Breakingviews - Ocado investment case requires heavy guesswork

FILE PHOTO: An Ocado truck returns to the Ocado depot in Hatfield, southern England July 21, 2010. REUTERS/Suzanne Plunkett/File Photo - RC1DDFC3D310

LONDON (Reuters Breakingviews) - Ocado’s long-awaited U.S. partnership is about as good as investors could have hoped for. That explains the UK online retailer’s 63 percent share-price rise on Thursday. Yet thin detail means Ocado’s true valuation requires heavy guesswork.

The 18-year-old retailer is best known in Britain for its online-delivery partnership with upmarket grocer Waitrose. In recent years, however, Ocado has focused on striking deals with international supermarkets worried about e-commerce behemoth Amazon creeping onto their turf. The British group’s expertise building automated warehouses for processing and packaging orders has led to partnerships with France’s Groupe Casino, Canada’s Sobeys and Sweden’s ICA Gruppen in the past six months.

Kroger’s commitment involves building up to 20 warehouses in three years, compared with just one each in the other deals. Financing all that would be a stretch for Ocado, which last year covered just two-thirds of its investment needs with operating cash flow. Hence Kroger is offering to buy 183 million pounds worth of new Ocado shares and pay exclusivity and consultancy fees early, reducing the UK group’s capital-spending burden. Add this to a 143 million pound February share placement, and Ocado has raised 326 million pounds of capital, enough to build more than 10 warehouses using a benchmark of 30 million pounds per site. Larger partner Kroger’s balance sheet could help build the other half.

After Thursday’s Kroger-related bump, Ocado’s share price has more than tripled in 12 months. That’s a significant blow to short sellers, who have about 7 percent of the company’s stock on loan, according to the latest Financial Conduct Authority data. Ocado bulls may be getting ahead of themselves, however.

The group released scant detail about the deal’s financial impact, which is understandable since that would affect negotiations with other retailers. Using Goldman Sachs’ profitability estimates, the new Kroger warehouses are worth about 1.82 pounds per share. Heady investors bid up Ocado’s stock by almost 3.50 pounds on Thursday, sending the barely-profitable group’s market value to almost 6 billion pounds. Net out debt, and its value is about 4 times consensus 2018 sales, a multiple that’s higher than Amazon’s, and usually reserved for companies growing at more than 40 percent per year based on a Bernstein analysis.

Kroger will boost Ocado’s long-term growth rate beyond last year’s 13 percent. Assuming much beyond that requires a hefty dollop of guesswork – and optimism.


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