Ocado - Green for go.
All,
Please find our existing analysis here.
We are pleased to see the Tech Solutions business become EBITDA positive. The jump in capacity fees is earlier than we had modelled and will take some of the focus away from the M&S JV. Our base case is that M&S will choose to consolidate the JV when the opportunity arises in 2024. Buying out Ocado may take M&S longer, but this seems equally likely. There is a final £156m (of the £750m original price for the 50% stake) due next year. Given the recent performance, M&S will be looking for a discount on the outstanding, but we do not see an abandonment of the online strategy. Execution is still needed, but Ocado has weathered the post-Covid pull back in Retail and is now seeing the green shoots of its pivot to the Tech Solutions business.
Investment Considerations:
- The SUNS currently yield nearly 11%, close to where we see returns matching risk. Surprisingly Ocado broke even in H1 (from an EBITDA perspective), and Revenue and profitability will continue to rise in the 2nd half of FY22/23. Over the next few days, we will update our model and finalise where we wish to position ourselves.
- We see the outstanding SUNs/Converts approx. 50/50 covered by the values of the 50% stake in the Ocado Retail business and the Technology business respectively. The former has been going through a tough market, and the latter is still very much an equity story, offering primarily option value. But Ocado is an attractive, growing company with a first-mover advantage that is an asset of its own today (albeit depreciating and to be replaced with value from growing cash flows).
Update H123:
- Some pleasant surprises in the overall numbers:
- Tech Solutions: Capacity fees of £175m were well above our expectations, and EBITDA was positive at £6m (-£56M forecast). The EBITDA number included £5m from the sale of the Dartford facility. Capex will peak in FY23, and in H123 it reached £149m.
- Ocado Logistics: Revenue +2% in line with cost increases => EBITDA flat at £15m. The business is seeing orders grow, but this is being matched by falls in basket size. As a fee-based business, the impact on EBITDA/Revenue is small.
- Ocado Retail EBITDA of -£3m was better than our forecast of -£27m, partly through better margins, but also through OpEx control. As with the UK Logistics business, orders are rising but basket items are still falling.
- Cash outflow slowing: FCF was £145m better than forecast, comprised of £80m EBITDA (including £21m of exceptional charges), £30m of working capital and £12m in capex.
- FY Guidance is unchanged, the Tech Solutions business is outperforming, we had EBITDA at around -£80m, but with capacity fees rolling in quicker than expected, and management expects a positive contribution. We will update our model over the coming weeks.
- M&S has the option to consolidate the Ocado Retail business from 2024. M&S also has payments of up to £156m due to Ocado as part of the original £750m purchase price. We expect the £18.7m charge Ocado took relating to the JV shows that Ocado expects a (modest) discount.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055