Ocado cash pile grows as Morrisons deal makes headway - UPDATE

More and larger online supermarket orders have helped Ocado to grow sales in the third quarter, as it made progress towards launching its partnership with Morrisons in early 2014. The FTSE 250 online grocery group grew gross sales 16.4% to £189.2m, helping it to increase cash levels by 81% to £114.6m.Chief Executive Officer Tim Steiner said: "We are encouraged by the continuing momentum in sales growth, reflecting an increase in both orders and basket size." He added management were focused on improving the offer for customers, with the range increased from around 31,000 at the half-year stage in June to over 33,000.Steiner and his team completed the agreement with Morrisons, whereby Ocado will provide the technology and operational expertise to allow the supermarket to finally launch its online offering.Morrisons paid the first intellectual property licence fees during the quarter, and completed the sale and leaseback arrangements of Ocado's Dordon Customer Fulfilment Centre in Warwickshire, for which it paid £138.3m under the arrangements and made full repayment of a bank facility.Steiner said the preparations for launch were progressing well."We now look forward to the launch of this business in early 2014, firmly endorsing our operating model and intellectual property for online grocery services."Broker Jefferies acknowledged that the latest update from the company looked "solid enough on an underlying basis" especially against a major summer recruitment drive by Waitrose.Analyst James Grzinic noted that the short covering of the stock had continued to prove a major catalyst to the share price in recent months but he wondered whether Ocado's operational delivery would be enough to "take over as a price driver now that the bear squeeze was nearing an end"."Fundamental buyers are likely to require greater operational reassurance at current valuation levels", he explained. "The major swing factor remains what value to place on the potential cash stream from other licensing/JV agreements. Our central case remains that this could build to a £20m net inflow over the longer term, making it worth some 33p in today's money. At current levels the market seems to assume something closer to 100p. Grzinic and his colleagues have doubts about the group's ability to replicate the UK model abroad due to the preference in overseas markets for click-and-collect online grocery ordering versus the UK's fondness for home delivery and, secondly, that the UK is "set to remain a unique example of Ocado being able to create value by separating the supplier partner and the licensing client".OH