ii view: Ocado revenue up but losses widen

Now partnering M&S, should investors treat Ocado as a grocery retailer or a technology firm?

Full-year results to 1st December 2019

• Revenue up 9.9% to £1.76 billion
• Group adjusted earnings (EBITDA) down 27% to £43 million
• Loss before tax of £214.5 million up from a loss of £44.4 million
• Net cash up 184% to £142.4 million

Guidance:

• Retail revenue growth of 10-15%
• International Solutions adjusted earnings (EBITDA) to decline due to continued investment

Chief executive Tim Steiner said:

"Although statutory results reflected a combination of factors, including the impact of the Andover fire, the underlying performance of Ocado Retail and the successful growth of Ocado Solutions were very encouraging.

"Our progress over the last twelve months has demonstrated many of Ocado Group's most important characteristics: resilience, innovation, focus and execution. 

"The first half of this year will see a new milestone for Ocado Group; the opening of the first customer fulfilment centres for our international partners. 

"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".

ii round-up:

This online grocery retailer was founded in 2000 and listed on the London Stock Exchange in July 2010 at an IPO price of 180p per share. They are currently worth 1,250p.

Today, Ocado (LSE:OCDO) operates two divisions - Retail and Solutions. 

Retail is the company’s own online supermarket business, now run as a 50:50 joint venture with Marks & Spencer (LSE:MKS). Preparations for the September 2020 switchover from Waitrose to M&S products are well underway.

Solutions is responsible for corporate partnerships with online retailers using the Ocado Smart Platform software and technology.

The combined revenue of its global partners is now £210 billion. Around 1,000 robots power its latest warehouse.

For a round-up of these full-year results, please click here.

ii view:

The difficulty in accurately valuing a growing but loss-making online business such as Ocado continues to divide both analysts and investors. Given a stock market value of £8.8 billion, roughly equal to both Sainsbury's (LSE:SBRY) and Morrisons (LSE:MRW) combined, investors already appear to be pricing in a lot of good news. 

Arguably, other traditional supermarkets do not offer a direct comparison. Ocado has been winning large contracts with significant overseas retailers. In 2019, it signed its eighth and ninth Solutions customers - Coles in Australia and Aeon in Japan. 

Its technology tag warrants serious consideration when assessing prospects. Preparations are advanced for the opening of its first international Customer Fulfilment Centres (CFC), for Groupe Casino in Paris and for Sobeys in Toronto.

However, while these full-year results serve to demonstrate resilience in the face of the previous warehouse fire and continued international growth, investors are still undertaking something of a ‘leap of faith. As such, and at current levels, Ocado shares remain an investment for higher risk investors.

Positives: 

• Revenue or sales grew by 9.9%
• Fees invoiced to International Solutions partners grew by 38%
• Funding position strengthened - a further £600 million recently raised

Negatives:

• Price to net asset value of 14.3, above the three-year average of 8.2 
• Doesn’t pay a dividend
• Ongoing need for investment – 2019 capital expenditure of £260 million (2018: £213 million)

The average rating of stock market analysts:

Weak hold