Online supermarket Ocado’s (OCDO) shares ripen up 5.2% to 584.4p as it announces another international tie-up, an agreement with Sweden’s leading grocer ICA.
Hatfield-headquartered Ocado’s fourth international deal in the last two years is welcomed by the market, though the somewhat subdued share price reaction perhaps reflects the fact the tie-up will require yet more capital expenditure (capex) going forwards.
A highly-rated ‘marmite’ stock often in the sights of short-sellers, Ocado’s shares have soared in the wake of previous agreements to power overseas supermarkets with its technology known as the OSP (Ocado Smart Platform).
These include deals struck with France’s Groupe Casino and Canada’s Sobeys, building upon CEO Tim Steiner’s long-promised first overseas deal with a mystery regional European retailer.
ABOUT ICA
Its latest deal has been struck with ICA, the leading grocery retailer in Sweden with around 1,300 stores across the country and a market share of around 36%, generating sales of SEK 106.5bn in 2017.Ocado will partner exclusively in Sweden with ICA to launch the retailer’s online grocery services operation.
To quote Ocado's management speak, the ‘end-to-end’ solution Ocado plans to provide will include best-in-class front-end web site functionality, supported by Ocado's proprietary ‘web shop’ and mobile grocery ordering applications; construction of Ocado's latest generation, state-of-the-art automated warehouse designed specifically for grocery ecommerce, with Ocado investing to install internal infrastructure and robots.
ICA and Ocado say they will develop their first Customer Fulfilment Centre (CFC) in the Greater Stockholm area, a build expected to take three years, and will consider developing other CFCs elsewhere in Sweden.
WHEN WILL SHAREHOLDERS SEE A RETURN?
While Ocado expects the deal to ‘create significant long term value to the business’, it says the impact of the transaction ‘should be earnings neutral in the current financial year’. Furthermore, while Ocado expects minimal additional capex in full year 2018, it guides towards ‘additional capex in future years as development of the CFC project gets underway.'
As Shore Capital analyst Greg Lawless writes: ‘This is now the fourth international deal that Ocado’s solution business has signed over the last two years and the third in the last six months and shows that it continues to make progress as a licensee of its proprietary software and platform with international retailers.
'Most recently it signed deals with Group Casino in France, together with Sobeys in Canada. As ever, the development costs are front loaded and the latest deal with ICA is expected to be implemented by the end of 2020.
'Whilst we welcome the international deals we continue to questions their materiality. We ask when will these international deals make a fundamental difference to both revenues and the earning line and what will it do for return on capital employed (ROCE)?.'
JAM TOMORROW
Ocado’s full year results (6 Feb) revealed a lurch from pre-tax profit of £12.1m to a £500,000 loss, rising net debt, a dilutive placing and a warning 2018 profits will be constrained by ongoing investment to ‘accelerate’ growth.
Competition in the groceries space remains fierce - J Sainsbury (SBRY) and Asda plan to combine in a defensive sector super-merger - and Ocado was cold-shouldered again following more recent first quarter results.
Retail sales growth of 11.7% to £363.4m disappointed, deliveries impacted by winter storms and investors unimpressed by a 0.4% decline in Ocado’s average order size to £110.45.
