The latest Investing Matters Podcast with Jean Roche, Co-Manager of Schroder UK Mid Cap Investment Trust has just been released. Listen here.
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Https://markets.businessinsider.com/news/stocks/ocado-group-s-promising-cash-flow-improvement-and-market-expansion-opportunities-a-buy-recommendation-1032676655
This video is very much in line with my thinking from the Bernstein guy.
https://m.youtube.com/watch?v=0wJaTKjCX-Y
Following your prompt, Sang , I’ve now watched the video - which is 6 months old and made when the sp was, er, rather more than today!! So his advice turned out to be cr+p (although it did nearly hit 800 and I recall taking profits).
Yes - he says Tech is the thing for OCDO investors but look at it - is that really true regarding the company? It’s been pumping cash into UK CFCs and Logistics etc. etc and is now in the top three UK online grocers It’s primarily an f’in grocer ffs!!! And, despite being in the top three it is still making a loss every year - so something isn’t right - right?
The FY Report had Solutions at less than a third of group EBITDA - with Logistics dominating (thanks to people and vans) and Retail limping along due to the poor margins in grocery.
Autostore seem to have more focus on tech although they've admittedly not been as smart as OCDO in selling a product that provides a sustainable income stream.
OCDO tech has had more than a decade since IPO and a decade before that, so twenty years + , which is a long time in tech, but it still isn’t a global benchmark warehouse system. Is that because the UK grocery business was the priority?
I hope Steiner has a tough time at the AGM: after twenty + years building a top three UK on-line business and an advanced tech product he's still making a loss. I doubt he would even make it on The Apprentice. And he wants a bonus? LMAO.
He confirmed what I thought about the South Korea Lotte deal. SK has the highest online grocery market penetration at close to 30%. Lotte selected Ocado for 6 CFCs and they are a company with a strong background in automation in a country with a lot of highly advanced tech already in place.
Interesting contrast with Japan where online penetration is much lower at around 3%. Can Ocado's partnership with Aeon Next there help to increase online market share? You would think some of Japan's densely populated areas would be ideal for the Ocado delivery model.
As for Autostore they are focused on deploying their tech in smaller fulfilment centres with a much broader spread of sectors. Thanks to the investment in the Reimagined tech, Ocado can now position themselves as direct competitors to them in industries such as consumer packaged goods and pharmaceuticals. The Reimagined kit has brought down the cost and it's modular nature means it can be deployed with greater flexibility.
Off the top of my head it was only about 7-8 years ago that Ocado really turned their attention to selling systems to other grocery. They are projecting revenue from Solutions of about £500m for 2024. If they can increase that to £1bn or more over the next couple of years then the EBITDA contribution will increase greatly. Logistics is not expected to grow and Retail will be unlikely to deliver a margin of much more than 5%.
As Bernstein's William Woods said on the video the market seems incapable of valuing Ocado given the wild fluctuations in the SP. I think the current malaise is down to a mix of things like shorts betting that negative press can generate a death spiral down, the lacklustre UK market that has seen a number of companies either get bought out or opt to list in the US.
Obviously my optimism could be greatly misplaced. For all I know the OIA sales team could be running round like headless chickens with no strong strategic direction. Or they really have already reached the peak in terms of finding international grocery groups willing to sign up to the CFC model.
According to this the first Korean CFC is bigger than any of the Kroger ones- their largest was 375k square foot.
https://koreajoongangdaily.joins.com/news/2023-12-05/business/industry/Lotte-Shopping-breaks-ground-on-Ocadopowered-robotic-warehouse/1928264
One of the criticisms Kroger analysts have made are of Kroger's strategy. Rather than just buy tech upfront and then keep all future profits from digital sales they have to share sales revenue with Ocado.
So maybe the Ocado model is not as dumb as people make out. As well as getting the development fees they are setting themselves up for significant revenue streams in the future as more CFCs get up and running. I think this is the point Baillie Gifford are making when they say the business model is often poorly understood.
Lotte could also become a client of OIA as they have non grocery e-commerce business and also maybe in store fulfilment at their sites in Vietnam and Indonesia.
There’s a lot to digest there, Sangijuelas and there’s no doubt that the business model is poorly understood. The Tech contribution to EBITDA certainly improved in 2023 alongside its revenue, which was up by 44.3%. If that continues then the picture should improve over time. I think there are three more CFC’s to be added this year - resulting in at least 120 live modules in total (up from 111 at FY23). In the meantime, however, the larger UK Retail and Logistics (ie Grocery) numbers will inevitably continue to dominate the FY statement and define perceptions of the company.
I note that the eye-catching FY23 Group loss before tax (393.6m) is largely made up of depreciation, amortisation and impairment (395.9m), which includes internally generated intangible assets (like the costs of developing OSP etc.) together with the continuing roll-out of OSP hardware and software at all CFC sites. I’m no accountant but I understand this largely represents cap ex from previous years like investment in development of the core technology and software which is then amortised or depreciated over a number of years for tax reasons. So the cash has been spent and my comment that OCDO still makes a loss should be qualified to clarify that operational profits are being made but that they are effectively buried in the headline pre-tax profit/loss figure by cap-ex depreciation/amortisation from years prior. In that sense the situation is not as bad as it may first appear.
Also about 80% of the Solutions revenue is recurring revenue from ongoing fees and the sales cut rather than cash received from development costs.
There is a clear indication in the annual report that they know what have a lot of work to do in terms of getting partners to draw down more modules at existing sites.
I am prepared to give them the benefit of the doubt in trusting that they can make progress with that.
The current SP is a more attractive point to take that bet than earlier this year. For a long term hold that is.
" I hope Steiner has a tough time at the AGM: after twenty + years building a top three UK on-line business and an advanced tech product he's still making a loss "
He has put together a tidy sum of £1.5 Billion of tax credits as a result of those "losses" .... and developing robotic tech is a long,long journey when starting from humble beginnings ... he would have been stupid to have created profits and paid taxes on them...what for? ..when there was still so much further to push the tech development
As has been written...a 100 engineers and years taken to integrate AI into a robotic arm just to be able to pick up products of different sizes,weights, textures etc ..
When tech problems get solved, the end result looks, well somewhat obvious and there is little to show for the immense amount of work that goes into solving such complex issues
and yes...the "losses" as a result of amortisation, depreciation etc ... and a tidy sum of £428m of liabilities just waiting to move across into revenues
Yes..the model is very much misunderstood
and of course there are posters who would not anyone to drill down and understand the model
Automated warehouses whether by Ocado or anyone else are an absolute MUST ..
Society just does not have enough labour for the economy needs , something made even more difficult on going by an ageing society and a falling birth rate
so... automation isnt something that has reached some kind of saturation or over competition ....it is an area that is actually much in need ..... competition usually suggests there is a big market out there from which to take some market share ....nobody wants or even aims to take the whole market
Re: wanting Steiner to have a tough time at the AGM:
Ocado has said in the past that its pay schemes are approved by shareholders and only deliver above-market payouts for “the delivery of above-market, outstanding results”. I guess all on this board might have a view on whether the last three years have demonstrated outstanding results. However - there are good times around the corner apparently, providing the execs get even more incentive . What is the definition of a mug?
Tim got a £54 million bonus in 2020. At the time, Royal London Asset Management (RLAM) said that year’s bonus bonanza was “a classic example of how poorly-designed incentive plans can lead to excessive awards for management”.
According to BlackRock (Yes, Blackrock*), which voted against the remuneration report and the re-election of the entire remuneration committee, the incentive plans were: “subject to a single performance metric that only measured management’s performance indirectly”.“It was also designed to target an outcome that the executives — as significant shareholders themselves — were already incentivised to achieve”.
*Blackrock increased their short position two weeks ago…
Warehouses will be automated in time however HSBC rightly highlight the risks to Ocado in their latest Ocado research released last week, as below.
"analysts at HSBC highlighted the fact that the robot warehouse business might not be as high growth as hoped, forecasting slower uptake in what it said was already a “highly competitive” market with “many established participants”.
Did HSBC list the competition VP?
I will let you research the competition yourself. HSBC is current research. You quoted Bernstein research a day ago. Their info is 6 months old. Many negative issues have emerged within Ocado in the last 6 months....
I think it was Sangi rather than me - I was a bit dismissive and also mentioned the video was 6 months old.
I have researched the competition, that's why I'm interested in HSBC's list. I'd like to compare notes, like I did with Retireguy last week. But if it's not to hand , no worries, google will dig up something.
HSBC can talk up the competition but the talk in the automation industry has been that warehouses themselves have been slow to automate so their remains a massive opportunity to be exploited.
Fair enough, that's your view. We will see over time who's correct, yourself or HSBC. HSBC have had a reduce rating on Ocado for over 6 months. So far they have been on the money.
On checking, I found that the HSBC analyst (I could only find one) who maintained a Sell rating on Ocado Group was Linda Shu:
She covers the Healthcare sector, focusing on stocks such as Sino Biopharmaceutical, China Medical System Holdings, and Sinopharm Group Co. She has an average return of -1.6% and a 53.33% success rate on recommended stocks.
Warehouse automation and Technology are not listed amongst her specialities and I could find no recommendations from her within the sector. I could have done some more work but it would apparently cost me a fee and, given the above, I decided it really wasn't worth pursuing, especially as HSBC's rating didn't exactly shift the dial regarding OCDO. Unsurprisingly, there doesn't seem to be any available data to back up the claim about it being a “highly competitive” market with “many established participants”. No one I've asked so far has come up with any significant suggestions beyond Autostore.
The HSBC analyst re Ocado is Paul Rossington
When times are difficult, those companies able to invest in tech (I'm thinking about OCDO's potential clients here) tend to come out of the hard times with a competitive advantage (has to be the right tech at the right price and the right time). Those that were not able to invest in new tech, tend to get left behind and it's difficult to catch up when you slip behind. Personally I remain positive overall, but things take time and I'm waiting for my next entry. I still favour 350 or below.
Paul Rossington needs to get more credit then, VP:
https://markets.businessinsider.com/news/stocks/hsbc-keeps-their-sell-rating-on-ocado-group-ocdgf-1033283118
Maybe you could provide a link to his analysis?
Apologies Boyo, I have the info but cannot put a link to it on here.
Best of luck, as always DYOR.
Https://www.ocadogroup.com/investors/analyst-consensus/
Ocado still has Paul Rossington listed ....
Paul Rossington is head of European consumer retail research. For example, last week he issued a buy rating on Kingfisher (B&Q) and covers other stocks like Next.
With this background he may not be best placed to analyse a tech company.
Either way, HSBC couldn't be bothered to send an analyst on the annual results call so they can't be very interested in goings on at Ocado.
Anybody that hangs their hat on a broker rating needs their head wobbled. All you need to do is a quick check on their overall performance and you can see that they are extremely poor at their role. A 5 year old could do a better job by merely guessing.
Paul Rossington's return is negative based on his ratings if you followed his so called expertise and Linda Shu is just above break even........absolutely shocking that this board is being drowned out by the back and forth on this nonsense.
https://www.tipranks.com/experts/analysts/linda-shu?utm_source=markets.businessinsider.com&utm_medium=referral
https://www.tipranks.com/experts/analysts/linda-shu?utm_source=markets.businessinsider.com&utm_medium=referral
Searching Google with the news tab option brings nothing for Paul Rossington although he is often quoted on other companies.
According to TipRanks he didn't make any sell recommendations last week.
https://www.tipranks.com/experts/analysts/paul-rossington
I tend to take what analysts say with a pinch of salt. They will probably get replaced by AI shortly anyway.