Staple Retail equity research

Explore the most viewed and latest equity research and media content for companies within the Staple Retail sector. Stocks in this sector provide goods and services in the food wholesale and drug retail industries.

Staple Retail equity research

Explore the most viewed and latest equity research and media content for companies within the Staple Retail sector. Stocks in this sector provide goods and services in the food wholesale and drug retail industries.

Latest Content

Ocado Group

Value contingent on the solutions business

Recommendation and upside We are initiating coverage of Ocado Plc. (market cap. of £3.3bn and a float of c.67%) with an ‘Add’ recommendation and a target price of 570p (c.13% upside). Our upside is driven by the robust growth in both business segments. The solutions business is likely to take the driver’s seat as Ocado monetises the proprietary solution OSP by offering it to other retailers. Management’s recent success in forging two partnerships in France (traditionally inclined towards a network of ‘Drives’ vs home delivery in the UK) and North America is strong evidence of Ocado’s top-notch technology-driven proposition. We estimate the company will continue to forge similar partnerships in future, largely confined to the USA and Europe. The retail segment is also likely to sustain the ongoing momentum, due to: 1) expansion of the online grocery format in the UK – the fastest growing format (+53.8% by 2022 vs 15.4% for the overall UK grocery market), – underpinned by the ongoing structural shift in consumers’ buying preferences, 2) Ocado’s ability to gain market share, on the back of a best-in-class business model (among one of the few profitable online grocers across the globe), becoming more competitive by benchmarking the prices against Tesco and economies of scale – gradual increase in SKU count, increased delivery slots with higher geographical density and better routing. In 2014, investors lost faith in Ocado’s growth story after management failed to add new clients in its solutions business (although the retail business was growing satisfactorily). However, the stock price has more than doubled since November 2017 after the company announced two back-to-back deals in this segment (Casino and Sobeys in France and Canada, respectively). The company is likely to witness strong cash generation after the high investment phase (capex at c.10% of group revenue vs 2.4% for traditional UK grocers) in technology and new CFCs normalise in the out-years. Business and Trends Ocado is one of the most promising pure-play online grocers in the world. It relies on proprietary / best-in-class technology for online retailing, logistics and distribution of products (e.g. use of bots in fulfilment centres, routing software for efficient product delivery, artificial intelligence to engage customers). The UK-based retailer operates through two business segments, retail and solutions. The retail segment (14.6% CAGR during FY12-16) generates c.92% of total revenue, which includes sale of goods through ‘Ocado.com’ to an active customer base of over 580,000 (covers 70% of the UK population and 50% of total area). It sources the majority of the products from Waitrose and, hence, is perceived as offering good quality products but at slightly expensive prices. Although Ocado commands only a 1.3% share of the UK grocery market (worth £185bn), it ranks third (after Tesco and Sainsbury) in the online food segment with a market share of c.16%. The firm’s non-food business is still in the nascent stage and constitutes c.7% of total retail sales. It started in 2013 with launch of pet goods website (Fetch.co.uk), followed by kitchen goods website (Sizzle.co.uk) in the subsequent year. In 2016, the company launched a premium beauty destination site and flagship physical store, Fabled, in partnership with Marie Claire. The solutions business involves monetisation of Ocado’s proprietary solution ‘OSP’ (owns over 200 patents / patent applications) by offering it to other retailers. The solution presents a blend of automated warehousing and distribution capability, and physical fulfilment centres to assist the retailers to launch / expand their e-commerce business. The fulfilment assets are modular (can be built to almost any size) and scalable (can be built in multiple phases) and, in turn, help the business partners to operate in a capital-light manner. OSP tasted its first commercial success in 2013 by entering into a 25-year agreement with UK’s fourth largest grocer Morrisons – the task involved the launch and operation of the online business (Morrisons.com). The two companies formed a JV, with equal sharing capacity rights of Ocado’s Dordon customer fulfilment centre (CFC). Morrisons agreed to pay a combination of upfront cost, annual service cost, R&D expenditure and a share of the positive EBIT from the new business. However, the deal was renegotiated in 2016: 1) Ocado agreed to expand Morrisons’ delivery coverage by granting it additional capacity at Erith CFC (scheduled to open in 2018), 2) Ocado became free to forge partnerships with other UK retailers, excluding Tesco, Sainsbury’s, Asda, Aldi and Lidl, and 3) in return, Morrisons terminated the profit-sharing clause with Ocado for the next 15 years. Need to know As of FY16, Ocado’s retail business enjoyed slightly better profitability vs solutions (6.5% vs 5.5%) and accounts for c.90% of the group’s EBITDA. However, contribution of the solutions business should rise in the coming years as retailers across globe are shifting their focus to strengthen the e-commerce platform (triggered by Amazon’s big leap into grocery business with the acquisition of Whole Foods last year). Despite a mid single-digit EBITDA margin and negligible tax payments (benefiting from the accumulated tax losses), Ocado has failed to generate positive FCF (£-21m in FY16). This is largely due to the high capital expenditure (explained above) as the entity has invested heavily in the automated warehousing capability (D&A expense at c.5% of the group revenue is also almost double that of UK grocers). No wonder, the group has a depressed ROE (c.5%; turned positive in 2014) and ROCE (c.150bp below the 7.2% WACC). Upcoming triggers We expect the next major trigger for the company to be the onboarding of new clients in the solutions business. Moreover, a sustained top-line momentum in the retail segment (>10% yoy) and improving profit margins are also likely to nudge investors’ sentiment. Moreover, a takeover attempt by big retailers (to improve their e-com proposition in an increasingly competitive landscape) cannot be ruled out considering the c.67% free float for the stock. The grocer is a strategic fit especially for Amazon – the US retailer has more to lose if Ocado’s solutions business decides to bulk-up opponents such as Kroger and Wal-Mart.

  • 23 Feb 18
  • -
  • -

Real-time access to the latest equity research, for the first time.

📑🔎📊📈

Historically, Private Investors have had access to significantly less professional investment research and information than institutions, funds, and banks. At Research Tree, we're trying level that playing field by aggregating the latest equity research & video content from over 400 analysts at 34 City brokerages and research houses in one platform. 

 

Our goal is simple: provide retail and non-institutional investors with full access to the latest valuations, target prices, analysis, and financial models on the companies they care about, in real-time.

 

Our Partners

🏛

Research Tree aggregates the latest equity research from over 400 analysts at 34 City brokerages and research houses in one platform, giving users full access to the latest valuations, target prices, analysis, and financial models on the companies they care about, in real-time.