Ocado Group Plc

Ocado Group Plc (LON: OCDO) is an online grocery retailer Company. It develops end to end operating solutions, using its technology for online grocery retail.

On 13 May 2021, the Company will hold its Annual General Meeting.

Rationale for Valuation – Avoid at GBX 2,230.00

• On a trailing 12 months, the Company’s Price/Cash Flow, EV/Sales and EV/EBITDA multiples are significantly higher than the Diversified Retail industry multiple, reflecting overstretched valuations.
• On the leverage front, the debt-equity ratio stood at 0.80x in FY20, which was higher than the industry median, reflecting that the Company is highly leveraged compared to the industry.
• The Company's net margin and Return on equity were in the negative zone from the last three years.
• From the technical standpoint, the stock is currently trading below its mid-Bollinger band (200 SMA) at GBX 2,347 and hence could face resistance around these levels.

Key Risks

• Many governments have increased taxes on such items, which can influence online players and overall goods industry.
• Due to Brexit related uncertainties, consumer confidence is also dented while the labour costs can potentially rise.
• The outlook for sales is uncertain due to the rapidly evolving nature of Covid-19 disruption.

Recent News

On 16 April 2021, the Company invested in Oxbotica Ltd, an autonomous vehicle software company. It will invest around £10 million in Oxbotica.

Trading Update (for the 13 weeks to 28 February 2021 (Q1 FY21), as on 18 March 2021)

(Source: Company Website)

• The Company witnessed strong demand from online grocery and progress on average orders per week of around 2.5%.
• In Q1 FY21, the retail revenue increased by around 40% YoY, with an average order size of £147.
• In FY21, Ocado Retail will be opening two standard sized Customer Fulfilment Centre’s.
• Erith CFC (Customer Fulfilment Centre) ended the period at more than 150,000 orders per week.
• Marks & Spencer Group (its joint venture firm) products were accounted for more than 25% of the average basket.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

In Q2 FY21, the Company expects positive revenue growth as it continues to ramp the Bristol CFC. Ocado Retail has returned to a 'normalised' trading week, with sales and EBITDA growth in future quarters. Recently, it had commercially partnered with Oxbotica. As part of this collaboration, the Company will outfit a subset of its warehouse vehicles and delivery vans with data capture capabilities, including video cameras, RADAR, LiDAR and other sensing devices. In the first quarter of 2021, the Company made good progress, with strong demand for online grocery and the continuation of a smoothed trading week. However, OCDO remains cautious on the FY21 outlook, due to the current pandemic trends.

Moreover, the business is more exposed to the economic uncertainties arising from the Covid-19 pandemic.  In the future, the Company may face emerging headwinds and cost pressures. The stock made a 52-week low and high of GBX 1,561.50 and GBX 2,914.00, respectively.

Based on the headwinds faced by the Company, we have given an “Avoid” recommendation on Ocado Group Plc at the current price of GBX 2,230.00 (as on 19 April 2021 at 8:00 AM GMT).

WM Morrison Supermarkets Plc

WM Morrison Supermarkets Plc (LON: MRW) is a United Kingdom-based Company, which deals in retail supermarket stores and associated activities.

On 11 May 2021, the Company will release its Q1 trading statement.

Rationale for Valuation – Buy at GBX 182.03

• The online sales tripled during the year, while the capacity increased fivefold. Both online and wholesale division remained profitable.
• The final ordinary dividend was 5.11 pence, brought the total full-year dividend to 11.15 pence, representing a 27.1% jump against FY20.
• As per valuation metrics, EV/Sales and EV/EBITDA (on a trailing 12 months) multiples are currently lower than the Food & Drug Retailing industry multiples.
• The company's debt/equity ratio in the past three years was considerably below the industry median. In FY21, the debt/equity ratio was 0.81x.
• From a technical standpoint, 50-day SMA (GBX 176.57) supports an upside potential.

Key Risks

• Change in regulation pertinent to Food Safety and Product Integrity can lead to additional costs.
• The Covid-19 pandemic and Brexit restricted the movement of goods and services the prices of raw material, which eventually impacted the cash flows.

Financial Highlights (for the 52 weeks ended 31 January 2021 (FY21), as on 11 March 2021)

(Source: Company Website)

• Total revenue increased by 0.4% YoY, with an increase in like-for-like sales of 8.6% (excluding fuel and VAT).
• However, the profit before tax and exceptionals decreased by 50.7% YoY and EPS before exceptionals reduced by 54.9% YoY.
• Free cash outflow for FY21 increased to £450 million (FY20: £238 million inflow) because of low profitability, higher stock and lower fuel sales.
• Furthermore, the Company had a net debt of £3,169 million as of 31 January 2021, while ROCE decreased to 3.9% YoY.
• In December 2020, the Company announced a previously deferred H2 FY20 special dividend of 4.00 pence, which was paid in January 2021.
• The Board proposed a final ordinary dividend of 5.11 pence, bringing the full-year ordinary dividend of 7.15 and full-year total dividend of 11.15 pence.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company expects 2022 profit before tax and exceptionals to be higher than the financial year 2021. It also expects a strong free cash flow, with a significant reduction in net debt. The net debt/EBITDA for FY22 is expected to be no higher than the FY20 level of 2.4x. On the operational front, the Company would convert 300 McColl’s stores into Morrisons Daily over the span of the next three years. Overall, the Company had entered FY22 with a strong trading momentum and robust operational gearing. In January 2021, the Company has paid the deferred special dividend of 4.00 pence per share. The Company has shown strong performance with rapid growth in wholesale and online channels and increased market share. The stock made a 52-week low and high of GBX 157.78 and GBX 205.41, respectively.

Based on the factors discussed above, we have given a “BUY” recommendation on WM Morrison Supermarkets Plc at the current market price of GBX 182.03 (as on 19 April 2021 at 8:00 AM GMT) with a lower double-digit upside potential based 15.06x Price/NTM Earnings (approx.) on FY22E Earnings Per Share (approx.).

*All forecasted figures and Peer/Industry information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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