Ocado – Chrysalis
All,
Please find our updated model here.
Ocado is emerging from its Retail beginning to become a technological company focused on Retail Logistics; the business is still some way from being free cash flow positive and needs to demonstrate the timely conversion of pledges to orders and delivery of customer fulfilment centres (CFCs). Ocado plans to move from depending on client grocery offerings to being a capacity provider, but is it far enough along that route to be considered a debt story?
Investment considerations.
- The December 2025 SUNs currently yield 7.5%, with the 26 and 27 SUNs yielding 10% and 11%; Ocado needs to refinance the 2025 Converts by the end of 2024 as the 2026 SUNs and the 2027 Converts mature within three months of each other.
- The 26 and 27s look better value than 2025, but we see this is close to equity risk, and inside 11%, we are not tempted, considering said volatility and the back-dated economics.
- Ocado still looks like an equity story and must draw a less conditional line to generating fees for capacity provision to persuade debtholders to invest.
- The 50% of the retail JV is worth about £470m to Ocado. The logistics is around £1.0bn, which covers the debt. However, Technology is some years from being free cash flow positive, making the valuation very sensitive to any delay in the build-out.
- The fact is that this will shuffle along for some time before cost and value become clearer, but there is still a monster equity cushion behind the debt
Refinancing is looming:
- Ocado is still an equity story, and selling debt without an equity kicker will require a very high coupon or an equity component (a convertible). Issuing a five-year (NC2, par +1/2 coupon) bond could soften the cost for Ocado, allowing it to refinance at a lower rate once it was generating cash.
- Debt holders will want a clear expected evolution of the Modules/CFC to be delivered and capacity payments and how that impacts any funding gap.
- We understand that the delay in delivery of modules reduces short-term capex, but it also lowers the capacity payments.
- Our model projects a further equity requirement of £300m to bring the business to being free cash flow positive. With a market capitalisation of £3bn bridging this gap is achievable.
- The 2026 £600m convertible matures in December 2025, so will need to be dealt with by the end of 2024. The £500m SUNs and the £350m Convertible mature in Oct-26 and Jan-27, and will need to be dealt with simultaneously.
FY23 Results were stronger than we expected:
- FY23 results were published at the end of February, numbers were ahead of our model and above the median of analyst consensus. Overall, we see the results as a positive development for the Tech Solutions business, and the end game for the ownership of the M&S JV is approaching. Technology Solutions has now turned to Adjusted EBITDA positive, which exceeded our model. Divisional capex was lower than we modelled, but 2024 guidance for sites and modules is in line.
- Ocado now expects the M&S JV to be deconsolidated in 2025.
M&S JV is the Retail tail-wagging the Technology dog.
- Our core thesis is that M&S will eventually buy Ocado out, leaving just a capacity fee.
- The first step will be M&S assuming control and consolidating the JV, and Ocado will retain an equity-accounted investment.
- The row between M&S has been around the range offered rather than the operational capabilities at Ocado.
- The relative importance of the Retail JV will fall rapidly over the next two years.
- A longer-term home is needed for the Retail business. M&S taking management control and consolidating the Retail business will help focus investor minds on the Technology business.
Aengus
T: +44 203 744 7055