1st Nov 2022 18:10
(Alliance News) - Ocado Group PLC shares rocketed on Tuesday, as it announced its Solutions business will expand into South Korea, but the news did not win everyone over.
Ocado Solutions will parter with Lotte Shopping, the largest retail affiliate of the South Korean conglomerate Lotte Group.
Lotte Group is one of the largest business conglomerates in South Korea, with interests spanning retail, food, hotels and chemicals, with a total annual revenue of KRW75 trillion, about GBP45 billion.
Lotte Shopping is the group's largest retail affiliate, operating department stores, hypermarkets, supermarkets and e-commerce platforms in South Korea, with an annual revenue of KRW15.6 trillion, about GBP9.8 billion.
Shares were trading up 32% at 624.46 pence each by Tuesday afternoon. The stock remains down over 60% in 2022 so far, however.
The online grocer said the pair will develop a network of customer fulfilment centres in South Korea, with six planned by 2028. Ocado plans to roll out its in-store fulfilment solution in 2024, with the first CFC to go live in 2025.
No financial details were provided. Ocado said it expects the deal to create "significant long-term value", but the transaction will have a "negligible" impact on earnings for the current financial year, as fees will only be recognised in revenue once operations have begun.
"The structure of fees agreed with Lotte are similar to those agreed with other international Ocado Solutions partners. Lotte will pay Ocado Solutions certain fees upfront and during the development phase, then ongoing fees linked to both sales achieved and installed capacity within the CFC and service criteria," the grocery explained.
interactive investor's Victoria Scholar hailed the deal as a "smart opportunistic move" which would allow Ocado to "gain a foothold in an important growing economy".
"The tech business will be able to generate fees from Lotte during the development phase and fees linked to sales as well, which will likely be revenue accretive," Scholar noted.
However, the details about the similarity in the fee structure rang alarm bells at Shore Capital, with the bank noting that Ocado's current strategy "to date does not amount to very much".
"Ocado has a dozen such partnerships to date and the Solutions business on a compound and sequential basis remains sub-scale, loss-making, cash consumptive and delivers negative return on capital employed."
Shore warned it will be "some time indeed" before any financial benefits are seen from this partnership.
In fact, Shore warns the new deal is likely to bring forward the need for another round of fundraising given the high capital expenditure to be sustained from financial year 2025.
The online grocer is wrestling with the trend of deglobalisation, "which means greater friction, higher costs, lower margins and probably stronger inflation and elevated base rates", the investment bank contends. Such an environment, in which risk is "derated", is not conducive to the success of loss-making technology companies.
Ocado reported a pretax loss of GBP211.3 million in the six months to May 29, on revenue of GBP1.26 billion.
However, Shore conceded it would be "churlish" not to embrace the fact that Ocado has expanded into another market and added another client for its solutions business.
"We recognise that this is a self-made FTSE 100 story. However...it just does not make any money, which is a bit of a challenge for Neanderthal folks like us.
"It has not made any money in twelve, soon to be thirteen, years as a listed, never mind private entity, which we believe makes our assertions on its business model sound."
By Elizabeth Winter; [email protected]
Copyright 2022 Alliance News Limited. All Rights Reserved.
Related Shares:
Ocado