRS 16. IFRS 16 boostedadjusted  EBITDA by £15 million.

Cash on 1 December 2019 was £751 million.

A week later, Ocado raised £600 million in 2025 bonds, giving it plenty of headroom.

(This is the big problem for shorters: it’s not running out of money soon! I note that the disclosed short positions now add up to 3.1% shares outstanding, up from 2.4% in December.)

With regard to net cash or net debt, the adjusted net cash position was just £142 million on 1 December 2019. I would watch out for this reducing to a net debt position, as the proceeds from the £600 million bond issue are spent (or consumed by losses!)

CEO comment: the CEO seems particularly enthused about international operations. New international clients have been acquired in Australia and Japan, and Ocado’s robotic facilities will help partners in Canada and France. And he remains as idealistic as ever:

The landscape of grocery retailing globally is changing. We are excited to be able to play a leadership role through Ocado Retail, our joint venture with M&S, and through our Solutions partnerships, as we fulfil our mission of changing the way the world shops”.

  • “Ecosystem” – Ocado is developing facilities of different sizes, with a mini-customer fulfilment centre opening in Bristol. Ocado calls this “a uniqe and flexible ecosystem”.
  • Robots – robotic arms are helping to fulfil customer orders in Erith (south-East London). Ocado is working on “vision systems, tactile gripper technology and machine-learning” so that robots can do more.
  • Efficiency KPIs moving in the right direction.

And Ocado still bullish on the food offering at M&S:

“…we believe M&S has substitutes at the same price or lower, and of the same quality or better, for the majority of those currently supplied by Waitrose (which represent under 4,000 products out of the total range of 58,000).”

Profitability still very mixed. There are benefits from scale at Erith offset by one-off issues and investment

My view

My problem with Ocado is the same I have with the logistics industry in general: a lack of proprietary technology. What is to stop other supermarket partners from offering similar services?

The best argument for Ocado is probably to do with its scale. If it is the largest online fulfilment partner, then large international supermarkets might feel compelled to turn to it for help (and there is evidence that this is happening). If it’s impossible for others to compete due to a lack of scale, then perhaps Ocado’s investments could yield a satisfactory return

But it has been around for a long time – 13 years on the stock market – and should have started posting some serious profits by now.

The stock now seems to be a bet on international expansion and cutting-edge technology. But again, without truly proprietary assets, its power to earn above-average returns will be limited.

Would I bet against it? In the current credit environment, no. Ocado was able to borrow from the bond market at just 0.875%. There will be great money to be made from shorting if/when financially unsound companies are shut out from the bond market, but now is not that time.

I certainly don’t get the “hype” associated with Ocado’s £9 billion valuation and my sympathies are firmly with the bears. I clearly don’t understand its technological edge and the power of its ecosystem!



A shorter report than usual. See you tomorrow!



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