What’s holding Ocado shares back?

Ocado (OCDO) chief executive Tim Steiner used Tuesday’s brief but bullish third-quarter trading update to boast of industry-leading growth in retail revenue. There’s detail on further investment through its customer fulfilment centres (CFCs), too, yet traders are in selling mood.

Retail revenue in the 13 weeks to 27 August grew by 13% year-on-year to £313 million, in line with consensus forecasts, but “significantly in excess of the average for our industry”. Overall group revenue jumped 14% to £344 million, average orders per week rose 16% to 254,000, but average order size slipped slightly to £106.25.

Ocado will scale up capacity in its Andover CFC as well as build a fourth in Erith, south-east London – its biggest to date. Steiner admits these will increase costs in the short-term, though Rob Joyce, analyst at Goldman Sachs, only expects a small negative impact on cash profits.

Steiner claims these investments will “allow us to meet the rapidly growing demand for our services from UK consumers”. They will also allow Ocado “to offer the very latest technology to current and future customers of our Ocado Smart Platform (OSP)”.

Still, with only one international partner announced so far, investors are far from convinced and sent shares down as much as 7% Tuesday to 280p.

Ocado shot to a 14-month high in June after penning an agreement with an unnamed European grocer for use of its OSP. Long seen as a potential seminal moment in the Ocado investment case, the deal suggested progress despite being shrouded in mystery.

The silence since regarding further international partnerships has been deafening for investors and shares had already sold off 9% to close of play Monday.

In the City, opinion appears split. Ocado remains one of the most shorted stocks on the London Stock Exchange with almost 17% of its shares out on loan, according to data from the Financial Conduct Authority. UBS has doubts, including Ocado among its least-favoured trades for 2018 with price target of 200p.

But bulls were reassured by CFO Duncan Tatton-Brown that Ocado remains “confident in signing several [OSP] deals in the future”, leading them to leave their ‘buy’ recommendations intact.

However, Citi’s Nick Coulter did admit that “if Ocado does not sign additional OSP agreements, the company’s value would rely solely on the growth of the existing operations and agreements”.

Coulter currently values its UK operations at 311p, with a further 89p included “for its nascent international operations”. This latter figure is based on the one agreement signed and an assumed four further deals over the medium term. A 400p target price implies upside of over a third.

The overarching agreement is that there are plenty of positive catalysts that could finally put a rocket under Ocado’s share price. These include Amazon's (AMZN) deal with Whole Foods, which is encouraging as it may force food retailers to rethink their online grocery strategy.

Other positives include the scaling of Andover; and the development of Morrisons (MRW)’ store-pick module.

While there may be more to come from Ocado in due course, sentiment could keep shares rangebound until further international deals are forthcoming.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.