Ocado Group PLC (OCDO)

Ocado Group PLC is the world ‘s largest online grocery retailer, headquartered in the Hatfield, the UK. The group has developed a unique end-to-end operating solution for online grocery retail. As on July 26, 2010, the shares of the group were admitted to the main market of the London Stock Exchange.

Institutional Ownership: Capital Research & Management Co. (Global Investors), Baillie Gifford & Co. and Citigroup Global Markets Ltd. are the major institutional investors in the group, and the top ten institutional investors hold approximately 34.49% of the group's shares. (Source: Thomson Reuters)

Recent Deals
As on August 05, 2019, the company completed the arrangement with Marks and Spencer Group Plc to establish a 50-50 joint venture to provide solution services underpinned by Ocado Smart Platform and the provision of branding and sourcing from M&S, which was earlier announced on February 27, 2019.

As on June 06, 2019, the group has announced the acquisition of 58% interest in Jones Food Co. Consideration involved in this was disclosed by the group.

Trading Update- Q3 FY19

Source: Company Filing (as on September 17, 2019)

Led by successful results of joint venture between The Ocado Group Plc and Marks and Spencer Group Plc, which was completed on August 05, 2019, the group’s retail sales increased by 11.4% to £386.3m from £346.9m recorded in the year-ago period, driven by solid average orders per week growth of 12.1% recorded in the third quarter of FY19. Average orders per week during the quarter under consideration surged to 314,000 from 280,000 recorded in the year-ago period. However, average orders size was marginally reduced to £105.42 against £106.26 recorded in the same quarter of the corresponding financial year.

Stock Performance
 
Daily price chart (as on September 17, 2019), before the market close. (Source: Thomson Reuters).

While writing the stock performance (at 01:51 PM GMT), shares of the company were trading at GBX 1,352.50 and increased marginally against the previous closing level. In the year-ago period, its shares have registered a 52w high price of GBX 1,440.50 and a 52w low price of GBX 730.60 respectively. It has delivered a price return of approximately 48% on a YoY basis and approximately 71% on a YTD basis, respectively.

Peer Comparison

Source: Thomson Reuters

Conclusion                                                                                             
Despite a decent quarterly result reported by the group, we believe the stock was quoting at a steep higher valuation against the peer group companies. As it was clearly visible in the peer analysis, that in terms of Price-to-Earnings, Price-to-Book Value per share, EV/EBITDA and EV/Sales, the company was trading at a substantially higher valuation against the peers' average. Also, the group's LTM Return on Equity (ROE) stood at negative 35.7% whereas peer's average ROE stood at 6.6%, despite the fact that retail industry is in pain in the UK. A negative ROE also reflects that the company is not creating any value to the shareholders. Also, the group's long-term debt is substantially higher within the selected peer group.

Therefore, based on the overstretched valuation, we have given an "Avoid" recommendation at the current price of GBX 1,352.50 (as on September 17, 2019).

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