Ocado Group PLC - Facing Unprecedented Challenges, With the Small Suppliers

United Kingdom-based 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. The company’s objective is to transmute online grocery via automation and cutting-edge technology.

On 14^th July 2020, the company will release its interim results.

Update (as on 6^th May 2020) – Representing Business Response to COVID-19 and Current Update
Throughout the continuing Coronavirus crisis, Ocado Retail has shown great resilience. At the start of the COVID-19 outbreak, demand improved significantly, almost overnight. During the unprecedented crisis, the company is also recognising the exceptional contribution of the front-line colleagues by giving them a bonus of 10 per cent. In the Second Quarter to date, the retail revenue increased by 40.4% as compared with the previous quarter (Q1 FY20: growth of 10.3%). Currently, the company is processing 110 thousand standard sized orders per week against the first quarter of 2020. During the period, the group has attained a milestone, with the delivery of the first international CFCs (customer fulfilment centres) to the international partners Sobeys and Groupe Casino. Overall, the company maintains decent liquidity and position with cash of £1.2 billion.

Share Price Performance

Daily Chart as at May-06-20, before the market closed (Source: Refinitiv, Thomson Reuters)

Ocado Group PLC’s shares were trading at GBX 1,732 before the market close (at 10:47 AM GMT+1) on 6th May 2020 and were up by 3.1% versus the previous day closing price. Stock 52 weeks High and Low are GBX 1,751.50 /GBX 994.01.

Valuation Metrics

(Source: LSE)

As on 31st March 2020, the Price to Sales multiple of the OCDO was 4.8x, which was higher as compared with the Food & Drug Retailers industry average of 0.4x. It indicates that the company is trading at a higher multiple as compared to its peers.

Key Risks
The company’s business is facing some uncertainties, which could affect the performance of the company. Brexit could also hamper the supply chain of the company, affecting the operations of the company. Some more risks: a technological disruption could affect the company’s overall performance; failure of engineering capabilities to be able to execute its business could hamper the revenue and profitability of the company; Failure of food safety or product safety could degrade the reputation of the company; any change in regulations or policies could impact the company’s revenue and costs.

Conclusion
The group continue to target further Solutions deals which would generate further cash fees but would negatively impact short term profits.Therefore, the company has suspended the outlook for Retail Revenue for FY2020 until OCDO can accurately estimate. In the financial year 2019, the company has made significant progress and signed up with three major supermarkets across three geographies, including a JV with M&S in the UK, entered into an agreement with Australia-based Coles to develop two CFCs. Currently, uncertainty persists over the lockdown scenario. Presently, the company is trading near the 52-week high, raising doubts at its upside potential at the current price level.

Based on the factors as highlighted above, we recommend investors to keep a “Watch” on the stock at the current price of GBX 1,751.50 (as on 6^th May 2020, before the market close at 10:10 AM GMT+1), with support from few catalysts needs to be evaluated at a later stage.

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