ii view: shares in ambitious Ocado may be overcooked

2020 will go down as a year to remember for this retailer, but will 2021 be another winner?

Full-year results to 29 November

• Revenue up 33% to £2.33 billion
• Adjusted profit up 69% to £73 million
• Reported loss before tax of £44 million, down from a loss of £214 million
• Capital expenditure up 101% to £526 million
• Cash and cash equivalents up 176% to £2.1 billion

Chief executive Tim Steiner said:

“The rapid acceleration of many pre-existing trends in business and society has been a feature of the Covid-19 crisis and the dramatic channel shift in grocery is a clear example of this. The landscape for food retailing is changing, for good. As we look ahead to a post-vaccine world and a return to a new normality, Ocado Group is very well placed to enable our grocery partners worldwide to bring the best customer experience to market, responsibly, with high levels of hygiene and superior, sustainable, and proven economics.”

We also look forward to welcoming shortly both a new Chairman and CFO and the fresh perspectives they will bring on our growth opportunities. With Kroger's first CFC set to go-live in H1, and seven of our nine partners likely to be on the OSP by the end of the year, we are very excited to be ever closer to our ambition of changing the way the world shops."

ii round-up:

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). It delivers over 50,000 products, including big-name brands, a range of M&S and Ocado own brand products and a growing non-food selection.

Solutions is responsible for helping other retailers with their online offerings using its Ocado Smart Platform software and robot technology. Current retail partners include Morrison's (LSE:MRW) in the UK, Kroger in the US and Coles in Australia. 

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

ii view:

The pandemic has seen consumers flocking to home delivery options such as Ocado’s. Retail revenue during the year to late November grew by 35% to over £2.1 billion. Adjusted profits, or earnings before interest tax and amortization (EBITA), jumped by 266% to £148.5 million, helping offset increased losses for its International Solutions business. 

But positive developments for the solutions business continue. International solutions expects to see two new customer fulfilment centres open during the first half of 2021. The global market for robotic picking solutions has also been brought into sharper focus in the wake of its recent acquisitions of Kindred Systems and Haddington Dynamics. 

For investors, the outsourcing by rivals in using its services and technology through its solutions business, is arguably most exciting. The Retail business has been estimated to represent less than a tenth of Ocado’s overall group valuation. The company’s technology and assistance to other retailers requires serious consideration when assessing prospects.

That said, a legal claim over patents by Norwegian robotics company AutoStore remains in the background and is raising expected future legal costs. Similarly, additionally flagged investments in technology also helped to dampen adjusted earnings estimates for 2021, and bargain hunters will note that the share shave more than doubled over the last year. In all, and with the share price currently standing above the consensus analyst fair value estimate of just over £21, the shares look to be up with events. 

Positives: 

• The combined revenue of its nine global solutions partners is £210 billion
• Cash and equivalents of £2.1 billion on the balance sheet at the end of November

Negatives:

• Legal claim over patents by Norwegian robotics company AutoStore
• Doesn’t pay a dividend

The average rating of stock market analysts:

Sell