#OCDO Ocado - Tech solutions for online grocery automation. Clear leader in field. Inflation linked revenue contracts. Impressive founder/CEO. Interesting valuation at 671p
#OCDO Ocado - Tech solutions for online grocery automation. Clear leader in field. Inflation linked revenue contracts. Impressive founder/CEO. Interesting valuation at 671p
Generally supportive insider buying trends from various individuals, despite occasional CEO sales
#OCDO Ocado - Tech solutions for online grocery automation. Clear leader in field. Inflation linked revenue contracts. Impressive founder/CEO. Interesting valuation at 671p
Ocado Group Plc - 671p
TIKR PROFILE
https://app.tikr.com/stock/about?cid=109303666&tid=109303670&ref=lnv9v8
DESCRIPTION - Tech solutions for online grocery automation (the bulk of the business value), plus a JV with UK’s M&S in online grocery retail (which serves as proving ground for the tech solutions it sells to other global grocery retailers). As far as we can find from our research, there is currently no clear rival that competes at a similar level to Ocado in the field of online grocery automation.
INVESTMENT CASE - Looks cheap based on expected future profitability of tech solutions business. Analysts we have spoken to think the Ocado tech business alone will be doing c£500m of EBITDA in 2026 just on the contracts Ocado already has in place today, with this EBITDA then growing more thereafter without even considering incremental orders. Large optionality exists on top of this from any additional contracts signed with new customers. And then the UK retail business is probably worth around 15-20% of the current market cap but with less upside potential going forwards.
FUNDAMENTAL DATA - Market cap £5.3bn @ 671p, EV£6.2bn, 11/21 revenue £2.5bn, net income -ve £220m. Trailing EV/revenue 2.5x
LED BY FOUNDER CEO TIM STEINER - We highly recommend watching the Youtube interviews with Founder CEO Tim Steiner, a very impressive individual. They are in the final Appendix section below.
We have plans to introduce an off-shoot blog series on Founder-led companies in the future, because such investment cases share a lot of the positive aligned incentives that we seek to identify by monitoring insider transactions.
Insider dealing details
Here are all of the insider dealing transactions since June 2021
One large sale from Founder Steiner in June ‘21 - a 9% reduction of his holding. His last sale before this was one year earlier in June 2020, again 2m shares. His remaining holding as of today is 19.8m shares. His sale strikes us as a continuation of reasonable portfolio planning, rather than anything particularly concerning. He actually made larger reductions of his holdings back in 2018 and it is notable that since the share price has been fallen this year he has not sold a share for the first time in many years.
The rest of the insider dealing log since June 2021 shows a flurry of buys from several individuals.
Jorn Rausing is a member of the billionaire packaging family who created TetraPak - he has been a consistent buyer of large chunks of Ocado stock and is now the fourth largest shareholder with c9% of the shares. He added £7.4m at approx 659p on 15 and 16 September.
The largest shareholder (14.5% of outstanding) is London & Amsterdam Trust Company, a holding company controlled by Soros prodigy and investment wizard Nicholas Roditi. A link to a brilliant biography piece on Roditi by Swen Lorenz’s excellent ‘Undervalued Shares’ blog is in the appendix.
Founder Tim Steiner’s full personal dealing history in Ocado stock:
More details
Based on our findings, Ocado’s tech solution business is the standout leader in automation for online grocery retailing. Its solutions make online grocery orders profitable for the retailer at a similar margin to normal in-store sales, instead of the alternative “pick-in-store” method which is at best a break-even strategy for retailers.
The company has been in a heavy investment phase and will continue to be for a few years, but we are also getting closer to a period where the tech solutions business should move into profitability.
For the time being the Retail JV with UK retailer M&S is irrationally dominating movements in the share price. Given the poor consumer outlook, this is creating an opportunity for longer term minded investors to buy the tech solutions crown jewel for a discounted price at a time when the retail JV is delivering unpleasant updates to the market and damaging sentiment towards the stock.
The contract structure of sales to international retailers is attractive - Ocado receives roughly 5% of available sales capacity served by the tech solutions it installed for the customer. This contract structure means that revenues are tied to inflation - a huge attraction given the macro backdrop we find ourselves in.
These fees should make Ocado c40% cash contribution margin (before central costs, R&D etc) after the cost of running and maintaining the facilities and after depreciation on the upfront capex for the equipment.
The Ocado retail JV with M&S is the biggest user of the tech solutions business, and the test bed for new innovation. Sobey’s and Kroger are the next most advanced in terms of live and operating Customer Fulfilment Centres with Ocado tech. Sobey’s transcripts show management raving about how good Ocado is, for example this excerpt from their 22 June 2022 earnings call (Voila is what Sobeys/Empire call their online solution powered by Ocado):
https://app.tikr.com/stock/transcript?cid=7683267&tid=2609112&e=1786224298&ts=2592394&ref=lnv9v8
“Turning to e-commerce. As you know, we have been investing in the only profitable and scalable solution for grocery e-commerce in Canada. Voila now has 2 CFCs operational in Canada with 2 more in development and 98 locations with curbside pickup. Grocery e-commerce, coupled with a strong bricks-and-mortar offering and a strong loyalty engine like Scene+ give us a competitive advantage over the other models currently in market. Our e-commerce business has come a long way since we opened our first CFC in Toronto 2 years ago. With the opening of the Ottawa spoke, we can now reach approximately 90% of online spend in Ontario through Voila. We completed the launch of ‘Voila par IGA’ app in Montreal, which now covers approximately 95% of Quebec's online spend and the transition has been operationally seamless. Net Promoter Scores for ‘Voila par IGA’ app are higher than the iga.net and the service is attracting net new customers to Empire. Quebec dealers are happy to have all of their teammates focused on the in-store experience, and we are now setting our sights on the west in our future launches in Alberta and BC.”
As far as we can find from our research, there is currently no clear rival that competes at a similar level to Ocado in the field of online grocery automation.
We found it particularly impressive that Ocado won a contract with Aeon, Japan’s largest supermarket chain, to roll out CFCs there, given the difficulty for a Western company in winning business in Japan, particularly in this robotics/automation sector where Japanese players are typically world leaders. Links in appendix re the Aeon contract.
“We see Ocado as a state-of-the-art, exciting and transformative partner aligned with our strategy of accelerating Aeon’s digital shift to serve Japan’s consumers,” said Aeon CEO Motoya Okada.
Valuation / upside
Analysts who are closer to the stock than us think that the tech business will be doing £500m of EBITDA in 2026 based solely on the contracts Ocado has already won with global grocery retailers such as America’s Kroger, Canada’s Sobey and Japan’s Aeon. The analysts think that EBITDA will then grow to c£1bn in 2028, again based mostly on contracts that are already won (but assuming some greater rollout within those existing customers). There should then be large upside optionality on top of this from signing contracts with new retailers.
Balance sheet/cash position - Ocado raised £575m in FY 11/20, giving them almost £2bn in current liquidity which should comfortably take them through to FCF breakeven in 2026. They do however need to refinance the £600m convertible in 2025. They may be able to introduce project based financing over the next couple of years which would make their funding situation even more comfortable.
Risks
Warning signs to look for would be evidence of reluctance from Kroger to place more orders. We would expect further Kroger orders in 2023 or 2024 latest. Having said this, at this valuation the stock is arguably cheap even based on the orders already in place.
The retail JV with M&S will be experiencing a tough consumer environment for the immediate future but it should in theory only make up circa 20% of the stock’s valuation today, and incrementally less as time goes on. In this retail JV they have built capacity for 2x the level of today’s sales, so capital requirements for this business from here are low and it should keep growing double digits.
Choosing to build CFCs (Customer Fulfilment Centres - Ocado facilities), rather than going with a “pick-in-store” method for fulfilment of online grocery orders from customers, is a big decision for a retailer’s CEO because it is capital intensive and requires them to take a 4-5 year time horizon. Signing the deal itself is a potentially career defining moment, but one which should allow a retailer to make similar margins on online orders as they make from in-store sales (versus break-even at best for pick-in-store). So when there is greater uncertainty in the world it will make CEOs less likely to make such big investment decisions. Kroger’s CEO loves Ocado and where its relationship is going, but even he will probably have to take into consideration how the world evolves over the next 6m before deciding on the next phase of the relationship, given they are already in the middle of building out c$7.5bn of sales capacity from Ocado facilities (7.5% of their group grocery sales).
Essentially, the recessionary environment could slow new orders to the tech solutions business thanks to a more cautious attitude to investment from grocery CEOs.
Extra Resources
“Ocado Story So Far” - new video posted to Ocado’s Youtube on 14 Sep 2022.
https://www.youtube.com/watch?v=naLrSCCLDUw
Earnings transcript from Empire (Canadian company that owns Sobey’s) discusses Ocado (referred to as Voila solution)
Deal with Japanese Supermarket giant Aeon
Youtube interviews with Founder CEO Tim Steiner (recommend)
Undervalued Shares Blog by Swen Lorenz
https://www.undervalued-shares.com/
PRICE CHART
Thanks for this, as they are in cash burn mode at present is there not a concern that more cash will be needed to be raised and the funds they have at present will not be sufficient?