Fitch Latest Rating /24 Jun 2024 13:43
Years later, which also leads to Ocado being paid full fees for its capacity and services later.
At end-FY23, Ocado's technology was employed at 14 international CFC by five customers, with an average of 3.14 modules in each, which have gradually gone live since FY20. Two new international CFCs opened in FY23. The slower than anticipated ramp up of partner CFCs has been due to lower demand and in some cases operational challenges. Ocado is helping its clients via its partner success programme and the results of these efforts are not fully in Ocado's control.
Projections Revised Downwards: We expect addition of on average three new CFCs per year over the next three years, which is less than our previous assumption. We now incorporate 17 instead of 22 live international CFCs by end FY24, then increasing to 23 CFCs by end of FY26. Kroger is the key partner with eight live CFCs, with no new CFCs added during FY23, and slower rollout than initially envisioned. Sobey's is another key partner with three live CFCs. Opening of CFCs for Coles has been delayed to FY24 from FY23.
This is leading to slower progression of EBITDA for Ocado, but is mitigated in cash flow terms by an average GBP390 million annual capex per year, which is lower than our previous forecast. Ocado also plans to grow its intelligent automation segment in a capex-light way. Despite the lower capex, we project an average GBP270 million annual negative free cash flow (FCF) over FY24-FY26.
Refinancing, Higher Cost of Capital: We expect weak EBITDA interest coverage metrics, at around 1.7x on average in FY24-FY26, as we expect Ocado to refinance its GBP600 million convertible bond with 0.875% coupon ahead of its maturity in December 2025, at a materially higher interest rate. The inability to refinance or refinancing at a materially higher rate than modelled would be negative for the rating.
Satisfactory Liquidity: Ocado has sufficient cash balances of around GBP0.8 billion to fund FY24 and FY25 capex, but cash will be eroded over the rating horizon. Cash will be supported by nearly GBP160 million cash inflows to be received from the Autostore settlement. We also assume that the revolving credit facility (RCF; GBP300 million), currently undrawn, remains available and is extended to support liquidity. We no longer assume any inflow from the M&S deferred consideration.
New Funding Needed in FY27: According to our rating case, Ocado may need to raise new funding in FY27 as its FCF is likely to still be negative after it has deployed its current cash balances. However, we understand that Ocado has further flexibility to lower its technology and support costs.
We also understand that Ocado's management does not intend to raise more debt beyond its refinancing needs and plans to fund growth capex from internally generated cash in mid-term. Current debt documentation has a debt incurrence covenant of a minimum 2.0x fixed charge coverage that does not apply to refinancing and
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