Shares
in
the
UK
struggling
online
grocer
Ocado
(OCDO)
have
jumped
15.8%
after
the
company
announced
a
reduction
in
interim
losses
and
a
welcome
boost
from
its
key
technology
division.
Ocado’s
pre-tax
losses
reached
£154
million
for
the
six
months
to
June
2,
the
company
said
today,
a
steep
reduction
on
last
year’s
huge
loss
of
£290
million.
The
online
grocer
also
posted
six-month
revenue
of
£1.54
billion,
driven
by
what
it
said
was
a
21.8%
jump
in
demand
for
its
technology
solutions
business,
which
provides
robots
and
software
to
retailers
looking
to
better
their
own
ecommerce
operations.
The
boost
comes
days
after
the
broker
Bernstein
downgraded
the
company’s
shares,
a
move
that
itself
triggered
a
share
price
slump
of
12%.
Year
to
date,
the
shares
are
still
down
48.7%,
however,
a
far
cry
from
its
lofty
performance
in
February
2021,
when
shares
were
trading
at
around £28
in
the
midst
of
the
pandemic. Over
the
three-
and
five-year
period
to
July
16
2024,
shares
have
fallen
81.14%
and
70.83%,
respectively.
Last
month
Ocado
was booted
off
the
FTSE
100.
Why
Have
Ocado
Shares
Been
Struggling?
Twin
headwinds
of
a
cost-of-living
crisis
and
a
return
to
“normal”
shopping
have
weighed
on
Ocado’s
prospects.
After
peaking
at
14%
of
all
shopping
activity
in
2021,
online
ordering
has
since
reverted
to
its
pre-pandemic
norms
of
11%
of
the
market.
But
Ocado
has
also
been
slow
to
make
good
on
proposed
business
deals.
Indeed,
it
hasn’t
yet
agreed
a
final
payment
for
the
50%
stake
of
Ocado
Retail
it
sold
to
Marks
&
Spencer.
The
companies’
ensuing
legal
battle
is
ongoing.
M&S
is
adamant
it
should
not
pay
the
remaining
£190
million
it
originally
owed.
In
addition,
US
supermarket
chain
Kroger
has
decided
to
close
three
stores
powered
by
Ocado’s
technology.
The
Morningstar
View
“Ocado
Group
reported
fiscal
2024
half-year
results,
with
revenue
up
12.6%
and
its
adjusted
EBITDA
reaching
£71.2
million
ahead
of
expectations,”
writes
Morningstar
director
of
research
Ioannis
Pontikis
in
a
note
today.
“Ocado
Retail’s
performance
was
driven
by
customer
growth,
an
increase
in
average
orders
per
week,
and
the
average
basket
value
increasing
by
1.8%.
Profitability
was
also
EBITDA-positive
at
£20.7
million
with
progress
expected
to
be
driven
by
efficiencies
and
operational
leverage
toward
a
mid-single-digit
EBITDA
margin
in
the
midterm.”
Pontikis
maintains
that
Ocado
is
undervalued,
assigning
the
company
a
5-Star
rating,
driven
by
its
technology
division,
and
more
specifically
the
Ocado
Smart
Platform,
which
has
contributed
to
the
firm’s
recent
share
price
bump.
“Technology
Solutions
revenue
jumped
21.8%
and
one
new
customer
fulfilment
centre
has
gone
live.
26
sites
are
now
up
and
running
with
management
reporting
EBITDA
of
£35
million,”
he
continues.
“Our
constructive
view
on
the
stock
is
supported
by
our
thesis
that
the
Ocado
Smart
Platform
is
a
leading
provider
of
online
grocery
fulfilment
solutions
for
large
brick-and-mortar
grocers,
especially
as
online
penetration
grows
in
developed
markets.”
Ocado
now
expects
its
underlying
group
cash
outflow
to
improve
by
about
£150
million
from
£100
million
due
to
lower
capital
expenditure.
The
business
also
has
£300
million
in
credit
lines
at
its
disposal
to
fund
growth
until
it
starts
to
generate
organic
positive
free
cash
flow.
Pontikis
also
argues
global
opportunities
and
future
tie-ups
justify
Ocado’s
Fair
Value
Estimate
of £9.20.
“Our
valuation
reflects
online
penetration
rising
to
25%
by
2040
in
developed
economies
with
Ocado’s
solutions
capturing
a
high
single-digit
market
share
in
these
digital
grocery
markets
through
Ocado’s
partners,”
he
says.
Key
Morningstar
Metrics
For
Ocado
• Morningstar
Fair
Value
Estimate: £9.20
• Morningstar
Star
Rating: ★★★★★
• Morningstar
Economic
Moat
Rating:
None
• Morningstar
Uncertainty
Rating:
Very
High
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