Interim revenue from the UK Retail arm was 5% above the average City forecast, which along with larger average customer order baskets helping underlying earnings (EBITDA) to come in well ahead of expectations.
The UK Retail business, which is a 50-50 joint venture with Marks & Spencer (LON:MKS), generated almost all the group revenues and EBITDA of £45.7m was up 87% year-on-year and 33% above the analyst consensus.
Fees invoiced to partners of its International Solutions business were up 58% to £74mln as roll-outs gained pace, though the International Solutions generated an EBITDA loss of £45mln, largely as expected.
Goldman Sachs analysts noted that Retail profit margins were 1.4% higher despite gross margins falling 1% — good news for M&S and “demonstrating operating leverage within Ocado’s online model… [and] contrasts with the negative margin impact from elevated online sales that several store-based grocers have recently flagged”.
Goldman also noted Ocado boss Tim Steiner’s belief that online channel shift from coronavirus is sustainable, with online penetration in the UK almost doubled in a few months, the US market last month reaching six times higher that of August last year and in China a major online grocery platforms saw triple-digit sales growth during COVID outbreak.
With the combined revenue of their nine current global partners standing at £210bn, whilst sales in addressable key markets are £2.8trnhe accelerated channel shift suggests to Ocado that its total fee opportunity could range from £3.5bn all the way up to £26.3bn.
Better to travel
This brings to mind the old market adage that it is often “better to travel than to arrive”, said Richard Hunter, head of markets at Interactive Investor.
“Ocado has certainly not finished its journey,” he observed.
“Perhaps in normal circumstances for a well-established company, the lack of signs for immediate profitability, no prospect of a dividend and a recent £1bn fundraising could be viewed as potential red flags.”
“However, this is not how Ocado is viewed. Sitting somewhere between a traditional food retailer and a high technology innovator gives the company two bites at the cherry,” Hunter said.
He added: “In addition, to be reinvesting in the business apace without an immediate eye on profit can be a winning strategy, as previously evidenced in the exponential growth of Amazon. As Ocado’s offering continues to set it apart from potential new entrants both in terms of scale and technological innovation, barriers to entry remain high which leaves Ocado with the prospect of signing up further large international partners.
“The conversion of great expectations into reality is starting to appear for Ocado, although perhaps not with the speed which the share price suggests.”
Many more years of losses seem likely, implied analysts at Berenberg, noting that any upgrades to the Retail joint venture profits are likely to offset by downgrades to Ocado Solutions as the group accelerates the roll-out of their e-commerce solutions to partners.
On your Marks
Analysts at Numis said the performance of Ocado Retail is meaningful for M&S, estimating that £80m of EBITDA translates into circa £25-30mln of net profit for M&S.
Clive Black at Shore Capital, house broker to M&S, noted while Ocado’s market value has mushroomed since the joint venture was announced, “the implied value of the online grocery activity in UK does not seem to feature in the M&S share price, something we find quite anomalous”.
He said within Ocado’s circa-£15bn market capitalisation, if the UK Retail element accounted for 30% of the value, “then that would imply a £2.25bn value for M&S’ stake in the UK business, which goes live in September, replacing Waitrose, a figure that would imply the whole of the rest of the M&S business has no equity value whatsoever”.
While it is likely that the UK Retail business accounts for a much smaller fraction of Ocado's value, Black felt “something does not seem to add up here”.