Ocado/Aeon: aisle be there

The prospect of Amazon filling its trolley with groceries terrifies the world’s supermarket chains. Ocado is there to reassure them — at a price. Aeon of Japan is the latest hyperventilating customer of the automated warehouses group. The endorsement by Asia’s largest supermarket group sent Ocado’s UK-listed shares up 11 per cent.

Boss Tim Steiner has wryly hailed the company’s “18-year overnight success”. Ocado’s journey from an overpriced player in low-margin food deliveries to whizzy tech company has been slow, yet remarkable. But does it justify a near quadrupling of the share price over just two years to nearly £9.4bn?

There are still plenty of sceptics. More analysts currently recommend selling the stock than buying it. Nearly 10 per cent of the shares are on loan to short-sellers. That is high, though down on the whopping 35 per cent in 2016. The share price recently curtsied by a fifth on worries about copycat competition. A tie-in with US grocer Kroger is proving tricky, sneer market rumour-mongers.

Fears are fostered by a dearth of financial data on tie-ins. Even so, they look overdone. Take the latest deal. A fair bit of guesswork is required. By 2025, the sales capacity of the new warehouses should be about £1.5bn, rising to £7bn by 2035. Ocado will take a fee, perhaps 3 to 6 per cent. Its costs could be about half that.

Numis reckons the targeted £7bn revenue capacity creates about £1.6bn of present value for Ocado, equivalent to about 20 per cent of its market worth. A lot is already in the price. Bulls were counting on Ocado to pull off some big deals.

Friday’s tie-in will further delay the date when Ocado becomes profitable. Accounting rules mean that costs are booked as they are incurred, but the revenues are not recognised until the warehouses open. Before this deal, it was expected to cross the line in 2022. It could now be another two years into the future. Jam tomorrow should be worth the wait, for once.

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