25th Jul 2022 15:31
(Alliance News) - Ocado Group PLC faces well-documented headwinds in its retail arm, though its tech offering, its "long-term driver", is growing in strength, analysts at Berenberg believe.
Berenberg backed its 'buy' rating for Ocado, though knocked its price target slightly to 1,290 pence from 1,415p, to reflect a recent fundraise.
Ocado shares were 3.5% lower at 763.60 pence each in London on Monday afternoon.
"Ocado's earnings and sentiment are being affected by headwinds facing the retail business, although this division is not the long-term driver of the group’s valuation," Berenberg explained.
"Encouragingly, Ocado Solutions remains on track, is well positioned to navigate inflationary pressures and the recent capital raise eliminates funding concerns."
Ocado in June raised roughly GBP580 million.
"We believe Ocado's ecosystem of grocery e-commerce solutions is best in class, and we expect more deals from both existing and new partners," Berenberg added.
Ocado Solutions offers warehouse automation services to retailers such as Groupe Casino in France, Coles in Australia and Kroger in the US.
Ocado said revenue in its UK Solutions & Logistics arm climbed 11% to GBP395.6 million in the half-year ended May 29. In the International Solutions unit, revenue more than doubled to GBP58.5 million from GBP26.6 million.
While Ocado's retail unit is grappling with a cost of living crisis, such pressure is not being felt at the tech offering.
Berenberg added: "Sales and Ebitda guidance for the Ocado Solutions technology business were maintained, which is reassuring given this is the key driver of the group's valuation. Ocado Solutions is shielded from inflationary pressures, with contracts linked to inflation. Moreover, from a capex perspective, while some robotic parts are purchased in dollars, Ocado's procurement scale benefits as it ramps up installed capacity for its international partners, which should mitigate transactional FX headwinds as well as underlying inflationary pressures, in our view."
Funding concerns for the burgeoning tech arm are also now removed, following June's fundraise.
"While an equity raise came as a surprise, particularly as previous messaging had indicated capital would be raised via debt, yields of unsecured debt have risen through 2022, and reducing the net debt provides more financial and strategic flexibility, in our view. We expect this to be the last equity raise as Ocado now has more than sufficient capital to reach the point whereby existing customer fulfilment centres can organically generate cash to self-finance further sites," Berenberg added.
By Eric Cunha; [email protected]
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